SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended March 31, 2012
Commission file number: 0-52953
(Exact name of small business issuer as specified in its charter)
7700 S. River Parkway
Tempe, AZ 85284
(Address of principal executive offices)
(Registrant's telephone number)
Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the 12 preceding months (or such shorter period that the registrant was required to submit and post such file). Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):
As of April 5, 2012, the issuer had 122,571,308 shares of common stock, $0.001 par value per share outstanding ("Common Stock") after giving effect to the issuance of 6,856,443 shares that we were obligated to issue in March 2012.
Item 1. Financial Statements
QUANTUM MATERIAL CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial statements. Accordingly, our interim statements do not include all of the information and disclosures required for our annual financial statements. In the opinion of our management, the consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of these interim results. These consolidated financial statements should be read in conjunction with our consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended June 30, 2011. The results for the nine months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full year ending June 30, 2012.
Since November 4, 2008, the Company has changed its business plans and is no longer intending to pursue the mining of mineral rights located in Nevada. The Company intends to pursue the business plans of its subsidiary, Solterra. The following is a brief business overview of Solterra.
Solterra is a start-up solar technology and quantum dot manufacturing firm which was founded by Stephen Squires. Mr. Squires perceives an opportunity to acquire a significant amount of both quantum dot and solar photovoltaic market share by commercializing a low cost quantum dot processing technology and a low cost quantum dot based third generation photovoltaic technology/solar cell, pursuant to an exclusive license agreement with William Marsh Rice University (“Rice University” or “Rice”). Our objective is to become the first bulk manufacture of high quality tetrapod quantum dots and the first solar cell manufacturer to be able to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in North America, Europe, the Middle East and Asia.
The Company recorded losses from continuing operations in the current period presented. Current liabilities exceed current assets, resulting in a negative net worth and accumulated deficits during the development stage. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, raise additional capital, and obtain debt financing.
Management has revised its business strategy to include expansion into other lines of business. In conjunction with the anticipated new revenue streams, management is currently negotiating new debt and equity financing, the proceeds from which would be used to settle outstanding debts at more favorable terms, to finance operations, and to develop its business plans. However, there can be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.
Note 2. Derivatives and Fair Value
The Company has evaluated the application of ASC 815, Derivatives and Hedging, 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 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.” These derivative instruments are not designated as hedging instruments under ASC 815 and are disclosed on the balance sheet under Derivative Liabilities.
ASC 825-10, Financial Instruments, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 825-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 describes three levels of inputs that may be used to measure fair value: Level 1 – Quoted prices in active markets for identical assets or liabilities; Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company’s Level 3 liabilities consist of the derivative liabilities associated with the November 4, 2008 note. At March 31, 2012, all of the Company’s derivative liabilities were categorized as Level 3 fair value assets. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Level 3 Valuation Techniques
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. We have valued the convertible note that contains down round provisions using a lattice model, with the assistance of a valuation consultant, for which management understands the methodologies. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of July 1, 2009 and September 30, 2012. The fair value of the derivatives as of July 1, 2009 upon implementation of ASC 815-40-15 was estimated by management to be $495,912. As part of implementing ASC 815-40-14 the Company decreased the accumulated deficit by $162,643 and decreased additional paid in capital by $212,184 and increased the discount on the convertible debenture by $446,371. The adjustment to the accumulated deficit was a result of the interest expense recorded in connection with the original derivative liability and the reversal of prior amortization expense, and the change in fair value of the derivative liability as of July 1, 2009.
Derivative Liabilities and Fair Value
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first nine months of fiscal year 2012:
Note 3. Related party transactions
The Company expensed management fees to the CEO / major shareholder as well as other related party executives of $469,405 and $659,000 respectively in the nine months ended March 31, 2012 and the year ended June 30, 2011. The Company was not able to pay the majority of these fees, and as a result the accrued liabilities related party were $829,722 and $446,027 respectively as of March 31, 2012 and June 30, 2011.
During the nine months ended March 31, 2012 the Company recorded $8,640 of rent expense for the use of executive office space in the home of the CEO / major shareholder, $0 was paid and $8,640 was accrued.
Note 4. Stockholders’ Equity
In July 2011 the Company issued 1,250,000 shares of common stock in exchange for cash at a price of $0.12 per share.
In September 2011 the Company issued 83,333 shares of common stock in exchange for cash at a price of $0.12 per share.
In September 2011 the Company issued 220,264 shares of common stock to pay accrued interest of $30,000 for the three month period ended September 1, 2011.
In October 2011 the Company issued 625,000 shares of common stock in exchange for cash at a price of $0.08 per share.
In December 2011 the Company issued 254,669 shares of common stock to pay accrued interest of $30,000 for the three month period ended December 1, 2011.
In December 2011 the Company issued 750,000 shares of common stock in exchange for cash at a price of $0.08 per share.
In January 2012 the Company issued 125,000 shares of common stock in exchange for cash at a price of $0.08 per share.
In March 2012 the Company issued 356,443 shares of common stock to pay accrued interest of $30,000 for the three month period ended March 1, 2012.
In March 2012 the Company issued 6,500,000 shares of common stock to related parties for services rendered at a price of $0.08 per share.
On December 18, 2011 the Company issued 2,000,000 common stock warrants (The Warrants), each of which entitles the holder to one share of the Company’s common stock with a strike price of $0.08 per share and a three-year term to the debenture holders in relation to the extension of the debenture expiration date to November 4, 2012.
In March 2012 the Company issued 3,500,000 common stock options to related parties in exchange for services rendered, each of which entitles the holder to one share of the Company’s common stock with a strike price of $0.03 per share and a five-year term.
Fair Value Considerations
The Company’s accounting for the issuance of warrants to the required the estimation of fair values of the financial instruments. The development of fair values of financial instruments requires the selection of appropriate methodologies and the estimation of often subjective assumptions. The Company selected the valuation techniques based upon consideration of the types of assumptions that market participants would likely consider in exchanging the financial instruments in market transactions. The warrants were valued using a Black-Scholes-Merton Valuation Technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments.
The Warrants were valued at $233,367 or $0.117 per warrant. The following tables reflect assumptions used to determine the fair value of the Warrants:
Fair value hierarchy of the above assumptions can be categorized as follows:
Note 5. Commitments and Contingencies
Certain default clauses related to the various agreements discussed in Item 2 (Management’s Plan of Operation) would result in a change of control of the board of directors. Certain debt holders would have the option to appoint independent members to the board under such default.
License Agreement - Work-Study Arrangements
License Agreement with Rice University
On August 20, 2008, Solterra entered into a License Agreement with Rice University. In September 2011, Solterra entered into an amended License Agreement and Quantum Materials entered into a new License Agreement with Rice. Rice is the owner of certain inventions and patent applications, know-how and rights pertaining to the synthesis of uniform nanoparticle shapes with high selectivity. We have obtained the exclusive rights to license and sublicense (subject to Rice’s consent, which shall not be unreasonably withheld), develop, manufacture, market and exploit Rice’s inventions, patent applications and any issued patents in the case of Solterra, for the manufacture and sale of photovoltaic cells and photovoltaic applications and in the case of Quantum Materials for the manufacture and sale of quantum dots for electronic and medical applications (excluding photovoltaic applications). With respect to Rice’s patent applications, Rice made a provisional filing for an invention disclosure titled “synthesis of uniform nanoparticle shapes with high selectivity” with the United States Patent and Trademark Office on April 13, 2007 and a subsequent utility filing on April 11, 2008 under the Patent Cooperation Treaty (“PCT”). PCT enables the U.S. applicant to file one application, "an international application," in a standardized format in English in the U.S. Receiving Office (the U.S. Patent and Trademark Office), and have that application acknowledged as a regular national or regional filing in any State or region that is party to the PCT. Dr. Michael Wong is a director of our company and is the inventor of Rice’s patent application licensed by Solterra.
Our initial agreement with Rice requires the payment of certain patent fees to Rice and for us to acquire additional funding and to meet certain milestones by specific dates. Rice and the Company recently established new milestones for the Company to achieve in the months and years ahead, the failure of which could lead to the termination of the license agreement.
Rice is entitled to receive during the term of each License Agreement certain royalties under the License Agreement of adjusted gross sales (as defined) ranging from 2% to 4% for photovoltaic cells and 7.5% of adjusted gross sales for quantum dots sold in electronic and medical applications. Minimum royalties payable under the License Agreement include $129,412 due August 1, 2012, $473,250 due August 1, 2013, $1,746,000 due August 1, 2014 and $3,738,600 due August 1, 2015 and each August 1 of every year thereafter, subject to adjustments for changes in the consumer pricing index. In the event of a Liquidity Event (as defined), Rice is entitled to receive from Licensee a fee of $750,000 within five business days of the Liquidity Event. The term of the License Agreement is to expire on the expiration date of Rice’s rights in its intellectual property and the Licensee’s rights are worldwide. Our Agreement, as amended, with Rice provides for termination of each Agreement in the event that we are determined to be insolvent as defined in the Agreements. The milestones of each License Agreement also require a quantum dot production pilot plant to be established by February 28, 2012, capable of producing 1,000 grams per week. This requirement has been met. The subsequent milestone of the License Agreement require a full scale quantum dot production plant be established by May 31, 2012. No assurances can be given that this milestone will be met by the Company on a timely basis.
Agreement with Arizona State University
Solterra had an agreement with Arizona State University (“ASU”) pursuant to which ASU at a cost of $835,000 will assist Solterra under the direction of Dr. Ghassan Jabbour in scaling up or optimizing the solar cells so that they can be printed. As of June 30, 2010, $630,000 of these costs in this agreement have been incurred and an additional $205,000 was to accrue before the end of the fiscal year ended June 30, 2010. During February 2010, Dr. Jabbour accepted a Directorship at the King Abdullah University of Science and Technology (KAUST), in Saudi Arabia. As a result of Dr. Jabbour now being located in Saudi Arabia, it is no longer logistically feasible for him to conduct the development work at ASU. As of December 31, 2010, we have paid ASU $175,000 under our contract with ASU. We are therefore working with Dr. Jabbour to continue his development work at the KAUST facilities and we are negotiating a substantially reduced fee with ASU. Dr. Jabbour is also our Chief Science Officer and is an employee of QMC/Solterra.
Agreement with University of Arizona
Solterra has entered into an exclusive Patent License Agreement with the University of Arizona ("UA") to license US Patent # 7,015,052, which was issued on March 21, 2006, entitled “Screen Printing Techniques for the Fabrication of Organic Light - Emitting Diodes”. Pursuant to the License Agreement, Solterra has an exclusive license to market, sell and distribute licensed products within its field of use which is defined as organic light emitting diodes in printed electronic displays and all other printed electronic components. Solterra has the right to grant sublicenses with respect to the licensed product and the license method (as defined in the agreement). Pursuant to said agreement, as amended, we are obligated to pay minimum annual royalties of $25,000 by June 30, 2012, $50,000 by December 31, 2012, $125,000 by June 30, 2013 and $200,000 on each June 30th thereafter, subject to adjustments for increases in the Consumer Price Index. Royalties based on net sales are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products for printed electronic displays. Our Agreement with UA may be terminated by UA in the event that we are in breach of any provision of this Agreement and said breach continues for 60 days after receiving written notice. Our Agreement with UA will also automatically terminate if Solterra becomes insolvent or unable to pay its debts as they become due. We can provide no assurances that we will be able to meet our obligations under our Agreement with UA. Termination of our Agreement with UA could materially adversely affect our operations.
Development service agreements
In October 2008, the Company entered into a development service agreement with Arizona State University ("ASU") to optimize the printing process of solar cells. The agreement is for the period October 1, 2008 to January 30, 2010 with an option for two additional years of services. This Agreement has not been extended by the parties due to the departure of Dr. Jabour from ASU. The final balance due ASU is under negotiation. The table below summarizes these financial commitments under this agreement. These amounts are recorded as research and development expenses in the consolidated financial statements.
The Company is currently in arrears for payment of obligations due to ASU totaling $455,000 as of March 31, 2012.
In addition, the Company had one other service agreement with a major university for a twelve month period starting in November 2009. These services were not completed as the Professor responsible for exercising the agreement has moved out of the country. The Company is negotiating final settlement for this agreement.
The Company has four employment agreements in effect. The CEO has a three-year agreement which started in January 2010 and the Chief Technology Officer has a one-year agreement which started in October 2009 and has been renewed for an additional 2 years. In addition, the Company has employment agreements with two other individuals which were scheduled to terminate in April 2012: one for Asian business development and one for Middle East business development .
Note 6. Warrants
No warrants were issued in the nine month period ending March 31, 2012.
Note 7. Subsequent events
We have evaluated subsequent events through May 8, 2012, the date our financial statements were available to be issued. We are not aware of any significant events that occurred subsequent to the balance sheet date that would have a material impact on our financial statements.
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 February 15, 2012 for the fiscal year ended June 30, 2011. 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 March 31, 2012 have been included.
Quantum Material Corp. is a start-up solar technology and quantum dot manufacturing firm. We perceive an opportunity to acquire a significant amount of both quantum dot and solar photovoltaic market share by commercializing a low cost quantum dot processing technology and a low cost quantum dot based third generation photovoltaic technology/solar cell, pursuant to an exclusive license agreement with William Marsh Rice University (“Rice University” or “Rice”). Our objective is for Quantum to become the first bulk manufacturer of high quality tetrapod quantum dots and for Solterra to be the first solar cell manufacturer to be able to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in North America, Europe, the Middle East and Asia.
Competitors are pursuing different nanotechnological approaches to developing solar cells, but the general idea is the same for all. When light hits an atom in a semiconductor, those photons of light with lots of energy can push an electron out of its nice stable orbital around the atom. The electron is then free to move from atom to atom, like the electrons in a piece of metal when it conducts electricity. Using nano-size bits of semiconductor embedded in a conductive plastic maximizes the chance that an electron can escape the nanoparticle and reach the conductive plastic before it is "trapped" by another atom that has also been stripped of an electron. Once in the plastic, the electron can travel through wires connecting the solar cell to an electronic device. It can then wander back to the nanocrystal to join an atom that has a positive charge, which scientifically is called “electron-hole recombination”.
A quantum dot solar cell typically uses a thin layer of quantum dot semiconductor material, rather than silicon chips, to convert sunlight into electricity. Quantum Dots, also known as nanocrystals, measure near one billionth of an inch and are a non-traditional type of semiconductor. Management believes that they can be used as an enabling material across many industries and that quantum dots are unparalleled in versatility and flexible in form. See “Note 5” regarding License Agreements with Rice University.
Quantum intends to design and manufacture solar cells using a proprietary thin film semiconductor technology that we believe will allow us to reduce our average solar cell manufacturing costs and be extremely competitive in this market. Quantum will be one of the first companies to integrate non-silicon quantum dot thin film technology into high volume low cost production using proprietary technologies. Our objective is to become one of the first solar module manufacturers to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in North America, Europe and Asia. Management believes that the manufacture of our thin film quantum dot solar cells can introduce a cost effective disruptive technology that can help accelerate the conversion from a fossil fuel dependent energy infrastructure to one based on renewable, carbon-neutral energy sources. We believe that our proposed products also can be a part of the solution to greenhouse gases and global warming.
Plan of Reorganization, Recent Financing and Change in Control
On November 4, 2008, the Company closed on an Agreement and Plan of Merger and Reorganization by and among the Company, Solterra Renewable Technologies, Inc. (“Solterra”), the shareholders of Solterra and Gregory Chapman as “Indemnitor” (the “Agreement”), which resulted in Solterra becoming a wholly-owned subsidiary of the Company. Pursuant to the Agreement, Mr. Chapman cancelled 40,000,000 shares of Common Stock of the Company owned by him and issued a general release in favor of the Company terminating its obligations to repay Mr. Chapman monies owed to him.
In accordance with the Agreement, the Company issued 41,250,000 shares of its Common Stock to the former stockholders of Solterra. Certain existing stockholders of the Company in consideration of Solterra and its shareholders completing the transaction, issued to the Company a Promissory Note in the amount of $3,500,000 due and payable on or before January 15, 2009, through the payment of cash or, with the consent of the Company, the cancellation of up to 12,000,000 issued and outstanding shares of the Company owned by them. While this note is in default and the Company has made demand for payment and is considering all legal options, our Management does not believe that this Note is collectible.
On November 4, 2008, the Company entered into a Securities Purchase Agreement, Debenture, Security Agreement, Subsidiary Guarantee Agreement, Registration Rights Agreement, Escrow Agreement, Stock Pledge Agreement and other related transactional documents (the “Transaction Documents”) to obtain $1,500,000 in gross proceeds from three non-affiliated parties (collectively hereinafter referred to as the “Lenders”) in exchange for 3,525,000 restricted shares of Common Stock of the Company (the “Restricted Shares”) and Debentures in the principal amount aggregating $1,500,000. Each Debenture has a term of three years maturing on November 4, 2011, which was recently extended to November 4, 2012, bears interest at the rate of 8% per annum and is prepayable by the Company at anytime without penalty, subject to the Debenture holders’ conversion rights. Each Debenture is convertible at the option of each Lender into the Company’s Common Stock (the “Debenture Shares”, which together with the Restricted Shares shall collectively be referred to as the “Securities”), currently at a conversion price of $.12 per share (the “Conversion Price”). The Registration Rights Agreement requires the Company to register the resale of the Securities within certain time limits and to be subject to certain penalties in the event the Company fails to timely file the Registration Statement, fails to obtain an effective Registration Statement or, once effective, to maintain an effective Registration Statement until the Securities are saleable pursuant to Rule 144 without volume restriction or other limitations on sale. The Debentures are secured by the assets of the Company and are guaranteed by Solterra as the Company’s subsidiary. In the event the Debentures are converted in their entirety, the Company would be required to issue an aggregate of 12,500,000 shares of the Company’s Common Stock, subject to anti-dilution protection for stock splits, stock dividends, combinations, reclassifications and sale of the Company’s Common Stock a price below the Conversion Price. Certain changes of control or fundamental transactions such as a merger or consolidation with another company could cause an event of default under the Transaction. We also entered into a Standstill Agreement with the Debenture Holders effective June 1, 2009 which was amended and expired on December 1, 2009. At the time the Standstill Agreement expired, the Company did not have an effective registration statement, registering the resale of all Registrable Securities as required by the Registration Rights Agreement. Nevertheless, management believes that no such registration statement was then or is currently required to be filed with the Securities and Exchange Commission as management believes that all securities of the Company held by the Debenture Holders are saleable pursuant to Rule 144 without volume restriction or other limitations on sale, so long as the Debenture Holders are not affiliated parties of the Company. As of the filing date of this Form 10-Q, the Debenture Holders have taken no action under the Registration Rights Agreement or other transaction documents to notify the Company that it is in default under any of such agreements even though an event of default may be deemed to exist for several reasons; including, without limitation, those enumerated above and the Company's failure to obtain director and officer liability insurance, failure to make a payment of interest on a timely basis and failure to be current from time-to-time with all obligations and responsibilities owed to Rice under our license agreement.
On December 18, 2011 the Company executed an agreement with the debenture holders to extend the maturity date of the convertible debenture to November 4, 2012. All other terms in the original agreement remain unchanged. In addition, the debenture holders were granted 2,000,000 three-year common stock warrants with a strike price of $0.08.
Plan of Operation
Since November 4, 2008, the Company is executing its business plan as follows:
Solterra plans to:
The Current Objectives of Solterra upon receipt of additional financing are as follows:
Liquidity and Capital Resources
At March 31, 2012 the Company had a working capital deficit of $3,874,528 with total current assets of $481 and total current liabilities of $3,875,009. Approximately $ $829,721 of these liabilities are owed to our officers, directors and employees for services rendered and expenses not reimbursed through March 31, 2012. 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, 2012, the Company lacks cash or cash equivalent assets and continues to incur losses in its development stage operations. In the past, the Company has been relying on loans from its Chief Executive Officer resulting from private sale transactions of our common stock he owned. The Company has also relied on various universities performing work and providing U.S. licensing rights under business agreements in which the Company is in arrears in payments as well as employees and consultants agreeing to defer payment of wages and fees owed to them. Currently, the Company is seeking additional financing; 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 used in operating activities for the nine months ended March 31, 2012 was $279,617. This is a result of a net loss of $866,637 partially offset by non-cash items including stock issued for debenture interest $110,680, as well as change in accounts payables and accrued liabilities of $51,753, change in accrued liabilities related parties $383,695, change in fair value of warrants and embedded conversion feature of $(592,000), amortization of convertible debenture discount of $591,595 and amortization of deferred finance cost of $36,167. Cash flows from financing activities during the nine months ended March 31, 2012 were $280,000 which consisted of $280,000 from the proceeds of the sale of common stock.
Cash was used in operating activities of $5,974 for the nine months ended March 31, 2011. This is a result of a net loss of $2,674,222 partially offset by non-cash items including stock issued for services of $1,428,855, and stock issued for debenture interest $164,568, as well as change in accounts payables and accrued liabilities of $306,433, change in accrued liabilities related parties $483,443, change in fair value of warrants and embedded conversion feature of $(221,479), amortization of convertible debenture discount of $383,866 and amortization of deferred finance cost of $78,750, and non-cash warrant expense of $29,877. Cash flows from financing activities during the nine months ended March 31, 2011 were $9,633 which consisted of $80,000 from the proceeds of the sale of common stock and ($70,367) from related party advances from Stephen Squires, our Chief Executive Officer, for certain loans to the Company. This resulted in an increase in cash for the period of $3,659 and cash on hand at the end of the period of 3,678.
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, 2012, the Company had not yet achieved profitable operations, has accumulated losses of $11,507,492 since its inception; at March 31, 2012, the Company has a working capital deficit of $3,874,528; 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 during fiscal 2012 to maintain 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 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 Toshinon 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 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.
Loans from Stephen Squires
In November 2008, Mr. Squires received 35,500,000 shares of the Company's Common Stock as part of a plan of reorganization, 20,000,000 of which he pledged to secure certain company indebtedness. Between December 2008 and December 2010, Mr. Squires privately sold an aggregate of approximately 13,431,000 shares of the Company's Common Stock for an aggregate of $595,000. Mr. Squires advanced to the Company cash loans and made payment of Company expenses utilizing $270,145 of the net proceeds of these private sales. On December 30, 2010, the Board of Directors authorized Mr. Squires to receive 10,000,000 restricted shares of Quantum Material Corp. in recognition of his support of the Company and in cancellation of all outstanding cash loans and advanced expenses totaling $270,145.
In January 2010, the board of directors granted Mr. Squires the option to convert his cash loans to the Company into common stock of the Company's subsidiary. In this respect, Mr. Squires has a two-year option to convert up to $200,000 into a maximum of 5% of the outstanding common stock of Solterra. As of the filing date of this Form 10-Q, Mr. Squires has declined to exercise this option.
Results of operations – Three and Nine Months Ended March 31, 2012 and 2011
General and administrative expenses
During the nine months ended March 31, 2012 the Company incurred $1,240,284 of general and administrative expenses, a decrease of $1,018,356 from the $2,258,640 recorded for the nine months ended March 31, 2011. The decrease in general and administrative expenses was primarily due to decreases in stock based compensation of $720,238, other professional fees of $199,004, remuneration of staff of $97,219, audit and legal expenses of $15,543, and offset by an increase in corporate expenses of $7,485 and travel expense of $6,457 .
Included in the expenses for the current nine months ended March 31, 2012 are remuneration of staff $1,079,751, legal and audit of $57,760, travel expense of $54,032, corporate expense of $21,429, other professional fees of $2,438, and amortization of furniture and equipment of $2,253. This compares to the nine months ended March 31, 2011 which included other professional fees of $201,442, remuneration of staff $637,352, stock based compensation of $1,259,855, license maintenance costs of $1,323, legal and audit of $73,303, corporate expense of $22,900, office expenses of $34,601, travel expense of $18,021 and amortization of furniture and equipment of $3,616.
During the three months ended March 31, 2012 the Company incurred $760,265 of general and administrative expenses, a decrease of $845,115 from the $1,605,380 recorded for the three months ended March 31, 2011. The decrease in general and administrative expenses was primarily due to a decrease in remuneration of staff of $155,897, a decrease in audit and legal of $14,618, a decrease in corporate expenses of 6,423, offset by an increase in travel of $14,439. For the three months ended March 31, 2012, other (income) expenses were ($85,074) as compared to $47,323. The decrease in other expenses was related primarily to the change in the fair value of the embedded conversion feature, amortization of convertible debenture discount and amortization of deferred finance costs.
Included in the expenses for the current three months ended March 31, 2012 were remuneration of staff $175,728, legal and audit of $15,500, travel expense of $15,068, corporate expense of $6,395 and amortization of furniture and equipment of $1,163. This compares to the three months ended March 31, 2011 which included remuneration of staff $331,625, legal and audit of $30,118, corporate expense of $12,818, travel expense of $629 and amortization of furniture and equipment of $1,156.
Research and development expenses.
Research and development expenses of $16,650 were incurred in the nine months ended March 31, 2012, compared to $0 in the nine months ended March 31, 2011. The increase is the result of $6,671 in royalties to Rice University, $4,281 in patent expenses and $5,698 in sample Qdot manufacturing. Development expenses of $2,706 were recorded in the three months ended March 31, 2012, compared to $0 in the three months ended March 31, 2011.
Amortization of convertible debenture discount
The convertible debenture discount of $1,500,000 was amortized over the 36 month term of the debenture using the effective interest method. The debenture was issued on November 4, 2008. Amortization recorded for the nine month period ended March 31, 2012 and 2011 was $586,730 and $383,866, respectively. The amortized balance of the discount at March 31, 2012 is $0 resulting in the convertible debenture value on the balance sheet net of the discount $1,500,000. For the three months ended March 31, 2012, the amortization of convertible debenture discount was $0 as compared to $157,778 for the comparable period of the prior year.
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 is being amortized using the effective interest method over the thirty-six month life of the debenture. Amortization expense for the nine months ended March 31, 2012 and 2011 was $36,167 and $78,750 respectively. Amortization expense for the three months ended March 31, 2012 and 2011 was $0 and $26,250, 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.
In March 2012 the Company issued 356,443 shares of common stock to pay accrued interest of $30,333 for the three month period ended March 1, 2012.
Interest expense recorded for the nine months ended March 31, 2012 was $110,680 compared to $134,568 in the nine month period ended March 31, 2011. Interest expense recorded for the three months ended March 31, 2012 and 2011 was $37,926 and $84,266, respectively.
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, 2012 the Company issued 831,376 shares of the Company’s restricted Common Stock to pay $90,333 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 decrease in interest expense was recorded of $20,347 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 nine months ended March 31, 2012 and 2011 was a decrease of $592,000 and a decrease of $221,479, respectively, decreasing the fair value of embedded conversion feature liability from $1,223,000 to $631,000. In the three months ended March 31, 2012 the decrease was $123,000. In the three months ended December 31, 2011 the decrease was $220,971.
During the nine months ended March 31, 2012, cash was used in operations of $279,617. During this period the Company received proceeds from financing activities of $280,000. These changes resulted in an increase of $383 in the cash position for nine months ended March 31, 2012. The opening cash at June 30, 2011 was $98 and the closing balance at March 31, 2012 was $481.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our short-term money market investments. The Company does not have any financial instruments held for trading or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure. The Company does not have any credit facilities with variable interest rates.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are not effective at March 31, 2012. Management bases its’ determination upon the untimely filing of our Form 10-K for the years ended June 30, 2011 and 2010 and our Form 10-Q for the periods ended September 30, 2010, December 31, 2010, March 31, 2011,September 30, 2011 and December 31, 2011.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
In our Management’s Report on Internal Control over Financial Reporting included in the Company’s Form 10-K for the year ended June 30, 2011, management concluded that our internal control over financial reporting was effective as of June 30, 2011.
Management did; however, identify a significant deficiency; a significant deficiency is a deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. Currently we do not have sufficient in-house expertise in US GAAP reporting. Instead, we rely very much on the expertise and knowledge of external financial advisors in US GAAP conversion. External financial advisors have helped prepare and review the consolidated financial statements. This deficiency of not having sufficient qualified staff has resulted in the Company being unable to file our 10-K for the years ending June 30, 2011 and 2010 and our Form 10-Q for the periods ended September 30, 2010, December 31, 2010, March 31, 2011, September 30, 2011 and December 31, 2011 in a timely manner. Although we have not identified any material errors with our financial reporting or any material weaknesses with our internal controls, no assurances can be given that there are no such material errors or weaknesses existing. To resolve this situation, we are seeking to recruit experienced professionals to augment and upgrade our financial staff to address issues of timeliness and completeness in US GAAP financial reporting. In addition, we do not believe we have sufficient documentation with our existing financial processes, risk assessment and internal controls. We plan to work closely with external financial advisors to document the existing financial processes, risk assessment and internal controls systematically.
We believe that the measures we are taking, if effectively implemented and maintained, will resolve the significant deficiency discussed above.
Except as described above, there have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to any pending legal proceedings. Our property is not the subject of any pending legal proceedings. To our knowledge, no governmental authority is contemplating commencing a legal proceeding in which we would be named as a party.
Item 1A. Risk Factors
As a Smaller Reporting Company as defined Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item 1A.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities. None
Item 4. Mining Safety Discosures – not applicable.
Item 5. Other Information.
See "Note 3 to the Financial Statements" for description of Various Related Party and Other Transactions.
Item 6. Exhibits
The following exhibits are all previously filed in connection with our Form 8-K filed November 10, 2008, unless otherwise noted.
* Filed herewith.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.