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QUANTUM SOLAR POWER CORP. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report constitute "forward-looking statements". These statements, identified by words such as "plan," "anticipate," "believe," "estimate," "should," "expect" and similar expressions, include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. Such risks and uncertainties include those set forth under this caption "Management's Discussion and Analysis of Financial Condition and Results of Operation" and elsewhere in this Quarterly Report. We intend to discuss in our Quarterly and Annual Reports any events and circumstances that occurred during the period to which such document relates that are reasonably likely to cause actual events or circumstances to differ materially from those disclosed in this Quarterly Report. We advise you to carefully review the reports and documents we file from time to time with the United States Securities and Exchange Commission (the "SEC"). OVERVIEW We were incorporated on April 14, 2004 under the laws of the State of Nevada. Our principal executive offices are located at Suite 300, 1055 West Hastings Street, Vancouver, BC, Canada V6E 2E9. We are currently engaged in the research, development and marketing of next generation solar power generation devices utilizing our patent pending technology (the "Next Generation Device™ or NGD™ Technology") for photovoltaic devices that do not use silicon or other, rare earth elements. Once we have completed development, we expect to derive substantially all revenues from royalty based licensing arrangements. The NGD™ Technology, which is covered by two provisional U.S. patents and one Patent Cooperation Treaty Application, differs from conventional solar technology as it does not require expensive silicon based absorber components or rare earth elements. Our researchers at Simon Fraser University in British Columbia, Canada have developed and built a proof of concept prototype of a next generation device utilizing the NGD™ Technology (see "Technology Acquisition" and "NGDTM Technology" below). During the nine months ended March 31, 2012, we invested in $955,383 technological equipment and $1,234,208 in research and development for our NGDTM Technology. The equipment we purchased consisted of the following: (1) Two PVD75 thin-film deposition tools: These tools are used for metal and dielectric depositions via evaporation and sputtering. They complement the existing tools that we have access to at the research facility at Simon Fraser University. These tools have allowed us to increase the number of thin film deposition processes, which in turn enable improvements in process repeatability, thin film property enhancements, and device fabrication throughput. (2) FEI NanoSEM 430 scanning electron microscope: This microscope allows us unrestricted access to an ultra-high resolution microscope with elemental analysis capabilities. It further has special capabilities for imaging insulating samples, which is critical for work on glass substrates. This microscope is used to characterize all the films and devices produced by the thin film deposition tools, and allows us to run more efficient device optimization cycles. We are a development stage company. We have not earned any revenue to date nor have we entered into any licensing agreements to date. We do not anticipate earning revenue until we have completed the development and testing of our NGD™ Technology. We are presently in the development stage of our business and we can provide no assurance that we will be able to complete commercial development or successfully sell or license products incorporating our solar power generation devices, once development and testing is complete. We have limited operations. We conduct all of our research and development on a contractual basis with Simon Fraser University. We have relied on the sale of our securities and loans or capital infusions from our officers and directors to fund our operations to date. 3-------------------------------------------------------------------------------- RECENT CORPORATE DEVELOPMENTS Since the filing of our Quarterly Report for the fiscal quarter ended December 31, 2011 with the SEC, we experienced the following significant corporate developments: Changes to Executive Officers and Directors We adjusted our operational strategy to increase research and development activities and decrease administrative expenses where possible. On February 9, 2012, Stephen Pleging resigned as our President, Chief Executive Officer, Chairman and as a director in order to assist us in cutting non-research costs. Mr. Pleging remains a strong believer in our technology and is prepared to be involved as a consultant, particularly once the development of our NGDTM solar device reaches the appropriate stage. There were no disagreements between Mr. Pleging and us regarding any matter relating to our operations, policies or practices. On February 9, 2012, Stella Guo resigned as our Vice President of Corporate Development and as a director in order to assist us in our efforts to reduce administrative costs to increase its research and development activities. Ms. Guo determined that her appointment as a director and officer was premature, as her services cannot be effectively utilized while the NGDTM technology is not yet at the stage where we should consider expanding its operations into Asia. When the NGDTM Technology is ready for licensing and commercial deployment, Ms. Guo will discuss with management and the Board of Directors whether they would like her to provide us with consulting services to assist us in strategic planning, developing strategic partnerships and facilitating agreements with Asian manufacturing partners. There were no disagreements between Ms. Guo and us regarding any matter relating to our operations, policies or practices. On February 9, 2012, we appointed Andras Pattantyus-Abraham, as our President and Chief Executive Officer. Mr. Pattantyus-Abraham is our Chief Technology Officer and a director. Issuance under Foreign Private Placement On February 27, 2012, we issued 288,050 units (each a "Unit") at a price of $0.20 per unit pursuant to Regulation S of the United States Securities Act of 1933, as amended (the "Act"). Each Unit consists of one share of our common stock and one share purchase warrant (each a "Warrant"). Each Warrant entitles the holder to purchase an additional share of our common stock for a three month period following the date of the issuance at an exercise price equal to $0.25 per share. On March 26, 2012, we extended the expiry date of the Warrants from May 27, 2012 to March 25, 2013. Issuance to Consultant On March 27, 2012, we issued 250,000 shares of our common stock to Mirador Consulting LLC ("Mirador") pursuant to the terms of a consulting agreement. Mirador represented that it is an "Accredited Investor" as defined under Regulation D of the Act. 4-------------------------------------------------------------------------------- Grant of Non-Qualified Stock Options On April 12, 2012, we granted options (the "Options") to purchase 5,950,000 shares of our common stock at a price of $0.20 per share to consultants and directors eligible under our 2011 Stock Incentive Plan. The Options expire on April 12, 2015. The Options granted to our directors were as follows: Name Number of Options Date Exercisable Expiration Date Andras Pattantyus Abraham 750,002 04/12/2012 04/12/2015 166,666 06/30/2012 04/12/2015 166,666 09/30/2012 04/12/2015 166,666 12/31/2012 04/12/2015 Daryl Ehrmantraut 937,502 04/12/2012 04/12/2015 104,166 06/30/2012 04/12/2015 104,166 09/30/2012 04/12/2015 104,166 12/31/2012 04/12/2015 Graham Hughes 250,000 4/12/2012 04/12/2015 Escrowed Loan Agreement On April 23, 2012, we entered into a loan agreement (the "Loan Agreement") with Foundation Freehold Ltd. ("Foundation") for the principal amount of CDN $475,000 (the "Loan"). Our lawyers are holding the funds and executed documents in escrow and performance by all parties is subject to CIO-BC (as defined below) reaching a new agreement with SFU (as defined below). See "Technology Acquisition" below. The Loan is to be advanced to us, subject to certain conditions, according to the following schedule: (i) $175,000 to be advanced on April 25, 2012 (which has been advanced to our lawyers); (ii) $150,000 to be advanced on May 25, 2012; and (iii) $150,000 to be advanced on June 25, 2012. The loans are to be evidenced by promissory notes to be executed by us in favor of Foundation. We will be required to pay 9% annual interest on the Loan from the day of the first advance. The Loan is due on April 23, 2015. To secure the repayment of the Loan, we have agreed to provide a guarantee by 0935493 B.C. Ltd, our wholly owned subsidiary to be secured by a PVD 75 Deposition tool and Nova NanoSEM 430 Ultra-high resolution FESEM microscope. At any time, Foundation may elect to receive shares of our common stock in exchange for any portion of the principal or interest outstanding on the Loan on the basis of one share for each USD $0.02 of indebtedness converted. In the event of a default, Foundation my elect to receive shares on the basis of one share for each USD $0.01 of indebtedness converted. Foundation represented that it was not a "US Person" as that term is defined by Regulation S of the Act. We have not had enough cash to make our payments to CIO-BC for ongoing research and development costs. As a result, CIO-BC has fallen behind with its payments under the CIO-BC Research Agreement (as defined below) and the CIO-BC Research Agreement has been suspended by SFU. We are now working with CIO-BC to negotiate a new agreement with SFU. The new agreement with SFU, which has not been finalized or executed, will likely involve the pledging of some of our equipment other than the equipment pledged to secure under the Loan Agreement, as a security for obligations to SFU. There are no assurances that a new agreement with SFU will be reached, that SFU will allow us to continue to use their facilities to conduct our research and development activities or that we will receive any funds the Loan agreement. 5-------------------------------------------------------------------------------- TECHNOLOGY ACQUISITION We acquired the NGDTM Technology on December 16, 2009 by an agreement (the "Technology Acquisition Agreement") with Canadian Integrated Optics (IOM) Limited, ("CIO"). In consideration of the NGD™ Technology, we issued 71,500,000 shares of our common stock to CIO (of which CIO transferred over 99% pursuant to the terms of a takeover bid, under Canadian Securities Laws) and Desmond Ross, our former director and executive officer, returned 47,000,000 shares to the treasury. Under the Technology Acquisition Agreement, we also agreed to pay CIO, or such other parties designated by CIO, including Canadian Integrated Optics (BC) Ltd. ("CIO-BC"), for ongoing development and research costs under CIO-BC's existing research agreement (the "CIO-BC Research Agreement) with Simon Fraser University ("SFU"). The initial term of the CIO-BC Research Agreement was until July 30, 2010. Subsequent to entering into the Technology Acquisition Agreement, CIO-BC entered into an amendment agreement to the CIO-BC Research Agreement, whereby SFU agreed to extend the term until December 31, 2010. On December 23, 2010, CIO-BC entered into another amendment agreement dated January 1, 2011, whereby SFU agreed to further extend the term until July 31, 2011. On July 28, 2011, CIO-BC entered into another amendment agreement dated July 2, 2011, whereby SFU agreed to further extend the term until December 31, 2011. CIO-BC entered into another amendment agreement dated January 2, 2012, whereby SFU agreed to further extend the term until June 29, 2012 and in consideration of which we will pay $594,401 CDN plus expenses, during the term. We have not had enough cash to make our payments to CIO-BC for ongoing research and development costs. As a result, CIO-BC has fallen behind with its payments under the CIO-BC Research Agreement and the CIO-BC Research Agreement has been suspended by SFU. We are now working with CIO-BC to negotiate a new agreement with SFU. We have entered into the Loan Agreement, which will allow us to continue our research and development activities. However, the Loan Agreement and the first advance thereunder are held in escrow contingent on SFU allowing us to use their facilities to continue our research and development activities. There are no assurances that a new agreement with SFU will be reached, that SFU will allow us to continue to use their facilities to conduct our research and development activities or that we will be advanced any funds under the Loan agreement. NGD™ TECHNOLOGY Our NGD™ Technology is a patent pending, technology and proof of concept prototype for producing solar power without the necessity of utilizing expensive silicon based absorber components or other rare earth elements. Solar cells based on the NGD™ Technology can reach a regime of cost and efficiency not obtainable with conventional solar cells. As a result, we believe our NGD™ Technology has the potential to enable the manufacture of solar cells at significantly less cost per Watt than current producers. Thin Film solar cell technologies have proven inexpensive to manufacture but are at present only capable of efficiencies in the 10% power conversion efficient ("PCE") range. Crystalline silicon solar cells are in the 15% to 20% PCE range but are very expensive to manufacture due to the cost of silicon processing. The reason for both these shortfalls is directly linked with the semiconductors used in the fabrication process. All currently available solar cell technologies rely on a photovoltaic effect in which an incoming solar photon knocks loose a negative charge, leaving behind a positive charge, in a semiconducting material such as silicon. The positive and negative charges are then collected through separate conducting layers to be delivered as current to a load. Defects within the semiconductor layer can affect the power conversion efficiency by reducing the voltage and the current delivered to the load. Elimination of these defects can only occur through expensive purification and processing. The NGD™ Technology's principle of operation avoids the detrimental effects of defects within the semiconductor absorber layers by disposing of it altogether, and thus has the potential to simultaneously satisfy the requirements of high power conversion efficiencies and low costs. In addition, by eliminating expensive and exotic materials and manufacturing in a continuous rather than batch or wafer based process, we believe module costs can be reduced well below $1 per Watt-peak (Wp), the nominal price of a solar module widely recognized as the standard of solar commercial enablement. 6 -------------------------------------------------------------------------------- The market for solar energy has been limited by the costs of panels and by their low efficiencies. Quantum expects that with its low cost, high efficiency NGD™ that the economics of solar power will prove to be superior to alternatives and that new and unforeseen markets will open for solar devices. The solar panel business has been in a high growth phase over the past years however it is not sustainable since the growth has been fundamentally based on the availability of tax incentives, subsidies and other inducements. The economics of unsubsidized solar power are not attractive except in certain niche applications where choices are limited and the high costs can be justified. An average crystalline silicon cell solar module has an efficiency of 15%, an average thin film cell solar module has an efficiency of 6%. Thin film manufacturing costs potentially are lower, though. Crystalline silicon cell technology forms about 90% of solar cell demand. The balance comes from thin film technologies. Approximately 45% of the cost of a silicon cell solar module is driven by the cost of the silicon wafer, a further 35% is driven by the materials required to assemble the solar module. Thin film manufacturer First Solar is reported in some publications to have approximately $6 billion in contracts between 2010 and 2013. If First Solar were to have the opportunity to accept contracts worth $1 trillion and had the manufacturing capability to fulfill these contracts they would still be inhibited and negatively governed by material availability. According to the U.S. Geological Survey, there is enough tellurium available in global reserves to meet only 0.02 Terawatts ("TRW") of energy provision using existing thin film technology. The same applies to San Jose, California-based Nanosolar's Indium supply. Both companies current material choices (according to the Andrea Feltrin, Alex Freundlich Report, Photovoltaics and Nanostructures Laboratories, Center for Advanced Materials and Physics Department, University of Houston, Texas) limits these companies forever to sub-Gigawatt energy production (maximum 0.02 TRW per year). [[Image Removed]] Current Thin Film companies are coming close to competing commercially with coal but the materials they use such as tellurium and indium are very rare and capable of meeting only 0.13% of the worldwide energy demand even if they accessed the entire worldwide reserves of these materials. PLAN OF OPERATION The following discussion and analysis summarizes our plan of operation for the next twelve months, our results of operations for the nine month period ended March 31, 2012 and changes in our financial condition from June 30, 2011. This discussion should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operation included in our Annual Report on Form 10-K for the year ended June 30, 2011 filed with the SEC on September 13, 2011. If we can obtain sufficient financing we intend to continue the final development of our NGD™ Technology, and identify and engage original equipment manufacturers ("OEM's") interested in licensing our technology. We anticipate that the licensing agreements will be between us and OEM's with the expertise and facilities required to mass manufacture solar cells based on our NGD™ technology and that the OEM's will distribute the solar cells worldwide using their existing sales and marketing channels and at their expense. The cost of manufacture will be solely the responsibility of the OEM's. We expect to receive revenue on royalties based on the number of cells produced by the OEM's. This business model should allow us to maximize capital resources available at startup and through our OEM licensees positively address the demand for high efficiency solar cell devices. This business model should enable us to increase revenues and create brand recognition without the time, capital and risk associated with manufacturing plant construction. 7 -------------------------------------------------------------------------------- We are currently reviewing our expenditures and discussing with our consultants ways to reduce our costs so that a greater percentage of funds raised can be expended on our research program. There is no assurance that we will be able to obtain sufficient financing to proceed with our plan of operation. RESULTS OF OPERATIONS Three and Three Months Ended Percentage Nine Months Ended Percentage Nine Months March 31 Increase / March 31 Increase / Summary 2012 2011 (Decrease) 2012 2011 (Decrease) Revenue $ - $ - n/a $ - $ - n/a Operating (810,206 ) (1,733,005 ) (53.2 )% (3,624,459 ) (3,850,803 ) (5.9 )% Expenses Net Loss $ (810,206 ) $ (1,733,005 ) (53.2 )% $ (3,624,434 ) $ (3,850,803 ) (5.9 )% For the period from inception on April 14, 2004 to March 31, 2012, we have not earned any operating revenue. We had an accumulated net loss of $10,000,688 since inception. We incurred total operating expenses of $9,894,713 since inception. We have not earned any revenues since inception. We do not anticipate earning revenues until such time as we complete further development of, and enter into licensing agreements for our NGD™ Cell Technology. We are presently in the development stage of our business and we can provide no assurance that we will be able to generate revenues from sales of our product or that the revenues generated will exceed the operating costs of our business. Operating Expenses We have incurred operating expenses in the amount of $810,206 for the fiscal quarter ended March 31, 2012. Operating expenses for this period included the following expenses: Three Three Percentage Nine Nine Percentage Months Months Increase / Months Months Increase / Ended Ended (Decrease) Ended Ended (Decrease) March March 31, March 31, March 31, 31, 2012 2011 2012 2011 Amortization $ 24,313 $ 278 8645.7% $ 49,056 $ 834 5782.0% of equipment Amortization 19,185 19,185 0.0% 57,556 57,556 0.0% of patents General and 155,934 50,073 211.4% 610,274 402,030 51.8% administrative Professional 166,388 125,230 32.9% 679,226 346,442 96.1% fees Research and 353,569 614,390 (42.5)% 1,234,208 1,885,314 (34.5 )% Development Stock Based 90,817 923,849 (90.2)% 994,139 1,158,627 (14.2 )% Compensation Total $ 810,206 $ 1,733,005 (53.2)% $ 3,624,459 $ 3,850,803 (5.9 )% Operating Expenses Our operating expenses for the three and nine months ended March 31, 2012 have decreased as a result of decreased operations in the development of our NGDTM Technology. This has resulted in decreased research and development activities. The decrease was partially offset by increased general and administrative expenses and increased professional fees. General and administrative expenses primarily relate to fees paid to our: (i) officers, directors, consultants and employees; and (ii) amounts incurred in connection with investor relations activities. 8-------------------------------------------------------------------------------- Stock based compensation relates to recorded expenses for stock options granted to our directors, officers and consultants. Professional fees related to meeting our ongoing reporting requirements with the SEC. We anticipate our operating expenses will increase as we undertake our plan of operation. The increase will be attributable to our development, of our NGD™ solar cell technology. We also anticipate our ongoing operating expenses will also increase as a result of our ongoing reporting requirements under the Exchange Act. Net Loss We incurred a loss in the amount of $10,000,668 for the period from inception to March 31, 2012. Our loss was attributable to the costs of operating expenses which primarily consisted of research and development costs, general and administrative expenses and professional fees paid in connection with preparing and filing our Current, Quarterly and Annual Reports. LIQUIDITY AND CAPITAL RESOURCES Working Capital Percentage At March 31, 2012 At June 30, 2011 Increase / Decrease Current Assets $ 50,947 $ 344,965 (85.2)% Current Liabilities (1,083,065 ) (162,417 ) 566.8% Working Capital $ (1,032,118 ) $ 182,548 (665.4)% Surplus (Deficit) Cash Flows Nine Months Ended Nine Months Ended March 31, 2012 March 31, 2011 Cash Used in Operating Activities $ (1,700,261 ) $ (2,635,722 ) Cash Provided by Investing Activities 959,003 - Cash Provided by Financing Activities 2,338,529 3,713,544 Net Increase (Decrease) in Cash During $ (320,735 ) $ 1,077,821 Period As at March 31, 2012, we had cash of $22,554 and a working capital deficit of $1,032,118. The change in our working capital at March 31, 2012 from our year ended June 30, 2011 is primarily a result of increases in accounts payable and accrued liabilities and decreases in cash. The decrease in our cash flows during the nine month period ended on March 31, 2012 is primarily due to purchases of equipment used in our research and development activities and decreases in proceeds from the issuance of our common stock. The equipment we purchased consisted of the following: (1) Two PVD75 thin-film deposition tools: These tools are used for metal and dielectric depositions via evaporation and sputtering. They complement the existing tools that we have access to at the research facility at Simon Fraser University. These tools have allowed us to increase the number of thin film deposition processes, which in turn enable improvements in process repeatability, thin film property enhancements, and device fabrication throughput. (2) FEI NanoSEM 430 scanning electron microscope: This microscope allows us unrestricted access to an ultra-high resolution microscope with elemental analysis capabilities. It further has special capabilities for imaging insulating samples, which is critical for work on glass substrates. This microscope is used to characterize all the films and devices produced by the thin film deposition tools, and allows us to run more efficient device optimization cycles. 9 -------------------------------------------------------------------------------- Future Financings As of March 31, 2012, we had cash on hand of $22,554. Since our inception, we have used proceeds from the sales of our common stock to raise money for our operations and for our technology acquisition. We have not attained profitable operations and are dependent upon obtaining financing to pursue our plan of operation. For these reasons, our auditors stated in their report to our audited financial statements for the year ended June 30, 2011, that there is substantial doubt that we will be able to continue as a going concern. On January 13, 2012, our Board of Directors approved an offering (the "Foreign Units Offering") of up to 5,000,000 units (each a "Unit") at a price of $0.20 US per Unit pursuant to Regulation S of the Securities Act. Each Unit will consist of one share of our common stock and one share purchase warrant, with each warrant entitling the subscriber to purchase an additional share of our common stock for a three month period following the date of issuance at an exercise price equal to $0.25 US per share. On February 27, 2012, we issued 288,050 Units for proceeds of $57,610 under the Foreign Units Offering. As of March 31, 2012, we have received subscriptions for additional proceeds of $195,000 under the Foreign Units Offering but we have not yet issued the securities to the subscribers. We have no revenues to date from our inception. We anticipate continuing to rely on loans or equity sales of our common stock in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing stockholders. We do not believe that we have obtained sufficient financing to cover our anticipated expenses over the next four months. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing for to fund our planned business activities. OFF-BALANCE SHEET ARRANGEMENTS As at March 31, 2012, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. CRITICAL ACCOUNTING POLICIES Our significant accounting policies are disclosed in Note 2 to our audited financial statements included in our Annual Report for the year ended June 30, 2011. |