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QUANTUM MATERIALS CORP. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-K. All statements contained herein that are not historical facts, including, but not limited to, statements regarding anticipated future capital requirements, our future plan of operations, our ability to obtain debt, equity or other financing, and our ability to generate cash from operations, are based on current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties that may cause the Company's actual results in future periods to differ materially from forecasted results. Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of our Company. Our Company and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in this report and other Company filings with the Securities and Exchange Commission and in our reports to stockholders. Statements that relate to other than strictly historical facts, such as statements about the Company's plans and strategies and expectations for future financial performance are forward-looking statements within the meaning of the Act. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "will" and other similar expressions identify forward-looking statements. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and operating performance, and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See "Risk Factors" for a discussion of events and circumstances that could affect our financial performance or cause actual results to differ materially from estimates contained in or underlying our forward-looking statements. Business Overview QMC is a nanotechnology company specializing in the design, development, production and supply of nanomaterials, including quantum dots and tetrapod quantum dots ("TQDs"), a high performance variant of quantum dots, for a range of applications in the life sciences, optoelectronics, photovoltaics, lighting, security ink and sensor sectors of the market. QMC owns 100% of Solterra Renewable Technologies, Inc. ("Solterra"), an operating subsidiary that is focused on the photovoltaic (solar cell) market. Nanoparticle are materials with features in the nanoscale, which features can be beneficial in a number of applications. Quantum dots are atomic crystals, tiny nanoparticles which can operate as up converters or down converters, emitting either photons or electrons when excited. The color of light emitted varies depending on the size of the quantum dot so that photonic emissions can be tuned by the creation of quantum dots of different sizes. Their unique properties as highly efficient, next generation semiconductors have led to the use of quantum dots in a range of electronic and other applications, including in the biomedical, display and lighting industries. Quantum dots also have applications in solar cells, where their characteristics enable conversion of light energy into electricity, with the potential for significantly higher efficiencies and lower costs than existing technologies, thereby creating the opportunity for a step change in the solar energy industry through the use of quantum dots in printed photovoltaic cells. Quantum dots were first discovered in the early 1980's and the industry has developed to the point where quantum dots are now being used in an increasing range of applications, including the television and display industries, the light emitting diode ("LED") lighting industry and the biomedical industry. Sony, for example, has recently launched its first televisions using quantum dots to enhance the picture quality and power efficiency of its products, a number of major lighting companies are developing product applications using quantum dots to create a more natural light for LEDs, the biomedical industry is using quantum dots in diagnostic and therapeutic applications, and applications are being developed to "print" highly efficient photovoltaic solar cells in mass quantities at low cost. 29 According to a recent market research report, "Quantum Dots (QD) Market - Global Forecast & Analysis (2012 - 2022)" published in May 2012 by MarketsandMarkets (http://www.marketsandmarkets.com), the total market for quantum dots is expected to reach $7.48 billion by 2022, at a compound annual growth rate (CAGR) of 55.2% from 2012 to 2022. The key challenge for the quantum dot industry will be its ability to scale up production volumes sufficiently to meet growing demand for quantum dots while maintaining product quality and consistency and reducing the overall costs of supply to stimulate new applications. Quantum dots remain an extremely expensive commodity, with high cost small batch production processes constraining growth. The Company recently acquired a patent portfolio from Bayer AG that includes a number of patents 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. In addition the company has a worldwide exclusive license to a patented chemical process that permits it to produce high performance TQDs using a lower cost and environmentally friendly solvent for greater manufacturing flexibility. The Company has developed a proprietary method that allows it to mass produce consistent quantities of quantum dots and TQDs in a continuous process at lower capital costs than other existing processes. It also has the exclusive license to a patented screen printing technique for manufacture of LED's and OLED's which can include quantum dot enhanced electronic displays and other electronic components. The Company believes that these intellectual properties and proprietary technologies position the Company to become a leader in the overall Nanomaterials and quantum dot industry, and a preferred supplier of high performance quantum dots and tetrapod quantum dots to an expanding range of applications. Critical Accounting Policies Cash and cash equivalents Cash and cash equivalents include cash and all highly liquid financial instruments with original purchased maturities of three months or less. At various times during the year, the Company maintained cash balances in excess of FDIC insurable limits. Management feels this risk is mitigated due to the longstanding reputation of these banks. Fair value of financial instruments The Company's financial instruments consist of cash and cash equivalents, inventory, sales tax receivable and prepaids, deposits and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements. Use of estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Deferred Finance Costs Deferred finance costs which arose from the Company's convertible debenture financing are amortized using the effective interest method over the term of the debentures. Equipment Office furniture, office equipment and the microreactor are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized: minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives which are generally three to ten years. Method Period Office furniture Straight line 7 years Office equipment Straight line 3 years Microreactor Straight line 10 years 30 Long-lived assets We review our long-lived assets, which include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as "the asset") may not be recoverable. Such circumstances include, but are not limited to: · a significant decrease in the market price of the asset; · a significant change in the extent or manner in which the asset is being used; · a significant change in the business climate that could affect the value of the asset; · a current period loss combined with projection of continuing loss associated with use of the asset; and · a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life. Beneficial conversion Equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible equity instruments. 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 a deemed dividend or interest expense and an increase to additional paid-in-capital. The beneficial conversion has been fully accreted to the face value of the original loan and interest expense has been recognized. Research and development costs Research and development costs are expensed as they are incurred. Research and development expense was $91,803 and $114,980 for the years ended June 30, 2013 and June 30, 2014, respectively. Basic and diluted loss per share The Company reports basic loss per share in accordance with the ASC 260, "Earnings Per Share". Basic loss per share is computed using the weighted average number of shares outstanding during the period. Diluted loss per share has not been provided as it would anti-dilutive. Dilution is computed by applying the treasury stock method. Plan of Operation The Company has recently entered the commercialization stage of its business with the launch of the Wet Lab in July, 2013, its first permanent facility. The Wet Lab is located in San Marcos, Texas, approximately 30 miles south of Austin, Texas. This facility is part of the Star Park Technology Center, an extension of Texas State University, the fifth largest university in Texas and one of eight Texas Emerging Research Universities. This arrangement provides the Company with the opportunity to expand its operations within this 30 acre technology park. The Company has a year to year lease agreement and the option to add additional lab and office space on an as-needed basis. This location provides the Company with convenient access to an experienced faculty and specialized laboratory facilities that can support joint research and development efforts with Texas State University, and is in proximity to a number of leading companies in the life sciences, lighting, solar and electronics markets. The Wet Lab will be the center of operations of the Company and will be used by the Company to produce small sample quantities of Nanomaterials as well as larger quantities of Nanomaterials via its patented process for supply to research facilities, customers and potential customers, and potential development joint ventures. The facility is used to support test production runs, to fine tune the characteristics of the materials for optimized performance in the customer's specific application, and for continued R&D activities. The Wet Lab was established through funds raised in a private placement of common shares of the Company completed in early June 2013. The Company has established its first continuous manufacturing process at the Wet Lab and can now produce kilogram volumes of Nanomaterials for supply to customers on a commercial scale. This first unit is being used to validate synthesis protocols for customized materials development to meet customer specification and is also being used to produce samples and is capable of fulfilling small to medium-size orders. The Company has also negotiated an agreement with the equipment provider for the delivery of a production scale equipment unit capable of producing up to 4000 kilograms per year. This unit is intended to be used to fulfill large commercial orders. Subject to the Company obtaining financing for this larger equipment acquisitions, the sample size and production size equipment units are expected to be delivered to the Wet Lab during the first quarter of 2015. The second unit will be commissioned and tested upon delivery, with a view towards commencing initial production runs of materials within 30-60 days after installation. While the Company plans to work extensively with this provider of equipment units , the Company owns all rights to the designs and intellectual property resulting from the development project, and could contract with one or more other competent suppliers of equipment if that became necessary. 31 The Company is preparing to enter the next phase of its development - production and supply of commercial scale volumes of materials to potential customers and joint ventures in order to develop a platform of initial customers in various industries. In order to finance the development of its business, including the establishment of its continuous process manufacturing facility, purchase of the second equipment unit and the expansion of its marketing and sales capabilities. The Company expects to commence generating limited revenues from the production of materials at the Wet Lab in the third quarter of 2014. Such revenues are expected to be modest at first and will be dependent upon the Company generating purchase orders from potential customers currently under NDAs and evaluating the Company's technology. As part of this strategy, the Company has engaged in discussions with numerous target customers and has signed a number of NDAs and Sample Agreements to increase the probability of receiving firm orders from one or more of these entities. The Company's ongoing research and development functions are considered key to maintaining and enhancing its competitive position in the growing nanomaterials and quantum dot market. Nanomaterials and Quantum dot technology continue to evolve, with new discoveries and refinements being made on an ongoing basis. The Company intends to be at the forefront of technological development, and will focus a significant part of its efforts on this, as it has done historically. Continuing R&D activities at the Wet Lab will be an important aspect of the Company's strategy, as will the Company's collaboration with Rice University, University of Arizona, Texas State University and the numerous research centers and departments with which the Company has relationships. The key assets of the Company are its patents, high volume process equipment, licenses and other intellectual property rights, its knowhow and the expertise, capabilities and relationships brought to the Company by its management team. The Company will continue to develop its intellectual property portfolio and licensing rights. The Company is also working closely with numerous universities and public and private labs to develop and expand its intellectual property portfolio. As the business progresses, the Company will continually build out its portfolio of owned and licensed intellectual property, and take all appropriate steps to protect these rights. The Licenses with Rice and University of Arizona include provisions for milestones and milestone payments. To date, these have been paid as agreed, waived and/or extended by both Rice and University of Arizona, respectively, illustrating the support each university has given to the Company as it has attempted to advance its business with measured resources. As the Company moves forward, it expects to be able to meet all payment and other obligations under the Licenses, and the Company's funding strategy takes account of these requirements. The business of the Company is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, and regulation of hazardous materials used in or produced by the manufacture or use of quantum dots. Management believes that its patented technology, licensed patented chemistry and proprietary manufacturing process allow the Company to comply with current regulations by producing nanomaterials and by using environmentally friendly solvents, which are nevertheless contained and recycled in the production process. However, new regulations or requirements may develop that could adversely affect the Company or its products in the future. See "Risk Factors." Liquidity and Capital Resources At June 30, 2014 the Company had a working capital deficit of approximately $3,152,367 with total liabilities of approximately $3,662,495. Approximately $784,164 of these liabilities is owed to our officers, directors and employees for services rendered and accrued through June 30, 2014. The Company has been in the development stage since inception. As a result, the Company has relied on financing through the issuance of common stock and a convertible debenture as well as advances from a director, shareholder and employees' wages being partially or fully accrued but not paid. As of June 30, 2014, the Company lacks cash or cash equivalent assets and continues to incur losses in its development stage operations. Over the past six years, the Company relied on sales of its Common Stock to support its operations and on various universities performing work and providing U.S. licensing rights under business agreements in which the Company has at times been in arrears in payments as well as employees and consultants agreeing to defer payment of wages and fees owed to them and/or converting such wages and fees into the securities of the Company. Currently, the Company is seeking additional financing in excess of $3,000,000; however, no definitive agreements for additional financing have been received and the Company cannot provide any assurance that additional funding will be available to finance our operations on terms acceptable to us, if at all, in order to support our plan of operations. If we are unable to achieve the financing necessary to continue our plan of operations, then our stockholders may lose their entire investment in the Company. See "Notes to Financial Statements." 32 Cash was used in operating activities of $956,639 for fiscal 2014. This is a result of a net loss of $5,302,487 partially offset by stock issued for services of $902,300 and options issued for services of $1,252,828, stock issued for debenture interest and charges of $194,454, and change in the fair value of the derivative liability of $1,084,337. Cash flows used in investing activities during 2014 were $303,514 for the purchase of microreactor equipment. Cash flows provided by financing activities during 2014 were $1,273,533 which consisted of proceeds of the sale of common stock of $873,533 and proceeds from equipment financing debenture of $400,000. As of June 30, 2014, Mr. Squires does not have any unreimbursed cash advances due to him, and has accrued payroll and expenses totaling $119,681 owed to him and accrued payroll of $3,009 owed to his wife in her role as a bookkeeper for the Company. Cash was used in operating activities of $540,428 for fiscal 2013. This is a result of a net loss of $4,905,778 partially offset by stock issued for services of $1,582,975, options issued for services of $911,863, stock issued for debenture interest of $151,707, and changes in accounts payable of $143,820 and changes in accrued liabilities for related parties of $1,033,573. There were no cash flows used in investing activities in 2013. Cash flows from financing activities during 2013 were $697,598 which consisted of proceeds of the sale of common stock. In 2010, our board approved granting Mr. Squires the two year right to convert loans made by him of up to $200,000 into a maximum 5% interest in the common stock of Solterra, which option has expired unexercised. As of June 30, 2013, Mr. Squires does not have any unreimbursed cash advances due to him, and has accrued payroll and expenses totaling $197,125 owed to him and accrued payroll of $182,577 owed to his wife in her role as a bookkeeper for the Company, these amounts are included in amounts due to related parties. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying value and classification of assets and liabilities should the Company be unable to continue as a going concern. At June 30, 2014, the Company had not yet achieved profitable operations, has accumulated losses of $21,675,292 since its inception, at June 30, 2014, has a working capital deficit of $3,152,367 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company requires immediate and substantial additional financing (estimated at $3,000,000) during Q1 and Q2 of fiscal 2015 to maintain and expand its development stage operations. The Company is exploring all reasonable avenues of financing at this time, including, without limitation, the sale of equity, debt borrowing and/or the receipt of product licensing fees and royalties. We can provide no assurances that such financing will be obtained on terms satisfactory to the Company, if at all. Further, we can provide no assurances that one or more mutually acceptable licensing agreement(s) will be entered into on terms satisfactory to us, if at all. In this respect, see "Note 2" in our notes to the consolidated financial statements for additional information as to the possibility that we may not be able to continue as a "going concern." Off-balance sheet arrangements We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits. Officers and employees convert accrued salaries and bonus into warrants In November 2010, Steven Squires ($125,000), Brian Lukian ($234,375), David Doderer ($62,500), Robert Glass ($37,500), Ghassan Jabbour ($243,750), Andrew Robinson ($50,000) and Toshinori Ando ($35,000) converted the amount of monies set forth beside their names into five-year warrants to purchase 1,666,666 shares, 3,125,000 shares, 833,333 shares, 500,000 shares, 3,250,000 shares, 666,666 shares and 466,666 shares, respectively. In summary, a total of $788,125 was converted into warrants to purchase 10,508,331 shares exercisable at $.075 per share through the expiration date of November 4, 2015. 33 In May 2011, David Doderer ($81,250), Robert Glass ($61,250), Ghassan Jabbour ($62,500), Andrew Robinson ($50,000) and Toshinon Ando ($65,000) converted the amount of monies set forth beside their names into five-year warrants to purchase 738,636 shares, 556,818 shares, 568,181 shares, 454,545 shares and 590,909 shares, respectively, In summary, a total of $320,000 was converted into warrants to purchase 2,909,089 shares exercisable at $.11 per share through the expiration date of May 18, 2016. In January 2013, Chris Benjamin ($39,825), Art Lamstein ($101,139), Toshinon Ando ($125,000), Robin Squires ($122,577), and Ghassan Jabbour ($150,000) converted the amount of monies set forth beside their names into 1,075,275 common shares, 2,730,744 common shares, 3,375,000 common shares, 3,309,570 common shares and 4,050,000 common shares, respectively, In January 2013, David Doderer ($120,000), and Robert Glass ($96,629) converted the amount of monies set forth beside their names into five-year warrants to purchase 3,000,000 common shares and 2,415,725 common shares respectively. In February 2014, Stephen Squires ($95,000), David Doderer ($25,000), Chris Benjamin ($90,000), Ghassan Jabbour ($120,000), Andrew Robinson ($50,000), Toshinori Ando ($99,870), and Art Lamstein ($66,405) converted the amount of monies set forth beside their names into five-year warrants to purchase 17,071,082 shares exercisable at $.06 per share through the expiration date of February 10, 2019. In June 2014, Stephen Squires ($125,000), Chris Benjamin ($80,000), Ghassan Jabbour ($120,000), Robin Squires ($75,000), Toshinori Ando ($86,000) and Andrew Robinson ($40,000) converted the amount of monies set forth beside their name into an aggregate of 6,575,000 common shares and 5,000,000 five-year warrants exercisable at $.08 per share through the expiration date of June 6, 2019. In June 2014, Art Lamstein ($65,000) converted the amount of monies set forth beside his name into five-year warrants to purchase 1,083,333 shares exercisable at $.06 per share through the expiration date of June 6, 2019. Debt Conversions On April 3, 2014, Morse & Morse, PLLC converted $200,000 of legal fees into a $200,000 promissory note convertible at $.06 per share. On that date, the note was assigned to the firm's partners and an employee. In June 2014, the noteholders converted the principal and accrued interest into an aggregate of 3,363,654 shares of the Company's restricted Common Stock. On June 30, 2014, our holders of $1,000,000 in principal of secured debt, converted the principal of their debt into 16,666,667 shares of the Company's Common Stock at the conversion price of $.06 per share. Since Mr. Squires pledged his 20 million shares of Common Stock to secure the repayment of their loans, the former debt holders released the pledged securities back to Mr. Squires. The remaining $500,000 of secured debt which was originally incurred in November 2008, remains due and payable on November 4, 2014, subject to the noteholder's right of conversion through that date. The Company has the right of prepayment through the maturity date of this debt, subject to the debenture holder's right to receive prior written notice and its opportunity to convert prior to the redemption date of such note. 34 Results of Operations - June 30, 2014 versus June 30, 2013 Balance Sheet Cash At June 30, 2014, the Company's balance sheet included cash of $185,811 compared to cash of $172,431 at June 30, 2013, representing an increase in cash of $13,380 for the year. An amount of $873,533 was raised through the sale of common stock in fiscal 2014 as compared to $697,598 in the prior year, however operating costs have consumed the majority of the amount leaving the current cash balance of $185,811. The Company has been in a development stage since inception. As a result, the Company has relied on financing through the issuance of common stock and a convertible debenture in November 2008 as well as advances from related parties. License QMC and Solterra are parties to the Rice Licenses with Rice University. As noted herein, under the Rice Licenses, Solterra and QMC have been granted exclusive rights to develop, manufacture, market and exploit tetrapod quantum dots, in the case of Solterra, for photovoltaic applications, and in the case of QMC, for all electronic and medical applications. During the term of each Rice License, Rice is entitled to royalties ranging from 2% to 4% on sales of quantum dots for photovoltaic cells and 7.5% on sales of quantum dots for other electronic and Life Sciences applications. Rice is also entitled to certain milestone payments under each of the Rice Licenses. The milestone payments, payable on successive annual dates, and escalating from $129,412 up to $3,738,600 (subject to certain adjustments) were due to commence in August 2012. Certain key milestones, such as commencement of initial and scaled production by particular dates, were also required to be achieved by dates in 2013. As all of the milestones were not achieved by the originally anticipated dates, Rice has agreed to amend the first royalty payment date to November 15, 2014, and extend the time for achievement of remaining key milestones to August 15, 2014. Rice is also entitled to fees in the event of certain liquidity events occurring in relation to the Company and its business. As noted above, Solterra is also party to the UA License with the University of Arizona under which Solterra has been granted exclusive rights to use UA's patented screen printing techniques in the production and sale of organic light emitting diodes in printed electronic displays and other printed electronic components. Under the UA License, UA is entitled to royalties on sales of products within the scope of the UA License, of 2% on net sales of licensed products in non-display electronic products and 2.5% on net sales of licensed products for printed electronic displays, subject to certain minimum annual payments. Patent license costs have been expensed as research and development expenses and amounted to $0 and $14,804, respectively in the year ended June 30, 2014 and June 30, 2013. Furniture and equipment During the years ended June 30, 2014 and June 30, 2013, the company did not have any acquisitions or disposals of office equipment and furniture. The company is amortizing the office equipment and furniture on a straight line basis over 3 and 7 years, respectively, and has charged operations with $0 of amortization related to furniture and equipment for this year and $1,160 in the prior year. During the year ended June 30, 2014 the company acquired microreactor equipment, which was placed into service in April 2014. The company is depreciating the microreactor equipment on a straight line basis over 10 years, and has charged operations with $7,588 of depreciation expense for the year ended June 30, 2014. 35 Deferred financing costs Deferred finance cost incurred were $95,603, of which $19,920 was amortized for the year ending June 30, 2014. This amount relates to the $400,000 convertible debenture financing raised in February 2014. The deferred financing cost is being amortized using the effective interest method over the twenty-four month life of the note. The balance at June 30, 2013 was $75,683, which off-sets the face value of the note payable. Accounts payable and accrued liabilities The balance at June 30, 2014 was $966,841. Included in accounts payable is accrued liabilities to related parties of $784,164 for unpaid wages, legal fees of $18,432, other pro fees of $10,346, and accounting fees of $30,500. The balance at June 30, 2013 was $1,801,561. Included in accounts payable is accrued liabilities to related parties of $1,513,978 for unpaid wages, legal fees of $173,432, research & development fees of $68,000, and accounting fees of $39,641. Fair value of embedded conversion feature The Company has evaluated the application of ASC 815 to the Convertible Note 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 balance sheet at fair value with changes in the values of these derivatives reflected in the statements of operations as "Gain (loss) on derivative liabilities." Further explanation can be found in Note 7. As part of implementing ASC 815-40-14 the Company adjusted accumulated deficit by $162,643 and additional paid in capital by $212,184 for the year ended June 30, 2010. The fair value of the derivatives as of June 30, 2014 was estimated by management to be $1,871,337 as compared to the estimated fair value at June 30, 2013 of $787,000. The increase of $1,084,337 has been charged to operations in the current year. The increase is due primarily to the increase in stock price. Convertible debenture 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 to obtain $1,500,000 in gross proceeds from three non-affiliated parties in exchange for 3,525,000 restricted shares of Common Stock of Hague Corp and Debentures in the principal amount aggregating $1,500,000. The due date of these Debentures were extended through November 4, 2014 and bear interest at the rate of 8% per annum. The Debentures are pre payable by the Company at any time without penalty, subject to the Debenture holders' conversion rights. The Company recorded a discount of $1,155,826 associated with the 3,525,000 shares issued. The discount was amortized over the original three year life of the debenture. The Debentures are secured by the assets of Quantum Materials Corp and are guaranteed by Solterra as Quantum Materials Corp's subsidiary and were previously subject to a pledge of 20,000,000 shares by Stephen Squires, the Company's Chief Executive Officer. In June 2014, two of the non-affiliated parties opted to convert their debenture holdings totaling $1,000,000 into 16,666,667 common shares at a conversion price of $.06 per share. The remaining $500,000 in principal is held by one non-affiliated person and is convertible through the maturity date of November 4, 2014 at $.06 per share, subject to anti-dilution protection for stock splits, stock dividends, combinations, reclassifications and sale of the Company's Common Stock at a price below the Conversion Price. Certain changes of control or fundamental transactions such as a merger or consolidation with another company or other material event could cause an event of default under the Transaction Documents. 2014 Convertible Debenture On February 6, 2014, 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 $400,000 in gross proceeds from two non-affiliated parties (collectively hereinafter referred to as the "Lenders") in exchange for 5,000,000 common stock warrants exercisable at $.06 per share through December 31, 2016. The Debenture has a term of two years maturing on January 31, 2016. The Debenture bears 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' right of conversion at a conversion price of $.04 per share. 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. In the event of a second investment, the investor would receive warrants to purchase up to 8,125,000 shares, exercisable at $.06 per share with the second Debenture convertible at a conversion price of $.06 per share. The Agreement also provides for the investor 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. 36 In accounting for the above convertible debentures, the Company has recognized a beneficial conversion factor expense of $115,603, allocated warrant expense (deferred financing costs) of $95,603, and interest expense of 19,920 for the twelve months ended June 30, 2014. The warrant expense is treated as deferred financing costs and is being amortized using the effective interest rate method over the life of the loan agreement, twenty-four months. The debenture funds are held in escrow and released as progress payments are made on the microreactor construction. The funds which have been released as payment are originally classified as Deposits on Assets, until such time that the microreactor was put in service. The amounts are now classified as the Microreactor Equipment. On April 3, 2014, Morse & Morse, PLLC converted $200,000 of legal fees into a $200,000 promissory note convertible at $.06 per share. On that date, the note was assigned to the firm's partners and an employee. In June 2014, the noteholders converted the principal and accrued interest into an aggregate of 3,363,654 shares of the Company's restricted Common Stock. Common Stock During the fiscal year ended June 30, 2014 according to the provisions of the Convertible Debenture agreement, the Company elected to issue 2,565,010 shares of the Company's Common Stock to pay accrued interest on the debentures. The Company also issued 21,645,055 restricted shares of common stock at between $0.035 per share and $0.12 per share for a total of $830,333. Common stock increased from 182,988,347 shares at June 30, 2013 to 256,582,767 shares at June 30, 2014. During the fiscal year ended June 30, 2013 according to the provisions of the Convertible Debenture agreement, the Company elected to issue 2,176,247 shares of the Company's Common Stock to pay accrued interest on the debentures. The Company also issued 22,388,375 restricted shares of common stock at between $0.035 per share and $0.12 per share for a total of $697,598. Common stock increased from 124,113,887 shares at June 30, 2012 to 182,988,347 shares at June 30, 2013. Statement of operations - June 30, 2014 General and administrative expenses During the twelve months ended June 30, 2014 the Company incurred $3,823,649 of general and administrative expenses compared to the $4,213,819 recorded for the twelve months ended June 30, 2013. The decrease of $390,170 can be attributed to a decrease in stock based compensation expense of $339,710, a decrease in compensation of $191,191, offset by an increase in office and general expenses of $89,653. Included in the expenses for the current twelve months were stock based compensation of $2,155,128, executive compensation of $628,154, non-executive compensation of $327,350, legal and audit of $95,430 and travel expense of $139,893. Research and development expenses. The Company incurred research and development expenses of $114,980 in the twelve months ended June 30, 2014, as compared to 91,803 in the twelve months ended June 30, 2013. The Company has two development agreements in place with major universities, along with licensing agreements in place with two additional universities. One development agreement is to optimize the printing process of solar cells and the other development agreement is to optimize the manufacturing process for quantum dots. Amortization of convertible debenture discount The convertible debenture discount of $1,500,000 was amortized over the original 36 month term of the debenture using the effective interest method. The debenture was issued on November 4, 2008. Amortization recorded for the twelve month period ended June 30, 2014 was $0. The amortized balance of the discount at June 30, 2014 is $0 resulting in the convertible debenture value on the balance sheet net of the discount $1,500,000. At June 30, 2014 the amortization for the twelve months was $0. In addition, $1,000,000 of the debenture was converted to 16,666,667 common shares in June 2014, leaving a remaining balance of $500,000 for the debenture on the balance sheet. 37 Amortization of deferred finance cost This amount relates to the $315,000 of expenses associated with the $1,500,000 convertible debenture financing raised in November 2008. The deferred financing cost was amortized using the effective interest method over the thirty-six month life of the debenture. Amortization expense recorded for the twelve month period ended June 30, 2014 and 2013 was $0 and $0, respectively. In February 2014 the Company recognized deferred financing costs associated with the $400,000 convertible note issued with warrants, in the amount of $95,603. The deferred financing cost is being amortized using the effective interest method over the twenty-four month life of the note. Amortization expense recorded for the twelve month period ended June 30, 2014 and 2013 was $19,920 and $0, respectively. Interest expense on the convertible debenture This amount relates to the 8% interest associated with the $1,500,000 convertible debenture issued in November 2008, and the 8% interest associated with the $400,000 convertible debenture issued in February 2014. Interest expense recorded for the period ended June 30, 2014 was $163,530 compared to $151,707 in the prior year ended June 30, 2013. According to the provisions of the Convertible Debenture agreements the Company has elected to issue shares of the Company's Stock to pay accrued interest on the debentures. In the year ended June 30, 2014, the Company issued 2,852,133 shares of the Company's restricted Common Stock to pay $133,152 of accrued interest. As the provision to pay stock for interest discounts the market price of the stock for the $1,500,000 debenture, the Company has attributed this discount to interest expense and additional paid in capital. The effect of this extra interest expense for the twelve months ended June, 30 2014 is $30,378. Change in fair value of warrants and embedded conversion feature This amount relates to the change in value of the derivative liabilities. The change recorded in the year ended June 30, 2014 was $1,084,337 as compared to the change in value recorded in the year ended June 30, 2013 of $441,000. Option and Warrant expense The Company issued 2,000,000 common stock warrants related to the debenture extension and has attributed $138,800 to the warrant value using the Black Scholes price model during the year ended June 30, 2013. The value will be expensed over the duration of the debenture extension, as such, $99,252 of the warrant value was recognized as expense in current fiscal year, with the remainder of $39,548 to be recognized in the subsequent fiscal year. The Company issued 5,415,725 common stock options to employees in exchange for salaries owed and has attributed $440,840 to the options value using the Black Scholes price model during the year ended June 30, 2013. As $216,629 was previously recognized as salary expense, the remainder of $224,211 was recognized in operating expense. 38 In October 2012, the Company issued 15,000,000 shares of common stock and options to purchase an additional 15,000,000 shares to executives as part of their employment agreements entered into during the fiscal year and has attributed $1,050,000 to the options value using the Black Scholes price model. The expense was recognized in the year ending June 30, 2013 and included in operating expense. The Company issued 2,000,000 common stock options to two individuals for services. The options were valued using the Black Scholes Model, resulting in a valuation of $136,200, recognized for the year ending June 30, 2013 and included in operating expense. Reference is made to Item 5 for a description of securities sold in fiscal 2014. Significant Accounting Pronouncements Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification™ ("ASC") is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. Management has reviewed the aforementioned rules and releases and believes any effect will not have a material impact on the Company's present or future financial statements. |