NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 — ORGANIZATION AND NATURE OF OPERATIONS
Quantum
Materials Corp., a Nevada corporation, and its wholly owned subsidiary, Solterra Renewable Technologies, Inc. (collectively referred
to as the “Company”) are headquartered in San Marcos, Texas. The Company is a nanotechnology company specializing
in the design, development, production and supply of quantum dots, including tetrapod quantum dots, a high performance variant
of quantum dots, and highly uniform nanoparticles, using its patented automated continuous flow production process. Quantum dots
and other nanoparticles are expected to be increasingly utilized in a range of applications in the life sciences, television and
display, solid state lighting, solar energy, battery, security ink, and sensor sectors of the market. Key uncertainties and risks
to the Company include, but are not limited to, if and how quickly various industries adopt and fully embrace quantum dot technology
and technological changes, including those developed by our competitors, rendering our technology uncompetitive or obsolete.
Going
Concern
The
Company recorded losses from continuing operations in the current period presented and has a history of losses. The ability of
the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, obtain revenues
from operations, raise additional capital, and/or obtain debt financing.
In
conjunction with anticipated revenue streams, management is currently negotiating equity and debt financing, the proceeds from
which would be used to settle outstanding debts, to finance operations, and for general corporate purposes. However, there can
be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently
to continue as a going concern.
The
accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification
of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue
as a going concern.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation:
The consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States and include the accounts of the Company and its subsidiaries. All significant inter-company transactions
and account balances have been eliminated upon consolidation.
Revenue
Recognition:
The Company recognizes revenue from the sale of products and services in accordance with the Securities and Exchange
Commission Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements.”
The
Company recognizes revenue when product has been delivered and risk of loss has passed to the customer, collection of the resulting
receivable is reasonably assured, persuasive evidence of an arrangement exists, and the fee is fixed or determinable. The assessment
of whether the fee is fixed or determinable considers whether a significant portion of the fee is due after normal payment terms.
If it is determined that the fee is not fixed or determinable, the Company recognizes revenue at the time the fee becomes due,
provided that all other revenue recognition criteria have been met. Sales arrangements may contain customer-specific acceptance
requirements for both products and services. In such cases, revenue is deferred at the time of delivery of the product or service
and is recognized upon receipt of customer acceptance.
Cash
and Cash Equivalents:
The Company considers all highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents.
Restricted
Cash:
Restricted cash represents cash held in escrow for the purpose of purchasing the Company’s microreactors. Restricted
cash is not generally available to the Company until the purchase has been paid in full, at such time any excess funds will be
transferred to the Company.
Accounts
Receivable:
Trade accounts receivables are recorded in accordance with terms and amounts specified in the related contracts
on an ongoing basis. Management of the Company continually monitors accounts receivable for collectability issues. The Company
evaluates the collectability of accounts receivable on a specific account basis using a combination of factors, including the
age of the outstanding balances, evaluation of the customer’s financial condition, and discussions with relevant Company
personnel and with the customers directly.
Financial
Instruments:
Financial instruments consist of cash and cash equivalents, restricted cash, payables, and convertible debentures.
The carrying value of these financial instruments approximates fair value due to either their short-term nature or interest rates
that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.
Concentrations
of Credit Risk:
The Company maintains its cash in bank deposits with financial institutions. These deposits, at times, exceed
federally insured limits. The Company monitors the financial condition of the financial institution and has not experienced any
losses on such accounts. The Company is not party to any financial instruments which would have off-balance sheet credit or interest
rate risk.
Property
and Equipment:
Property and equipment are stated at cost. Depreciation is computed on the straight-line basis over the estimated
useful lives of the various classes of assets as follows:
Furniture and fixtures
|
|
7 years
|
Computers and software
|
|
3 years
|
Machinery and equipment
|
|
3 - 10 years
|
Licenses
and Patents:
Licenses and patents are stated at cost. Amortization is computed on the straight-line basis over the estimated
useful life of five years.
Asset
Impairment:
In accordance with Accounting Standards Codification (ASC) 360-10-35
“Impairment or Disposal of Long-Lived
Assets”
, the Company evaluates the recoverability of property and equipment if facts and circumstances indicate that
any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with
the asset are compared to the asset’s carrying amount to determine if an impairment of such property is necessary. The effect
of any impairment would be to expense the difference between the fair value of such property and its carrying value. There were
no impairment charges in the consolidated statements of operations during the years ended June 30, 2016 and 2015.
Debt
Issuance Costs:
The costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the
related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt.
Accumulated amortization was $15,203 and $0 at June 30, 2016 and 2015, respectively. Amortization expense for the years ended
June 30, 2016 and 2015 was $15,203 and $0, respectively. Amortization expense is projected to be $63,933 and $51,409 for the twelve
months ended June 30, 2017 and 2018, respectively.
Income
Taxes:
The Company follows ASC 740
“Income Taxes”
regarding the accounting for deferred tax assets and
liabilities. Under the asset and liability method required by this guidance, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely
than not that a portion of those assets will not be realized in a future period.
The
Company follows ASC 740
“Income Taxes”
regarding the accounting for uncertainty in income taxes. This guidance
clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an income tax position is required
to meet before recognizing in the consolidated financial statements and applies to all income tax positions. Each income tax position
is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax
position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position
is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the
largest amount that is greater than 50% likely to be realized upon its ultimate settlement. Additionally, the Company recognizes
income tax related penalties and interest in the provision for income taxes.
Earnings
per Share:
The Company accounts for earnings per share in accordance with ASC 260
“Earnings Per Share”
.
Basic earnings per share amounts are calculated by dividing net income (loss) by the weighted average number of common shares
outstanding during each period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average
number of common shares outstanding for the periods, including the dilutive effect of stock options and warrants granted. Dilutive
stock options and warrants that are issued during a period or that expire or are canceled during a period are reflected in the
computations for the time they were outstanding during the periods being reported.
Use
of estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the amounts reported of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Beneficial
Conversion:
Debt and equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to
the holders of the convertible notes. The deemed dividend associated with the beneficial conversion is calculated as the difference
between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited
to the value received. The beneficial conversion amount is recorded as beneficial conversion expense and an increase to additional
paid-in-capital.
Derivative
Instruments:
The Company enters into financing arrangements which may consist of freestanding derivative instruments or hybrid
instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC 815,
“
Accounting for Derivative Instruments and Hedging Activities”,
as well as related interpretation of this standard.
In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the consolidated balance
sheets and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly
and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized
as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based
on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.
The
Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are
considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers,
among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For
less complex derivative instruments, such as freestanding warrants, the Company generally uses the Black-Scholes model, adjusted
for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms,
dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments
requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the
instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes
model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative
financial instruments are initially and subsequently carried at fair values, income (expense) going forward will reflect the volatility
in these estimates and assumption changes. Increases in the trading price of the Company’s common stock and increases in
fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in
the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result
in the application of non-cash derivative income.
Fair
value measurements:
The Company estimates fair value at a price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation
techniques require inputs that are categorized using a three-level hierarchy, from highest to lowest level of observable inputs,
as follows: (1) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active
markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar
assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and
(3) significant unobservable inputs, including those that require considerable judgment for which there is little or no market
data (“Level 3”). When multiple input levels are required for a valuation, the Company categorizes the entire fair
value measurement according to the lowest level of input that is significant to the measurement even though other significant
inputs that are more readily observable may have also utilized.
Research
and Development Costs:
Research and development (R&D) costs are expensed as incurred. These expenses include the costs
of the Company’s proprietary R&D efforts, as well as costs incurred in connection with certain licensing arrangements.
Research and development expense was $305,703 and $64,460 for the years ended June 30, 2016 and 2015, respectively.
Reclassifications:
Certain amounts in the June 30, 2015 consolidated financial statements have been reclassified to conform to the classifications
in the June 30, 2016 consolidated financial statements.
NOTE
3 — PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
1,625
|
|
|
$
|
1,625
|
|
Computers and software
|
|
|
11,447
|
|
|
|
11,447
|
|
Machinery
and equipment
|
|
|
911,744
|
|
|
|
826,582
|
|
|
|
|
924,816
|
|
|
|
839,654
|
|
Less: accumulated
depreciation
|
|
|
150,142
|
|
|
|
63,615
|
|
|
|
|
|
|
|
|
|
|
Total property
and equipment, net
|
|
$
|
774,674
|
|
|
$
|
776,039
|
|
Depreciation
expense for the years ended June 30, 2016 and 2015 was $86,527 and $42,955, respectively.
NOTE
4 — LICENSES AND PATENTS
Licenses
and patents consisted of the following:
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
William Marsh Rice University
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
University of Arizona
|
|
|
15,000
|
|
|
|
15,000
|
|
Bayer acquired
patents
|
|
|
137,743
|
|
|
|
137,743
|
|
|
|
|
192,743
|
|
|
|
192,743
|
|
Less: accumulated
amortization
|
|
|
75,256
|
|
|
|
36,707
|
|
|
|
|
|
|
|
|
|
|
Total licenses
and patents, net
|
|
$
|
117,487
|
|
|
$
|
156,036
|
|
In
August 2014, the Company acquired a patent portfolio from Bayer AG for $137,743 that included patents and patent applications
covering the high volume manufacture of quantum dots, including heavy metal free, various methods for enhancing quantum dot performance,
and a quantum dot based solar cell technology.
Amortization
expense for the years ended June 30, 2016 and 2015 was $38,549 and $33,957, respectively. Amortization expense is projected to
be $38,549, $38,549, $35,799 and $4,590 for the twelve months ended June 30, 2017 through 2020, respectively, and $0 thereafter.
NOTE
5 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company follows Financial Accounting Standards Board Accounting Standards Update (“ASU”) 2011-04
“Fair Value
Measurement”
as it relates to financial assets and financial liabilities, which defines fair value, establishes a framework
for measuring fair value under GAAP and expands disclosures about fair value measurements. The provisions of this standard apply
to other accounting pronouncements that require or permit fair value measurements.
This
guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Hierarchical levels, as defined in this guidance and directly
related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities are as follows:
Level
1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities.
Level
2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability
(e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation
or other means.
Level
3 – Inputs that are both significant to the fair value measurement and unobservable.
The
reported fair values for financial instruments that use Level 2 and Level 3 inputs to determine fair value are based on a variety
of factors and assumptions. Accordingly, certain fair values may not represent actual values of the financial instruments that
could have been realized as of June 30, 2016 and 2015 or that will be realized in the future and do not include expenses that
could be incurred in an actual sale or settlement.
The
carrying amounts of cash and cash equivalents, accounts payable and current debt approximate their fair value due to the short
maturity of those instruments.
Convertible
Debentures
The
Company measured the estimated fair value of the convertible debentures using significant other observable inputs, representative
of a Level 2 fair value measurement, including the interest and conversion rates for the instruments. The following table sets
forth the fair value of the Company’s convertible debentures as of June 30, 2016 and 2015:
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Convertible debentures
issued in September 2014
|
|
$
|
25,050
|
|
|
$
|
21,710
|
|
|
$
|
25,050
|
|
|
$
|
31,730
|
|
Convertible debentures issued in
January 2015
|
|
$
|
500,000
|
|
|
$
|
1,083,333
|
|
|
$
|
500,000
|
|
|
$
|
1,583,333
|
|
Convertible debentures issued in
April - June 2016
|
|
$
|
1,565,000
|
|
|
$
|
1,695,417
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivative
Liabilities
The
Company has evaluated the application of ASC 815, “
Derivatives and Hedging”,
to the Convertible Debenture issued
November 4, 2008. Based on the guidance in ASC 815, the Company concluded these instruments were required to be accounted for
as derivatives as of July 1, 2009 due to the down round protection feature on the conversion price and the exercise price. The
Company records the fair value of these derivatives on its consolidated balance sheets at fair value with changes in the values
of these derivatives reflected in the consolidated statements of operations as “Change in fair value of derivative liabilities.”
These derivative instruments were not designated as hedging instruments under ASC 815 and were categorized as Level 3 fair value
assets. During the year ended June 30, 2015, the Company recognized a gain of $1,871,337 and is included in the statements of
operations as change in fair value of derivative liabilities. Due to the conversion of the notes, at June 30, 2015 all of the
Company’s derivative liabilities have been realized and there are no other derivative liabilities on outstanding convertible
debentures as of June 30, 2016.
Level
3 Valuation Techniques
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial liabilities consist
of the derivative liabilities for which there is no current market for these securities such that the determination of fair value
requires significant judgment or estimation. At the date of the original transaction, the Company valued the convertible debenture
that contains down round provisions using a lattice model, with the assistance of a valuation consultant, for which management
understands the methodologies. This model incorporated transaction details such as the Company’s stock price, contractual
terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior. Using assumptions,
consistent with the original valuation, the Company has subsequently used the Black-Scholes model for calculating the fair value.
The
Company is not a party to any hedge arrangements, commodity swap agreements or any other derivative financial instruments other
than described above.
The
table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured
at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended June 30, 2016 and 2015:
|
|
Derivative
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Balance as of June 30,
2014
|
|
$
|
1,871,337
|
|
Total unrealized
gains or losses included in net loss
|
|
|
(1,871,337
|
)
|
|
|
|
|
|
Balance as of June 30, 2015
|
|
|
-
|
|
|
|
|
|
|
Total realized
gains or losses included in net loss
|
|
|
-
|
|
|
|
|
|
|
Balance as
of June 30, 2016
|
|
$
|
-
|
|
NOTE
6 — CONVERTIBLE DEBENTURES
The
following table sets forth activity associated with the convertible debentures:
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Convertible debentures
issued in November 2008
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Convertible debentures issued in
February 2014
|
|
|
-
|
|
|
|
400,000
|
|
Convertible debentures issued in
September 2014
|
|
|
25,050
|
|
|
|
500,050
|
|
Convertible debentures issued in
November 2014
|
|
|
-
|
|
|
|
350,000
|
|
Convertible debentures issued in
January 2015
|
|
|
500,000
|
|
|
|
500,000
|
|
Convertible
debentures issued in April - June 2016
|
|
|
1,565,000
|
|
|
|
-
|
|
|
|
|
2,090,050
|
|
|
|
2,250,050
|
|
Less: amount
converted to shares
|
|
|
-
|
|
|
|
1,725,000
|
|
Total convertible debentures outstanding
|
|
|
2,090,050
|
|
|
|
525,050
|
|
Less: unamortized discount
|
|
|
527,350
|
|
|
|
266,212
|
|
Less: debt
issuance costs
|
|
|
115,342
|
|
|
|
-
|
|
|
|
|
1,447,358
|
|
|
|
258,838
|
|
Less: current
portion
|
|
|
407,702
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total convertible
debentures, net of current portion
|
|
$
|
1,039,656
|
|
|
$
|
258,838
|
|
Future
maturities of convertible debentures for each of the next five years and thereafter are as follows:
Year
Ending June 30,
|
|
|
|
2017
|
|
$
|
500,000
|
|
2018
|
|
|
1,565,000
|
|
2019
|
|
|
-
|
|
2020
|
|
|
25,050
|
|
2021
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
2,090,050
|
|
November
2008 Convertible Debenture
On
November 4, 2008, the Company entered into a Securities Purchase Agreement, Debenture, Security Agreement, Subsidiary Guarantee
Agreement, Registration Rights Agreement, Escrow Agreement, Stock Pledge Agreement and other related transactional documents (the
“Transaction Documents”) to obtain $1,500,000 in gross proceeds from three non-affiliated parties (collectively hereinafter
referred to as the “Debenture Holders”) in exchange for 3,525,000 restricted shares of common stock of the Company
(the “Restricted Shares”) and Debentures in the principal amount aggregating $1,500,000. Each Debenture originally
had a term of three years maturing on November 4, 2011 bearing interest at the rate of 8% per annum and is pre-payable by the
Company at any time without penalty, subject to the Debenture Holders’ conversion rights. Starting in 2011, the Company
obtained one year extensions of the maturity date of the Debentures through November 4, 2014. In partial consideration of such
a loan extension, the Company agreed to issue to the Debenture Holders warrants to purchase an aggregate of 2,000,000 shares of
common stock exercisable at $0.10 per share. These warrants contain cashless exercise provisions in the event that there is no
current registration statement filed. When the maturity date was extended in June 2013 to November 4, 2014, the conversion price
per share was lowered to $0.06 per share.
On
June 30, 2014, $1,000,000 of the Debentures were converted into 16,666,667 common shares. The remaining $500,000 was converted
at $0.06 per share into 8,333,333 of common shares at the due date November 4, 2014. The Company recorded the conversion at the
fair market value of the shares at the date of conversion, off-set by the reduction of the derivative liability.
Interest
expense for the years ended June 30, 2016 and 2015 was $0 and $21,805, respectively.
As
of June 30, 2016 and 2015, $0 of principal was outstanding.
February
2014 Convertible Debenture
On
February 6, 2014, the Company entered into a Securities Purchase Agreement, Debenture and Escrow Agreement to obtain $400,000
in gross proceeds from two non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”).
The Debentures have a term of two years maturing on January 31, 2016 and bear interest at the rate of 8% per annum. The Debentures
are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion at a conversion
price of $0.04 per share at any date. The Debenture Holders received 5,000,000 common stock warrants exercisable at $0.06 per
share through December 31, 2016. The debt is secured by a security interest in certain microreactor equipment. Pursuant to the
Securities Purchase Agreement, the investor has certain preferential rights to fund a second microreactor at a cost of up to $650,000.
Such rights were exercised as described under the January 2015 Convertible Debenture below.
In
accounting for the above convertible debentures, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $95,603, recorded as debt discount. The debt discount is amortized using the effective interest rate method over
the life of the loan, two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2016 and
2015 of $0 and $75,683, respectively. Interest expense for the years ended June 30, 2016 and 2015 was $0 and $18,762.
In
January 2015, the holders of the $400,000 convertible debenture converted into 10,000,000 shares of common stock. As of June 30,
2016 and 2015, $0 of principal was outstanding.
September
2014 Convertible Debenture
Between
September 16, 2014 and October 28, 2014, the Company entered into Convertible Debenture Agreements to obtain a total of $500,050
in gross proceeds from five non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”).
The Debentures have terms of five years maturing between September 16, 2019 and October 30, 2019. The Debentures bear interest
at the rate of 6% per annum and are pre-payable by the Company at any time without penalty. The Debenture Holders have the right
of conversion at a conversion price of $0.15 per share at any date, and will receive an equal number of warrants having a strike
price of $0.30 per share and a term of five years.
In
accounting for the above convertible debentures, the Company allocated the fair value of the warrants to the proceeds received
in the amount of $203,074, recorded as debt discount. The debt discount is amortized using the effective interest rate method
over the life of the loan, five years. The Company recognized accretion of debt discount expense for the years ended June 30,
2016 and 2015 of $0 and $203,074, respectively. The Company recognized a beneficial conversion expense for the years ended June
30, 2016 and 2015 of $0 and $230,309, respectively. Interest expense for the years ended June 30, 2016 and 2015 was $1,528 and
$5,100, respectively.
In
October 2014, $350,000 of the Debentures were converted into 2,333,333 shares of common stock and an equal number of warrants
and in December 2014, $125,000 of the Debentures were converted into 833,334 shares of common stock and an equal number of warrants.
As of June 30, 2016 and 2015, $25,050 of principal was outstanding.
November
2014 Convertible Debenture
On
November 25, 2014, the Company entered into a Convertible Debenture Agreement which would allow the Company to borrow up to a
total of $500,000 in gross proceeds from a non-affiliated party. The Debenture has a term of five years maturing on November 25,
2019 and bears interest at the rate of 6% per annum and is pre-payable by the Company at any time without penalty. The debenture
holder funded five times between December 2014 and April 2015 for total proceeds to the Company of $350,000. The first three fundings
of $50,000 each converted at $0.15 per share, and received an equal number of warrants having a strike price of $0.30 per share
and a term of two years. The fourth funding of $50,000 and the fifth funding of $150,000 converted at $0.12 and $0.10 per share,
respectively. In January 2015 $100,000 was converted into 666,667 of common stock and in April 2015 $250,000 was converted into
2,250,000 of common stock.
The
Company recognized a beneficial conversion expense for the years ended June 30, 2016 and 2015 of $0 and $105,833, respectively.
As
of June 30, 2016 and 2015, $0 of principal was outstanding and on September 18, 2015, the Company notified the debenture holder
that per the terms of the debenture, the debenture was deemed cancelled.
January
2015 Convertible Debenture
On
January 15, 2015, the Company entered into Convertible Debenture Agreements to obtain $500,000 in gross proceeds from two non-affiliated
parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have a term of two years
maturing on January 15, 2017 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any
time without penalty. The Debenture Holders have the right of conversion at a conversion price of $0.06 per share at any date.
The Debenture Holders received 6,250,000 common stock warrants exercisable at $0.06 per share through January 15, 2017. The debt
is secured by a security interest in certain microreactor equipment. The Agreement also provides for the investors to have the
right to appoint one member to the Company’s Board of Directors in the event that any one of the aforementioned debentures
are converted into common stock of the Company.
In
accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the
amount of $348,105, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan,
two years. The Company recognized accretion of debt discount expense for the years ended June 30, 2016 and 2015 of $173,914 and
$81,893, respectively. The effective interest rate used during the years ended June 30, 2016 and 2015 was approximately 9% and
15%, respectively. The Company recognized a beneficial conversion expense for the years ended June 30, 2016 and 2015 of $0 and
$151,895, respectively. Interest expense for the years ended June 30, 2016 and 2015 was $40,110 and $18,192, respectively.
As
of June 30, 2016, $500,000 of principal was outstanding.
April
- June 2016 Convertible Debentures
During
the fourth quarter of the year ended June 30, 2016, the Company sold 1,565 Units for total proceeds of $1,565,000 from three affiliated
and fourteen non-affiliated parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”)
and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”)
at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued
at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum (the interest
rate was previously reported as 6% on the Form 8-K filed on March 31, 2016) and are convertible into unregistered and restricted
shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations
and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i)
a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus
in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s
issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration
per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers,
directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company.
In evaluating the accounting treatment of this anti-dilution feature, the Company believes that is has control over whether or
not the anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus
the Company can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise
price is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges,
mergers, and reorganizations.
In
accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the
amount of $486,487, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan,
two years. The Company recognized accretion of debt discount expense for the year ended June 30, 2016 of $51,435. The effective
interest rate used during the year ended June 30, 2016 was approximately 17%. The Company recognized a beneficial conversion expense
for the year ended June 30, 2016 of $513,941. Interest expense for the year ended June 30, 2016 was $25,849.
As
of June 30, 2016, $1,565,000 of principal was outstanding.
NOTE
7 — NOTES PAYABLE
Promissory
Note
In
February 2016 the Company issued an unsecured promissory note for $150,000 to a private individual at an interest rate of 0.5%
per annum. The note was due May 5, 2016. Interest expense for the years ended June 30, 2016 and 2015 was $172 and $0, respectively.
On May 6, 2016, the note was paid in full.
Note
Payable – Insurance
In
March 2016, to finance an insurance premium, the Company issued a negotiable promissory note for $20,024 at an interest rate of
4.87% per annum. Interest expense for the years ended June 30, 2016 and 2015 was $265 and $0, respectively. The note is due November
11, 2016. The balance outstanding at June 30, 2016 was $10,093.
NOTE
8 — EQUITY TRANSACTIONS
Common
Stock
During
the year ended June 30, 2016, the Company issued 1,000,000 shares of common stock for cash proceeds of $100,000. Additionally,
investors exercised options and warrants to purchase 13,454,669 shares of common stock for cash proceeds of $385,500 and forgiveness
of a liability of the Company of $39,178. Included were cashless exercises of 3,325,000 options and 8,217,634 warrants that resulted
in the issuance of 2,146,629 and 4,056,612 shares of common stock, respectively.
During
the year ended June 30, 2016, the Company granted 2,800,000 shares of common stock to consultants at the fair market value of
$280,000. This was recognized as a prepaid asset and will be amortized to expense over the life of the agreement. Additionally,
the Company granted 100,000 shares of common stock to consultants at the fair market value of $10,000 and was recognized as general
and administrative expense.
During
the year ended June 30, 2016, the Company cancelled 638,300 shares of common stock. See Note 17.
During
the year ended June 30, 2015, the Company issued 15,081,815 shares of common stock for cash proceeds of $1,529,444. Additionally,
investors exercised warrants to purchase 9,298,390 shares of common stock for cash proceeds of $517,705. Included in the 9,298,390
warrants exercised, 875,000 warrants were exercised in a cashless transaction with an allocated value of $94,667 recorded as additional
paid in capital.
During
the year ended June 30, 2015, the Company granted 6,928,324 common shares to consultants at the fair market value of $1,022,616.
This was recognized as general and administrative expense.
During
the year ended June 30, 2015, the Company issued 561,679 shares of common stock to a lender, in exchange for interest due, in
the amount of $40,568.
During
the year ended June 30, 2015, holders of convertible notes elected to convert debt of $1,725,000 into 24,416,667 shares of common
stock.
During
the year ended June 30, 2015, the Company cancelled 5,772,222 shares of common stock. Of this amount, 2,600,000 shares are related
to the settlement of a lawsuit with a former employee, see Note 16, and 3,172,222 shares are other cancellations that took place
throughout the year.
Stock
Warrants
A
summary of activity of the Company’s stock warrants for the years ended June 30, 2016 and 2015 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
Exercise
|
|
|
Number of
|
|
|
Contractual
|
|
|
Grant Date
|
|
|
|
Price
|
|
|
Warrants
|
|
|
Term
in Years
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
2014
|
|
$
|
0.07
|
|
|
|
41,666,515
|
|
|
|
|
|
|
$
|
0.08
|
|
Expired
|
|
|
0.06
|
|
|
|
(4,135,000
|
)
|
|
|
|
|
|
|
0.07
|
|
Granted
|
|
|
0.11
|
|
|
|
21,391,859
|
|
|
|
|
|
|
|
0.18
|
|
Exercised
|
|
|
0.06
|
|
|
|
(9,581,723
|
)
|
|
|
|
|
|
|
0.06
|
|
Cancelled
|
|
|
0.09
|
|
|
|
(1,056,818
|
)
|
|
|
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2015
|
|
$
|
0.09
|
|
|
|
48,284,833
|
|
|
|
|
|
|
$
|
0.13
|
|
Expired
|
|
|
0.08
|
|
|
|
(10,709,642
|
)
|
|
|
|
|
|
|
0.09
|
|
Granted
|
|
|
0.10
|
|
|
|
17,572,843
|
|
|
|
|
|
|
|
0.13
|
|
Exercised
|
|
|
0.06
|
|
|
|
(15,469,062
|
)
|
|
|
|
|
|
|
0.10
|
|
Cancelled
|
|
|
0.24
|
|
|
|
(416,667
|
)
|
|
|
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as
of June 30, 2016
|
|
$
|
0.11
|
|
|
|
39,262,305
|
|
|
|
2.88
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and
exercisable as of June 30, 2016
|
|
$
|
0.11
|
|
|
|
39,262,305
|
|
|
|
2.88
|
|
|
$
|
0.15
|
|
During
the years ended June 30, 2016 and 2015, 8,217,634 and 875,000 warrants were exercised in cashless transactions that resulted in
the issuance of 4,056,612 and 591,667 shares of common stock, respectively.
Outstanding
warrants at June 30, 2016 expire during the period September 2016 to June 2021 and have exercise prices ranging from $0.04 to
$0.30.
Salaries
Converted to Equity
During
the year ended June 30, 2016, certain officers and employees converted accrued salaries of $409,667 into 6,827,778 warrants to
purchase the Company’s common stock. The warrants are exercisable at $0.06 per share for a period of two years. The fair
value of the stock warrants at the time of conversion was $821,979. The variance of $412,312 was recognized as stock-based compensation
in general and administrative expense.
There
were no salary conversions during the year ended June 30, 2015.
NOTE
9 — STOCK-BASED COMPENSATION
The
Company follows ASC 718
“Compensation — Stock Compensation”
for share-based payments which requires all
stock-based payments, including stock options, to be recognized as an operating expense over the vesting period, based on their
grant date fair values.
In
October 2009 the Board of Directors authorized the approval of a stock option plan covering 7,500,000 shares of common stock,
which was increased to 10,000,000 shares in December 2009 and approved by stockholders in January 2010. The Plan provides for
the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2016, 9,200,000
options have been granted, with terms ranging from five to ten years, and 250,000 have been cancelled.
In
March 2012, 3,500,000 stock options, with a term of five years, were granted outside of a stock option plan.
In
January 2013 the Board of Directors authorized the approval of a stock option plan covering 20,000,000 shares of common stock,
which was increased to 60,000,000 shares in March 2013 and approved by stockholders in March 2013. The Plan provides for the direct
issuance of common stock and the grant of incentive and non-incentive stock options. As of June 30, 2016, 72,653,473 options have
been granted, with terms ranging from three to ten years, 3,325,000 have been exercised and 12,703,225 have been cancelled.
On
February 17, 2016, the Shareholders approved the 2015 Employee Benefit and Consulting Services Compensation Plan covering 15,000,000
shares. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options.
As of June 30, 2016, 300,000 options have been granted with terms of ten years.
In
June 2016, 6,000,000 stock options, with a term of ten years, were granted outside of a stock option plan.
Incentive
Stock Options:
The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes-Merton
valuation model. The volatility is based on expected volatility over the expected life of thirty-six to sixty months. Compensation
cost is recognized based on awards that are ultimately expected to vest, therefore, the Company has reduced the cost for estimated
forfeitures based on historical forfeiture rates, which were between 14% and 16% during the year ended June 30, 2016. As
the Company has not historically declared dividends, the dividend yield used in the calculation is zero. Actual value realized,
if any, is dependent on the future performance of the Company’s common stock and overall stock market conditions. There
is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes-Merton model.
The
following assumptions were used for the years ended June 30, 2016 and 2015:
|
|
Year
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
143.92
|
%
|
|
|
149.98
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rates
|
|
|
1.28
|
%
|
|
|
1.71
|
%
|
Expected term (in years)
|
|
|
3.0
to 5.0
|
|
|
|
5.0
|
|
The
computation of expected volatility during the year ended June 30, 2016 was based on the historical volatility. Historical volatility
was calculated from historical data for the time approximately equal to the expected term of the option award starting from the
grant date. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve in effect at the time of grant
for the period corresponding with the expected life of the option.
A
summary of the activity of the Company’s stock options for the years ended June 30, 2016 and 2015 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
Remaining
|
|
|
Optioned
|
|
|
Aggregate
|
|
|
|
Exercise
|
|
|
Optioned
|
|
|
Contractual
|
|
|
Grant Date
|
|
|
Intrinsic
|
|
|
|
Price
|
|
|
Shares
|
|
|
Term
in Years
|
|
|
Fair
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
2014
|
|
$
|
0.06
|
|
|
|
59,103,473
|
|
|
|
|
|
|
$
|
0.09
|
|
|
$
|
13,268,088
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
0.10
|
|
|
|
16,300,000
|
|
|
|
|
|
|
|
0.16
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
0.05
|
|
|
|
(7,665,725
|
)
|
|
|
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2015
|
|
|
0.07
|
|
|
|
67,737,748
|
|
|
|
|
|
|
|
0.10
|
|
|
$
|
8,357,574
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
0.14
|
|
|
|
16,250,000
|
|
|
|
|
|
|
|
0.13
|
|
|
|
|
|
Exercised
|
|
|
0.06
|
|
|
|
(3,325,000
|
)
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
Cancelled
|
|
|
0.09
|
|
|
|
(5,287,500
|
)
|
|
|
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as
of June 30, 2016
|
|
$
|
0.08
|
|
|
|
75,375,248
|
|
|
|
5.77
|
|
|
$
|
0.11
|
|
|
$
|
3,771,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and
exercisable as of June 30, 2016
|
|
$
|
0.06
|
|
|
|
58,291,914
|
|
|
|
3.65
|
|
|
$
|
0.10
|
|
|
$
|
3,849,101
|
|
Outstanding
options at June 30, 2016 expire during the period March 2017 to June 2026 and have exercise prices ranging from $0.03 to $0.17.
Compensation
expense associated with stock options of $1,566,630 and $28,903 for the years ended June 30, 2016 and 2015, respectively, was
included in general and administrative expenses in the consolidated statements of operations. At June 30, 2016, the Company had
17,083,334 shares of nonvested stock option awards. The total cost of nonvested stock option awards which the Company had not
yet recognized was $1,597,559 at June 30, 2016. Such amounts are expected to be recognized over a period of 3 years.
Restricted
Stock:
To encourage retention and performance, the Company granted certain employees restricted shares of common stock with
a fair value per share determined in accordance with conventional valuation techniques, including but not limited to, arm’s
length transactions, net book value or multiples of comparable company earnings before interest, taxes, depreciation and amortization,
as applicable. Generally, the stock vests over a 3 year period. A summary of the activity of the Company’s restricted stock
awards for the years ended June 30, 2016 and 2015 is presented below:
|
|
Number of
|
|
|
Weighted
|
|
|
|
Nonvested
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
Share
Awards
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Nonvested restricted shares outstanding
at June 30, 2014
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
1,500,000
|
|
|
|
0.42
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested restricted shares outstanding
at June 30, 2015
|
|
|
1,500,000
|
|
|
|
0.42
|
|
Granted
|
|
|
250,000
|
|
|
|
0.14
|
|
Vested
|
|
|
(750,000
|
)
|
|
|
0.33
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested
restricted shares outstanding at June 30, 2016
|
|
|
1,000,000
|
|
|
$
|
0.42
|
|
Compensation
expense associated with restricted stock of $245,575 and $201,370 for the years ended June 30, 2016 and 2015, respectively, was
included in general and administrative expenses in the consolidated statements of operations. The total cost of nonvested stock
awards which the Company had not yet recognized was $218,055 at June 30, 2016. This amount is expected to be recognized over a
period of 1.25 years.
Agreements
with Officers and Employees:
In June 2016, the Company’s officers and certain employees owning options to purchase 60,670,933
shares of the Company’s common stock entered into an agreement with the Company that such persons cannot exercise their
options and the Company does not have to reserve for the issuance of shares of common stock underlying their options until the
earlier of June 30, 2017 or the Company having unreserved shares sufficient for all outstanding options to be exercised. This
could happen through an increase in authorized common shares, the cancellation of outstanding convertible notes or warrants, or
a shareholder approved reverse stock split.
NOTE
10 — LOSS PER SHARE
The
Company follows ASC 260,
“Earnings Per Share”
for share-based payments that are considered to be participating
securities within the definition provided by the standard. All share-based payment awards that contained non-forfeitable rights
to dividends, whether paid or unpaid, were designated as participating securities and included in the computation of earnings
per share (“EPS”).
The
following table sets forth the computation of basic and diluted loss per share:
|
|
Year
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net
loss
|
|
$
|
(6,105,950
|
)
|
|
$
|
(2,002,009
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
318,325,221
|
|
|
|
277,765,696
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
For
the years ended June 30, 2016 and 2015, 39,262,305 and 48,284,833 stock warrants, respectively, were excluded from diluted earnings
per share because they are considered anti-dilutive.
For
the years ended June 30, 2016 and 2015, 75,375,248 and 67,737,748 stock options, respectively, were excluded from diluted earnings
per share because they are considered anti-dilutive.
NOTE
11 — REVENUE
During
the year ended June 30, 2016, the Company recognized revenue of $240,835. Of this amount, $225,000 is a result of the Company
entering into a funded product development agreement (the “Agreement”) with leading global film manufacturer, Nitto
Denko Corporation. The $225,000 represents full payment pursuant to the Agreement. The Company worked with Nitto Denko Corporation
to develop quantum dot material, however the Agreement did not require specific deliverables by the Company. The Agreement did
place certain restrictions on the Company’s ability to communicate with a limited number of specifically named businesses
during the four month term of the agreement. Management does not believe the restrictions had a material negative effect on the
Company’s business prospects.
NOTE
12 — COMMITMENTS AND CONTINGENCIES
Agreement
with Rice University
On
August 20, 2008, Solterra entered into a License Agreement with Rice University, which was amended and restated on September 26,
2011; also on September 26, 2011, QMC entered into a new License Agreement with Rice (collectively the “Rice License Agreements”).
On August 21, 2013, QMC and Solterra each entered into amended license agreements with Rice University. QMC and Solterra entered
into second amended license agreements with Rice University on March 15 and 24, 2016, respectively.
The
Rice License Agreements, as amended, require the payment of certain patent fees to Rice and for QMC and Solterra to meet certain
milestones by specific dates. Pursuant to the Solterra Rice License Agreement, as amended, Rice is entitled to receive, during
the term, certain royalties of adjusted gross sales (as defined therein) ranging from 2% to 4% for photovoltaic cells and 7.5%
of adjusted gross sales for QDs sold in electronic and medical applications. Additionally, minimum royalties payable under the
Solterra Rice License Agreement include $100,000 due January 1, 2017, $356,250 due January 1, 2018, $1,453,500 due January 1,
2019, $3,153,600 due January 1, 2020 and each January 1 of every year thereafter, subject to adjustments for changes in the consumer
pricing index. Pursuant to the QMC Rice License Agreement, as amended, Rice is entitled to receive, during the term, a royalty
of 7.5% of adjusted gross sales for QDs sold in electronic and medical applications. Additionally, minimum royalties payable under
the QMC Rice License Agreement include $117,000 due January 1, 2017, $292,500 due January 1, 2018, $585,000 due January 1, 2019
and each January 1 of every year thereafter, subject to adjustments for changes in the consumer pricing index. The Rice License
Agreements and subsequent amendments have been filed on Form 8-K and are incorporated by reference herein.
Agreement
with University of Arizona
Solterra
entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On June 8,
2016, Solterra entered into an amended license agreement with UA. Pursuant to UA License Agreement, as amended, Solterra is obligated
to pay minimum annual royalties of $50,000 by December 31, 2016, $125,000 by June 30, 2017 and $200,000 on each June 30th thereafter,
subject to adjustments for increases in the consumer price index. Royalties based on net sales are 2% of net sales of licensed
products for non-display electronic component applications and 2.5% of net sales of licensed products for printed electronic displays.
The UA License Agreements and subsequent amendments have been filed on Form 8-K and are incorporated by reference herein.
Agreement
with Texas State University
The
Company entered into a Service Agreement with Texas State University (“TSU”) by which the Company occupies certain
office and lab space at TSU’s STAR Park (Science Technology and Advanced Research) Facility. The agreement is month-to-month
and can be terminated with 30-days written notice of either party.
The
following table summarizes future commitments of minimum royalties related to license agreements with universities:
|
|
License
|
|
Year
Ended June 30,
|
|
Agreements
|
|
|
|
|
|
2017
|
|
$
|
392,000
|
|
2018
|
|
|
848,750
|
|
2019
|
|
|
2,238,500
|
|
2020
|
|
|
3,938,600
|
|
2021
|
|
|
3,938,600
|
|
Thereafter
|
|
|
3,938,600
|
|
|
|
|
|
|
Total
|
|
$
|
15,295,050
|
|
Operating
Leases
The
Company leases certain office and lab space under a month-to-month operating lease agreement.
Rental
expense for the operating lease for the years ended June 30, 2016 and 2015 was $50,088 and $15,985, respectively.
NOTE
13 — CONCENTRATIONS
The
Company owns the design of its microreactors and currently contracts with only one supplier to manufacture this equipment. No
long-term supply contract exists. There are a limited number of manufacturers of this kind of equipment, and a change in suppliers
could result in a significant delay in the delivery time of future equipment. Unless such a delay involved replacement of current
capacity, it would not necessarily have an adverse effect on the Company’s near-term operating results.
The
Company has licensed certain patents from Rice University and the University of Arizona. While neither is required for the Company’s
immediate business opportunities in displays and solid state lighting, it is expected that the Company will market products utilizing
these patents or otherwise derive revenue from them in the future. It may not be possible to replace this intellectual property
if the Company loses its rights, and future business opportunities could be adversely affected if these rights are lost.
NOTE
14 — INCOME TAXES
The
components of income tax expense/(benefit) were as follows:
|
|
|
Year
Ended June 30,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
A
reconciliation of the expected U.S. tax expense/(benefit) to income taxes is as follows:
|
|
Year
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Expected tax expense / (benefit)
at U.S. statutory rate
|
|
$
|
(2,076,023
|
)
|
|
$
|
(680,683
|
)
|
Meals and entertainment
|
|
|
3,316
|
|
|
|
7,677
|
|
Derivatives
|
|
|
-
|
|
|
|
(636,255
|
)
|
Beneficial conversion
|
|
|
174,740
|
|
|
|
165,933
|
|
Prior year NOL true-up adjustment
|
|
|
(353,215
|
)
|
|
|
-
|
|
Stock option shortfall
|
|
|
8,900
|
|
|
|
-
|
|
Prior year warrant valuation adjustment
|
|
|
255,918
|
|
|
|
-
|
|
Change in valuation
allowance
|
|
|
1,986,364
|
|
|
|
1,143,328
|
|
Total
Income Tax Expense/(Benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes at the enacted tax rates in effect when the differences are
anticipated to reverse. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates,
it is more likely than not that a portion of those assets will not be realized in a future period.
Components
of deferred income taxes are as follows:
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Net operating losses
- federal
|
|
$
|
8,688,918
|
|
|
$
|
7,110,765
|
|
Stock-based compensation
|
|
|
1,882,874
|
|
|
|
1,347,748
|
|
Depreciation of property, plant and
equipment
|
|
|
(54,320
|
)
|
|
|
(82,056
|
)
|
Amortization of licenses and patents
|
|
|
4,206
|
|
|
|
8,738
|
|
Warrant Expense
|
|
|
(179,299
|
)
|
|
|
-
|
|
Accrued Expenses
|
|
|
29,180
|
|
|
|
-
|
|
Valuation
allowance
|
|
|
(10,371,559
|
)
|
|
|
(8,385,195
|
)
|
Net
deferred tax assets/(liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of June 30, 2016, the Company had approximately $25,556,000 in U.S. net operating loss (“NOL”) carryforwards
that expire beginning in 2029. Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”),
a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards
to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate
stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules and aggregation rules
which combine unrelated shareholders that do not individually own 5% or more of the corporation's stock into one or more “public
groups” that may be treated as 5-percent shareholder) increases by more than 50 percentage points over such stockholders’
lowest percentage ownership during the testing period (generally three years).
In general, the annual use limitation
equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt interest rate.
The Company believes there is a 382 limitation on its NOLs that will substantially limit the use of its NOLs in the future. However,
the Company is currently evaluating whether or not and when an “ownership change” has occurred and, if so, what the
annual limitation on NOL will be in future periods. The Company has recorded a valuation allowance on the entire NOL as it believes
that it is more likely than not that the deferred tax asset associated with the NOLs will not be realized regardless of whether
an “ownership change” has occurred.
The
Company files income tax returns in the United States and is subject to examination by income tax authorities for years 2008
to present.
NOTE
15 — SUPPLEMENTAL CASH FLOW INFORMATION
The
following is supplemental cash flow information:
|
|
Year
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
40,447
|
|
|
$
|
23,698
|
|
|
|
|
|
|
|
|
|
|
Cash paid
for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following is supplemental disclosure of non-cash investing and financing activities:
|
|
Year
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Conversion
of debentures into shares of common stock
|
|
$
|
-
|
|
|
$
|
1,725,000
|
|
|
|
|
|
|
|
|
|
|
Allocated
value of warrants issued with convertible debentures
|
|
$
|
486,487
|
|
|
$
|
266,212
|
|
|
|
|
|
|
|
|
|
|
Stock warrants
issued for conversion of accrued salaries
|
|
$
|
409,667
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense
paid in shares of common stock
|
|
$
|
61,682
|
|
|
$
|
206,667
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of shares
|
|
$
|
-
|
|
|
$
|
157,999
|
|
|
|
|
|
|
|
|
|
|
Financing
of prepaid insurance
|
|
$
|
10,093
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Stock warrants
issued as debt issuance costs
|
|
$
|
73,044
|
|
|
$
|
-
|
|
NOTE
16 — LITIGATION
During
the fourth quarter of the fiscal year ended June 30, 2014, the Company commenced an action against a former employee in Federal
Court in Austin, Texas regarding the termination of his employment agreement. The Company was seeking to recover all common stock
and cancel all options issued to the former employee as part of his employment agreement. The former employee filed a counterclaim
against the Company alleging breach of contract of the employment agreement seeking allegedly unpaid compensation.
On
December 22, 2014 the parties came to a non-appealable judgment agreement. Pursuant to this agreement, the former employee and
the Company agreed that he may retain 2.4 million shares that were issued to him as part of his prior employment agreement. The
former employee additionally agreed to forego $364,129 of accrued and unpaid wages, terminate all outstanding options and warrants
of 7.7 million and 1.1 million, respectively, and return 2.6 million shares, which were part of his signing bonus, to the Company
for cancellation. As a result of this settlement, the Company recorded a gain of $546,129 which is presented in the consolidated
statements of operations as Gain on Settlement.
NOTE
17 — TRANSACTIONS WITH AFFILIATED PARTY
During
the year ended June 30, 2016, the Company’s former CFO surrendered 638,300 shares of common stock and options to purchase
an additional 987,500 shares in exchange for the cancellation of indebtedness to the Company aggregating $79,000. As a result
of this surrender, the Company recorded a gain of $174,568 which is presented in the consolidated statements of operations as
Gain on Settlement.
During
the year ended June 30, 2016, the Company’s current CFO and two of the Company’s directors invested $15,000, $10,000,
and $25,000 respectively in the convertible debentures issued April – June 2016 and described in Note 6.
During
the year ended June 30, 2015, the Company sold 3,150,000 shares of common stock to family members of a key executive for total
proceeds of $315,000.
NOTE
18 — RECENTLY ISSUED ACCOUNTING STANDARDS
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from
Contracts with Customers
. The revenue recognition standard affects all entities that have contracts with customers, except
for certain items. The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance
under current generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining
revenue recognition. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective
Date,
which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities are required to
adopt the revenue recognition standard for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued
ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.
Early adoption of
this updated guidance is permitted as of the original effective date of December 31, 2016. The Company is in the process of evaluating
the impact, if any, of the adoption of this guidance on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting.
This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including
the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement
of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. Early adoption is permitted. The Company is in the process of evaluating the impact, if any, of the adoption of this
guidance on its consolidated financial statements.
In
November 2015, the FASB issued ASU 2015-17,
Income Taxes: Balance Sheet Classification of Deferred Taxes.
This ASU requires
entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. It thus simplifies
the current guidance, which requires entities to separately present deferred tax assets and deferred tax liabilities as current
and noncurrent. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. Early adoption is permitted. The Company has adopted this guidance effective for the year ended June 30, 2016.
In
February 2016, the FASB issued ASU 2016-02,
Leases,
which updates guidance on accounting for leases. The update requires
that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing
its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to
make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to
current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction
now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments
in the statement of cash flows. The standards update is effective for interim and annual periods after December 15, 2018 with
early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for
leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when
adopted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated
financial statements.
In
August 2014, the FASB issued ASU No. 2014-15
Preparation of Financial Statements — Going Concern (Subtopic 205-40), Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
Under GAAP, continuation of a reporting entity
as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation
becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis
of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation
basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting.
Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about
the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared
under the going concern basis of accounting, but the amendments in this update should be followed to determine whether to disclose
information about the relevant conditions and events. The amendments in this update are effective for the annual period ending
after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company will
continue to evaluate the going concern considerations in this ASU, however, at this time, the Company has not adopted this standard.
The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements.
NOTE
19 - SUBSEQUENT EVENTS
In
August 2016 the Company issued 200 Units of its previously announced private placement to a family member of a key executive
for proceeds of $200,000. These Units are identical to the Units described in Note 6 under the heading “April - June 2016
Convertible Debentures”.
(b) Financial
Statement Schedules: