QUANTUM MATERIALS CORP.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes and other financial information included
elsewhere in this Form 10-K. In addition to historical financial information,
the following discussion and analysis contains forward-looking statements that
involve risks, uncertainties, and assumptions. Our actual results and timing of
selected events may differ materially from those anticipated in these
forward-looking statements as a result of many factors, including those
discussed under the "Risk Factors" section and elsewhere in this Form 10-K,
which are incorporated herein by reference.
Business Overview
We are a nanotechnology company specializing in the design, development,
production and supply of nanomaterials, including quantum dots ("QDs"), tetrapod
quantum dots ("TQDs"), and other nanoparticles for a range of applications in
televisions, displays and other optoelectronics, photovoltaics, solid state
lighting, life sciences, security ink, battery, and sensor sectors of the
market. Our wholly owned operating subsidiary, Solterra Renewable Technologies,
Inc. ("Solterra"), is focused on the next generation photovoltaic (solar cell)
market, using quantum dot semiconductors.
QDs are nanoscale semiconductor crystals typically between 10 and 100 atoms in
diameter. Approximately 10,000 would fit across the diameter of a human hair.
Their small size makes it possible for them to exhibit certain quantum
mechanical properties. QDs emit either photons or electrons when excited. In the
case of photons, the wavelength (color) of light emitted varies depending on the
composition and size of the quantum dot. As such, the photonic emissions can be
tuned by the creation of QDs of different types and/or sizes. Their unique
properties as highly efficient, next generation semiconductors have led to the
use of QDs in a range of electronic and other applications, in the display and
lighting industries. QDs 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 QDs in printed photovoltaic cells.
QDs were first discovered in the early 1980s and the industry has developed to
the point where QDs are now being used in an increasing range of applications,
including televisions and displays, light emitting diode ("LED") lighting (also
known as solid-state lighting), and in the biomedical industry. LG, Samsung, and
other companies have recently launched new televisions using QDs to enhance the
picture color quality and power efficiency. A number of major lighting companies
are developing product applications using QDs to create a more natural light for
LEDs. The biomedical industry is using QDs in diagnostic and therapeutic
applications; and applications are being developed to print highly efficient
photovoltaic solar cells in mass quantities at a low cost.
A key challenge for the quantum dot industry has been and may continue to be its
ability to scale up production volumes sufficiently to meet growing demand for
QDs while maintaining product quality and consistency and reducing the overall
costs of supply to stimulate new applications.
Plan of Operation
We currently operate from a leased facility in San Marcos, Texas at the STAR
Park Technology Center , an extension of Texas State University (the "San Marcos
Facility"). This location provides us with convenient access to university
faculty and specialized laboratory facilities that can support joint research
and development efforts with Texas State University . Located approximately 30
miles south of Austin, Texas , this location is also in close proximity to a
number of leading companies in the electronics, lighting, solar, and life
sciences markets. We intend to relocate the operations to a larger facility
capable of accommodating the manufacturing of QD processing equipment once
sustained revenues are achieved.
The Company has established commercial-scale manufacturing equipment at the San
Marcos facility and now through process optimizations has the capacity to
produce more than four metric tons (4,000kg) per year of quantum dots and other
nanomaterials for supply to its customers. The Company has continuously improved
the Quantum Dot production process and have designed new reactors from the
ground up. The Company is in the process is building 4 new reactors in-house
using its own design and I.P. In order to preserve this I.P. the Company has
determined that it will be manufacturing micro-reactors in-house for the
foreseeable future.
27
We expect to commence generating revenues from the production of materials at theSan Marcos facility. Such revenues are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners and licensees. Our marketing strategy is to engage in strategic arrangements with manufacturers, distributors, and others to jointly develop applications using its patented continuous production process. Such joint collaborations will involve us working closely with its industry counterparts to optimize the performance of our materials in each application or device and to use the results from product development and testing to further enhance product specifications. We continue to collaborate with a number of partners in the Life Science, consumer goods, Pharma and designer products industries. We have signed a licensing agreement to establish quantum dot production inAsia and to date, we have not entered into any formal commercial supply agreements. We believe these collaborations will support our internal research and development activities which will continue to be a primary part our business. Our principal revenue streams are expected to come from (i) Licensing agreements for our quantum dot enabled end to end solutions. (ii) sales of quantum dots and other nanomaterials, (ii) royalties from manufacture and/or sales of products and components by third parties incorporating the Company's products or technology, (iii) milestone payments under joint development arrangements with product developers and manufacturers, and (iv) fees where we engage in licensing/sub-licensing arrangements for our owned and/or licensed technology. (v) Fees from app deployment and usage. Our ongoing research and development functions are considered key to maintaining and enhancing its competitive position in the growing nanomaterials and quantum dot market. Nanomaterial and quantum dot technology continues to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development and intend to focus a significant part of our efforts on this, as we have done historically. Continuing R&D activities at theSan Marcos facility and our collaboration withTexas State University , and the numerous other research centers and departments with which we have relationships will be important aspects of our strategy.
Our business is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, the manufacture, transportation and export of chemical substances, and the regulation of hazardous materials used in or produced by the manufacture or use of QDs. Management believes the patented (owned and licensed) processes and proprietary manufacturing equipment employed allow us to comply with current regulations. However, new regulations or requirements may develop which could adversely affect the Company or its products in the future. See "Risk Factors" section. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our judgments and estimates in determining our financial condition and operating results. Estimates are based upon information available as of the date of the consolidated financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and require management's most subjective judgments often as a result of the need to make estimates about the effect of matters inherently uncertain. The most critical accounting policies and estimates are described below. 28 Basis of Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted inthe United States and include the accounts of the Company and its subsidiaries. All significant inter-company transactions and account balances have been eliminated upon consolidation. Revenue Recognition: The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. The five-step model is applied to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services transferred to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Title and risk of loss generally pass to our customers upon shipment. In limited circumstances where either title or risk of loss pass upon destination, we defer revenue recognition until such events occur. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are typically estimated based on observable transactions when these services are sold on a standalone basis. For the years endedJune 30, 2019 and 2018 our revenue was immaterial. Contract liabilities are presented on our consolidated balance sheet and consist of advanced payments. As ofJune 30, 2019 , and 2018 contract liabilities were$500,000 and$0 , respectively. Financial Instruments: Financial instruments consist of cash and cash equivalents, restricted cash, payables, and convertible debentures. The carrying value of these financial instruments approximates fair value due to either their short-term nature or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements. Asset Impairment: In accordance with Accounting Standards Codification (ASC) 360-10-35 "Impairment or Disposal of Long-Lived Assets", the Company evaluates the recoverability of property and equipment if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if an impairment of such property is necessary. The effect of any impairment would be to expense the difference between the fair value of such property and the carrying value. There were no impairment charges in the consolidated statements of operations during the years endedJune 30, 2019 and 2018. Debt Issuance Costs: The costs related to the issuance of debt are presented on the consolidated balance sheets as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt. Income Taxes: The Company follows ASC 740 "Income Taxes" regarding the accounting for deferred tax assets and liabilities. Under the asset and liability method required by this guidance, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A deferred tax asset will be reduced by a valuation allowance when, based on the Company's estimates, it is more likely than not that a portion of those assets will not be realized in a future period. 29 The Company follows ASC 740 "Income Taxes" regarding the accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an income tax position is required to meet before recognizing in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. Additionally, the Company recognizes income tax related penalties and interest in the provision for income taxes. Beneficial Conversion: Debt and equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible notes. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as beneficial conversion expense and an increase to additional paid-in-capital. Derivative Instruments: The Company enters into financing arrangements which may consist of freestanding derivative instruments or hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities, as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations
of each instrument.
The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as freestanding warrants, the Company generally uses the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk-free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of the Company's common stock. Since derivative financial instruments are initially and subsequently carried at fair values, income (expense) going forward will reflect the volatility in these estimates and assumption changes. Increases in the trading price of the Company's common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company's common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.
Liquidity and Capital Resources
Going Concern The Company recorded losses from continuing operations in the current period presented and has a history of losses. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing. In conjunction with anticipated revenue streams, management is currently negotiating equity and debt financing, the proceeds from which would be used to settle outstanding debts, to finance operations, and for general corporate purposes. However, there can be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern. 30
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.
As ofJune 30, 2019 , we had a working capital deficit of$7,141,117 , with total current assets and liabilities of$20,069 and$7,161,186 respectively. Included in the liabilities are$757,569 owed to our officers, directors and employees for services rendered and accrued throughJune 30, 2019 ,$2,605,042 of convertible debentures, net of unamortized discount and$25,130 of notes payable that are due within one year. As a result, we have relied on financing through the issuance of common stock and convertible debentures. As ofJune 30, 2019 , we have cash and cash equivalent assets of$478 . We continue to incur losses in operations. Over the past five years we have primarily relied on sales of common stock and debt instruments to support operations 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 securities of the Company. Management believes it may be necessary for the Company to rely on external financing to supplement working capital to meet the Company's liquidity needs in the fiscal years ended 2020 and 2021; the success of securing such financing on terms acceptable to the Company, if at all, cannot be assured. If we are unable to achieve the financing necessary to continue our plan of operations, our stockholders may lose their entire investment in the Company.
The following table summarizes the net cash provided by (used in) operating, investing and financing activities for the periods indicated:
Years Ended
June 30,
2019 2018
Operating activities
- (1,877 )
Financing activities
Operating Activities. Net cash used in operating activities was$515,233 for the year endedJune 30, 2019 compared to$1,090,821 for the same period of 2018, a decrease in cash used of$575,591 . The decrease was primarily driven by decreased in operating costs, decreased payments on accounts payable, the increase in contract liabilities, and an increase in services in exchange for stock.
Investing Activities. Net cash used in investing activities was$0 for the year endedJune 30, 2019 compared to$1,877 for the year endedJune 30, 2018 . The decrease is related to fewer purchases of equipment in fiscal year 2019. Financing Activities. Net cash provided by financing activities was$513,686 for the year endedJune 30, 2019 compared to$1,042,112 for the same period of 2018, a decrease of$528,426 . The decrease is primarily due to fewer issuances of convertible debentures, offset by an increase in sales of common stock for cash, and fewer principal payments on our long-term debt during the year endedJune 30, 2019 .
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes we will be able to meet our obligations and continue our operations for the next fiscal year. Realization values may be substantially different from carrying values as shown and these consolidated financial statements do not give effect to adjustments that would be necessary to reflect the carrying value and classification of assets and liabilities should we be unable to continue as a going concern. As ofJune 30, 2019 , we had not yet achieved profitable operations, had a working capital deficit of$7,141,117 , and expect to incur further losses in the development of the business, all of which casts substantial doubt about our ability to continue as a going concern. 31
Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. We continue to explore available financing options, including, without limitation, the sale of equity, debt borrowing and/or the receipt of product licensing fees and royalties. We can provide no assurances that future financing, if needed, will be obtained on terms satisfactory to us, if at all. In this respect, see Note 1 in our notes to the consolidated financial statements for additional information as to the possibility that we may not be able to continue as a going concern. Financing Arrangements As ofJune 30, 2019 , we had the following convertible debentures outstanding. No. of Shares Outstanding Exercisable Warrants Warrant Principal Conversion Under Related Strike Price Exercise
Issuance Date Amount ($) (1) Interest Rate Price ($) Maturity Term Warrants ($) Period
September
2019 -
Sep-14 25,050 6 % 0.15 October 2019 3,333,667 0.3 Sep-19
April - June March 2018 -
2016 (2) (2) 1,218,772 8 % 0.01 July 2019 5,686,590 0.15 Aug-21
August 2016 (3)
(2) 200,000 8 % 0.01 Aug-18 833,200 0.15 Aug-21
January - March January - January 2022
2017 (3) (2) 60,000 8 % 0.12 March 2019 10,831,600 0.15 - March 2022
Jun-17 (2) 100,000 8 % 0.12 Feb-19 250,000 0.12 Jun-20
Jul-17 (2) 100,000 8 % 0.12 Feb-19 250,000 0.12 Jul-20
Sep-17 (2) 150,000 8 % 0.12 Feb-19 375,000 0.12 Sep-20
Nov-17 27,000 8 % 0.12 Nov-19 416,600 0.15 Nov-22
Dec-17 (2) 75,000 8 % 0.12 Mar-19 250,000 0.12 Dec-20
Feb-18 (2) 45,000 8 % 0.12 Feb-19 500,000 0.12 Dec-20
Mar-18 (2) 65,000 8 % 0.12 Mar-19 500,000 0.12 Mar-21
Apr-18 (2) 60,000 8 % 0.12 Mar-19 500,000 0.12 Mar-21
Apr-18 70,000 8 % 0.12 Apr-21 200,000 0.12 Apr-21
Apr-18 20,000 8 % 0.12 Apr-20 1,166,660 0.15 Apr-23
Jun-18 40,000 8 % 0.12 Dec-18 1,000,000 0.12 Jun-21
Jul-18 45,000 8 % 0.12 Jan-19 1,000,000 0.12 Jun-21
Aug-18 30,000 8 % 0.12 Mar-19 1,000,000 0.12 Aug-21
Sep-18 25,000 8 % 0.12 Apr-19 1,000,000 0.12 Sep-21
Dec-18 52,000 8 % 0.12 Dec-20 262,458 0.15 Dec-23
(1) This table does not include
equity line of credit that did not close in the form of promissory notes,
which bear interest at 8% per annum, matured on
considered past due at the time of this report. The promissory notes are
convertible into unregistered and restricted shares of shares of the
Company's common stock only if there is an Event of Default, as defined in
the notes. These amounts are subject to ongoing litigation, and the Company
does not intend to pay the balances or honor a conversion until the
litigation has concluded. See Note 15 to the Notes to Condensed Consolidated
Financial Statements. (2) These debentures are past due as of the date of this report (3) See Note 11 to the Notes to Condensed Consolidated Financial Statements.
32
Results of Operations - Year Ended
The following table sets forth our consolidated results of operations for the
periods indicated:
Years Ended
June 30, Increase/
2019 2018 (Decrease) %
Statement of Operations
Information:
Revenues $ 400 $ 20,120 $ (19,720 ) -98.0 %
General and administrative 5,840,807 6,093,075 (252,268 ) -4.1 %
Research and development 92,996 188,274 (95,278 ) -50.6 %
Beneficial conversion expense 143,778 1,303,078 (1,159,300 ) -89.0 %
Interest expense, net 1,262,150 1,023,989 238,161 23.3 %
Change in value of derivative
liability 148,719 (514,969 ) 663,688 128.9 %
Accretion of debt discount 318,070 1,327,742 (1,009,672 ) -76.0 %
Loss on shares unauthorized 712,695 - 712,695 N/A
Loss on debt extinguishment 438,589 - 438,589 N/A
Revenues
During the year endedJune 30, 2019 we recognized revenue of$400 compared to$20,120 for the year endedJune 30, 2018 , a decrease of$19,720 , or 98.0%. At the Company's stage of product development, our revenues are derived from funded product development agreements, and product testing agreements, and are not significant for fiscal years 2019 or 2018 as the Company has focused on product development.
General and Administrative Expenses
During the year endedJune 30, 2019 the Company incurred$5,840,807 of general and administrative expenses, a decrease of$252,268 , or 4.1%, from the$6,093,075 recorded for the year endedJune 30, 2018 . The decrease in general and administrative expenses breaks down as follows: Years Ended June 30, Increase/ 2019 2018 (Decrease) % Compensation$ 508,148 $ 864,345 $ (356,197 ) -41.2 % Stock-based compensation 1,748,075 1,580,012 168,063 10.6 % Legal and audit expenses 281,109 597,004 (315,895 ) -52.9 % Corporate expenses 1,108,717 539,813 568,904 105.4 % Other professional fees 2,067,152 2,379,264 (312,112 ) -13.1 % Depreciation 100,009 99,589 420 0.4 % Amortization 27,597 33,048 (5,451 ) -16.5 % Total General and Administrative Expenses 5,840,807 6,093,075$ (252,268 ) -4.1 %
The increase in corporate expenses was due primarily to various consultants that provided services throughout the year endedJune 30, 2019 . A portion of the increased corporate expenses was offset by having a lower headcount, and thus compensation being reduced. Stock-based compensation increased in 2019 due to some employees electing to be paid in stock or options, in lieu of cash, as well as the Company electing to extend the term of certain option grants, resulting in additional modification expense. Other legal and audit expenses, and professional fees were reduced for the fiscal year ended as less cost were incurred relating to litigation in process, along with less equity-based consulting incurred.
Research and Development Expenses
During the year endedJune 30, 2019 the Company incurred$92,996 of research and development expenses ("R&D"), a decrease of$95,278 , or 50.6%, from the$188,274 recorded for the year endedJune 30, 2018 . The primary reasons for the decrease are, in fiscal year 2019, the Company has reduced its focus on quantum dot process enhancement and focusing on product creation. Projects are being evaluated and this slows the process of R&D until product evaluation and proof of concept has been attained. 33
Beneficial Conversion Feature on Convertible Debenture
The beneficial conversion expense for the year endedJune 30, 2019 was$143,778 compared to$1,303,078 during the year endedJune 30, 2018 , a decrease of$1,159,300 , or 89.0%. The decrease was due primarily to issuance of new convertible debentures, and two triggering events creating down-round features in certain debentures to be recognized during the year endedMarch 31, 2018 . Similar triggering events did not occur during the year endedJune 30, 2019 . Interest Expense Interest expense for the year endedJune 30, 2019 was$1,262,150 compared to$1,023,989 during the year endedJune 30, 2018 , an increase of$238,161 , or 23.2%. The increased interest expense recorded in the fiscal year 2019 was primarily related to default interest being charged for debentures that are
past due atJune 30, 2019 .
Change in value of derivative liability
During the year endedJune 30, 2019 the Company recorded an expense of$148,719 related to the change in value of derivative liability. The expense is related to the change in value of the derivative related to the "make-whole" provision issued in relation to certain debenture extensions during prior quarters that results in the revaluation of the liability at quarter, and year ends. Accretion of Debt Discount During the year endedJune 30, 2019 the Company recorded$318,070 of accretion of debt discount expense, a decrease of$1,009,672 , or 76.0% from the$1,327,742 recorded for the year endedJune 30, 2018 . The decrease in accretion of debt discount expense is primarily related to the issuance of the convertible debentures during the fiscal year, which were lower compared to the year endJune 30, 2018 .
Loss on shares unauthorized
During the year endedJune 30, 2019 the Company recorded$712,695 of loss on shares unauthorized due to the contractual agreements for convertible debt, options and warrants for common stock, which exceeded the company's authorized shares in the aggregate by approximately 23,756,000 shares. Loss on debt extinguishment During the year endedJune 30, 2019 the Company recorded$438,589 of loss on debt extinguishment due to extensions of debentures of$825,000 in principal being extended, and the extensions of these maturity extensions created an effective extinguishment pursuant to the Debt Modification guidance, ASC 470-50. The Company recorded a loss on extinguishment of$438,589 in connection with these extensions.
Off-balance sheet arrangements
We have no off-balance sheet arrangements including arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
InJuly 2017 , the FASB issued ASU 2017-11-Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity's own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The Company elected to adopt ASU 2017-11 early, effectiveJuly 1, 2017 , and implemented the pronouncement retrospectively with a cumulative effect adjustment to outstanding financial instruments. The adoption of this guidance did not have an impact on its financial statements. In the fiscal year 2018, the Company had three triggering events related to a down round feature which resulted in recording a charge for beneficial conversion expense of$1,021,500 during the year endedJune 30, 2018 . 34 InMarch 2016 , the FASB issued ASU guidance related to stock-based compensation. The new guidance simplifies the accounting for stock-based compensation transactions, including income tax consequences, statement of cash flows presentation, estimating forfeitures when calculating compensation expense, and classification of awards as either equity or liabilities. The new standard requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit (expense) in the income statement. The new guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than a financing activity and requires presentation of cash paid to a tax authority when shares are withheld to satisfy the employer's statutory income tax withholding obligation as a financing activity. The new guidance also provides for an election to account for forfeitures of stock-based compensation. The Company adopted the guidance effectiveJuly 1, 2017 . With respect to the forfeiture election, the Company will continue its current practice of estimating forfeitures when calculating compensation expense. The adoption of this standard did not have a material impact on the Company's consolidated financial statements or related disclosures. InMarch 2018 , the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant toSEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the "Tax Act") and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. We will continue to evaluate this area and expect to finalize our conclusions by the first quarter of fiscal 2019. InMay 2017 , the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting. The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2017 . The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements. InMarch 2016 , the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the guidance effectiveJuly 1, 2017 . The adoption of this standard did not have a material impact on the Company's consolidated financial statements or related disclosures. InFebruary 2016 , the FASB issued ASU 2016-02, Leases, which updates guidance on accounting for leases. The update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The standards update is effective for interim and annual periods afterDecember 15, 2018 with early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when adopted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements. InAugust 2014 , the FASB issued ASU No. 2014-15 Preparation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. Under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements-Liquidation Basis of Accounting. Even when an entity's liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this update should be followed to determine whether to disclose information about the relevant conditions and events. Early adoption is permitted. The Company will continue to evaluate the going concern considerations in this ASU, however, at this time, the Company has not adopted this standard. The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated
financial statements. 35 InMay 2014 , the FASB issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606), which amends the existing revenue recognition requirements and guidance. The core principle of the new standard is to recognize revenue that reflects the consideration the Company expects to receive for goods or services when or as the promised goods or services are transferred to customers. Topic 606 requires more judgment than current guidance, as management will now be required to: (i) identify each performance obligation in contracts with customers, (ii) estimate any variable consideration included in the transaction price and (iii) allocate the transaction price to each performance obligation. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We adopted this standard effectiveJuly 1, 2018 and it did not have a material impact on our consolidated financial statements.
Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements.
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