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QTMM > SEC Filings for QTMM > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for QUANTUM MATERIALS CORP.

Form 10-Q for QUANTUM MATERIALS CORP.


15-May-2014

Quarterly Report


Item 2. Management's Plan of Operation

This Form 10-Q contains "forward-looking statements" relating to us which represent our current expectations or beliefs, including statements concerning our operations, performance, financial condition and growth. For this purpose, any statement contained in this report that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "anticipation", "intend", "could", "estimate", or "continue" or the negative or other comparable terminology are intended to identify forward-looking statements.

Statements contained herein that are not historical facts are forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, the forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and those actual results may differ materially from those in the forward-looking statements. Such risks and uncertainties include, without limitation:
well-established competitors who have substantially greater financial resources and longer operating histories, regulatory delays or denials, ability to compete as a start-up company in a highly competitive market, and access to sources of capital.

The following discussion should be read in conjunction with the Company's financial statements and notes thereto included elsewhere in this Form 10-Q and our Form 10-K filed October 15, 2013 for the fiscal year ended June 30, 2013. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear herein. The Company's actual results could differ materially from those discussed here.

The financial information furnished herein has not been audited by an independent accountant; however, in the opinion of management, all adjustments (only consisting of normal recurring accruals) necessary for a fair presentation of the results of operations for the period ended December 31, 2013 have been included.

Business Overview

QMC is a nanotechnology company specializing in the design, development, production and supply of 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.

Quantum dots are tiny nanoparticles of a semiconductor material which emit light, or fluoresce, when excited with energy. 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.

The Company has the exclusive license to a patented chemical process that permits it to produce high performance, heavy metal-free TQDs using a lower cost and environmentally friendly solvent for greater manufacturing flexibility. The Company has developed a proprietary method that it believes will allow it to mass produce consistent quantities of TQDs in a continuous process at lower costs than other existing processes, and has filed a provisional patent application on same. It also has the exclusive license to a patented screen printing technique for manufacture of quantum dot enhanced electronic displays and other electronic components. The Company believes that these three proprietary technologies position the Company to become a leader in the overall quantum dot industry, and a preferred supplier of high performance tetrapod quantum dots to an expanding range of applications.

Critical Accounting Policies

Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents, prepaid expenses, accounts payable 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

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


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Quantum enters into Securities Purchase Agreement and Transaction Documents to fund the purchase of its first two microractors

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.

Plan of Operation

The Company has to date been a research and development business operating out of temporary facilities. It has now 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 TQDs (via batch method) and larger quantities of TQDs (via its proprietary process units, once this equipment is acquired) for supply to research facilities, customers and potential customers, and potential development joint ventures. The facility will be used to support test production runs, to fine tune the characteristics of the quantum dots 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 obtained $250,000 to finance the build out and initial costs of operation of the Wet Lab.

The primary short term objective of the Company is to establish its first continuous manufacturing process at the Wet Lab and produce volumes of TQDs for supply to customers on a commercial scale. The Company has completed a joint development effort with a non-affiliated third party provider of industrial process equipment which resulted in the design and successful proof of concept testing of a scalable production unit for manufacturing the Company's proprietary TQDs on a low cost, continuous basis. The Company has negotiated an agreement with the equipment provider for the delivery of a lab scale equipment unit capable of producing 2 grams per hour. This first unit will be used to validate synthesis protocols for customized TQDs developed to meet customer specification and will also be used to produce samples and to fulfill 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 2 kilograms per hour. This unit is intended to be used to fulfill additional commercial orders. Subject to the Company obtaining financing for both of these equipment acquisitions, pursuant to a Securities Purchase Agreement described above, the sample size and production size equipment units are expected to be delivered to the Wet Lab during the first and third quarters of 2014, respectively. Each unit will be commissioned and tested upon delivery, with a view towards commencing initial production runs of TQDs 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.

The Company is preparing to enter the next phase of its development - production and supply of commercial scale volumes of TQDs 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 first two equipment units and the expansion of its marketing and sales capabilities, the Company will be seeking additional investment capital. Provided this capital raise is successful and can be accomplished in the first quarter of 2014, the Company expects to commence generating limited revenues from the production of TQDs at the Wet Lab in the second 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.


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The Company's ongoing research and development functions are considered key to maintaining and enhancing its competitive position in the growing quantum dot market. Quantum dot technology continues 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 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 licenses and 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, and currently has two patents pending for continuous process production of quantum dots. The Company will also work closely with Rice and University of Arizona 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 waived and 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 limited 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.

Liquidity and Capital Resources

At March 31, 2014 the Company had a working capital deficit of approximately $2,280,281 with total current liabilities of approximately $2,481,785. Approximately $1,538,468 of these liabilities is owed to our officers, directors and employees for services rendered and accrued through March 31, 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 March 31, 2014, the Company lacks cash or cash equivalent assets and continues to incur losses in its development stage operations. Over the past five 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."

Cash was used in operating activities of $394,916 for the nine months ending March 31, 2014. This is a result of a net loss of $1,950,401 and changes in accounts payable of $40,001 and change in fair value of warrants of $164,665, partially offset by stock issued for services of $708,000, stock issued for debenture interest of $113,711, stock issued for payment of accrued liabilities of $682,843 and net changes in accrued liabilities for related parties of $24,491. Cash flows from investing activities during the nine months ended March 31, 2014 were $185,511 which consisted of deposits on assets of $185,511. Cash flows from financing activities during the nine months ended March 31, 2014 were $609,500 which consisted of proceeds of the sale of common stock of $209,500 and proceeds from the issuance of a convertible debenture of $400,000. 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 March 31, 2014, Mr. Squires does not have any unreimbursed cash advances due to him, and has accrued payroll and expenses totaling $175,839 owed to him and accrued payroll of $93,421 owed to his wife in her role as a bookkeeper for the Company.

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 March 31, 2014, the Company had not yet achieved profitable operations, has accumulated losses of $18,323,206 since its inception, at March 31, 2014, has a working capital deficit of $2,280,281 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 fiscal 2014 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."


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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.

In May 2011, David Doderer ($81,250), Robert Glass ($61,250), Ghassan Jabbour ($62,500), Andrew Robinson ($50,000) and Toshinori 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), Toshinori 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.

Results of operations - Three Months Ended March 31, 2014 and 2013

General and administrative expenses

During the three months ended March 31, 2014 the Company incurred $391,554 of general and administrative expenses a decrease of $987,549 from the $1,379,103 recorded for the three months ended March 31, 2013. The increase in general and administrative expenses was primarily due to a decrease in executive compensation, primarily stock based compensation, in the amount of $882,255.

Included in the expenses for the current three months ended March 31, 2014 were remuneration of staff $216,910, legal and audit of $23,352, travel expense of $10,347, corporate expense of $18,093, and other professional fees of $94,216. This compares to the three months ended March 31, 2013 which included remuneration of staff $1,029,255, legal and audit of $29,882, travel expense of $36,258, corporate expense of $15,815, and amortization of furniture and equipment of $342..

Research and development expenses.

Research and development expenses of $13,038 were incurred in the three months ended March 31, 2014, compared to $12,804 in the three months ended March 31, 2013. The increase is the result of a decrease in patent expense of $12,804, offset by an increase in Q Dot manufacturing expense of $1,787 and an increase in licensing fees of $11,251.

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.


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In March 2014 the Company issued 641,026 shares of common stock to pay accrued interest of $37,500 for the three month period ended March 1, 2014.

According to the provisions of the Convertible Debenture agreement the Company has elected to issue shares of the Company's Stock to pay accrued interest on the debentures. In the three months ended March 31, 2014 the Company issued 641,026 shares of the Company's restricted Common Stock to pay $30,000 of accrued interest payable. As the provision to pay stock for interest discounts the market price of the stock the Company has attributed this discount to interest expense and additional paid in capital. However the timing of the shares being issued resulted in the share value being less than the interest paid therefore a increase in interest expense was recorded of $7,500 for the period.

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 three months ended March 31, 2014 and 2013 was an increase of $169,709 and an decrease of $185,000, respectively, increasing the fair value of embedded conversion feature liability from $452,626 as of December 31, 2013 to $622,335 as of March 31, 2014.

Results of operations - Nine Months Ended March 31, 2014 and 2013

General and administrative expenses

During the nine months ended March 31, 2014 the Company incurred $1,615,872 of general and administrative expenses an decrease of $724,420 from the $2,340,292 recorded for the nine months ended March 31, 2013. The decrease in general and administrative expenses was primarily due to a decrease in executive compensation, primarily stock based compensation, in the amount of $974,933.

Included in the expenses for the current nine months ended March 31, 2014 were remuneration of staff $737,610, legal and audit of $67,019, travel expense of $31,311, corporate expense of $56,985, and other professional fees of $638,244. This compares to the nine months ended March 31, 2013 which included remuneration of staff $1,792,967, legal and audit of $72,692, travel expense of $87,155, corporate expense of $42,536, and amortization of furniture and equipment of $1,160.

Research and development expenses.

Research and development expenses of $17,864 were incurred in the nine months ended March 31, 2014, compared to $18,804 in the nine months ended March 31, 2013. The decrease is the result of a decrease in patent expense of $14,804 and a decrease in royalties of $110, offset by an increase in Q Dot manufacturing of $2,721 and an increase in licensing fees of $11,251.

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.

In September 2013 the Company issued 766,668 shares of common stock to pay accrued interest of $38,334 for the three month period ended September 1, 2013.

In December 2013 the Company issued 777,778 shares of common stock to pay accrued interest of $37,878 for the three month period ending December 1, 2013.

In March 2014 the Company issued 641,026 shares of common stock to pay accrued interest of $37,500 for the three month period ending March 1, 2014.

Interest expense recorded for the nine months ended March 31, 2014 was $113,711 compared to $113,373 in the nine month period ended March 31, 2013.

According to the provisions of the Convertible Debenture agreement the Company has elected to issue shares of the Company's Stock to pay accrued interest on the debentures. In the nine months ended March 31, 2014 the Company issued 2,185,472 shares of the Company's restricted Common Stock to pay $91,000 of accrued interest payable. As the provision to pay stock for interest discounts the market price of the stock the Company has attributed this discount to interest expense and additional paid in capital. However the timing of the shares being issued resulted in the share value being less than the interest . . .

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