QUANTUM MATERIALS CORP. 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 statements 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 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 risk factors, condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Form 10-K filedMarch 23, 2021 for the fiscal year endedJune 30, 2019 . 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. 33 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 three-month period endedSeptember 30 ,
2019 and 2018 have been included. Business Overview
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.
QDs also have applications in solar cells, where their characteristics enable
conversion of light energy into electricity with the potential for significantly
higher efficiency than existing technologies. In traditional solar cells, a
photon can only be converted into a fixed amount of energy per photon,
regardless of the photon's total energy. Excess energy is converted to heat
which further lowers the efficiency of the panel. QD-based solar cells have the
potential to significantly exceed this efficiency because QDs are capable of
generating multiple electrons per photon strike rather than converting the extra
energy of high energy photons to heat as in the case of traditional solar cells.
QD solar cells can also convert the infrared portion of the spectrum that is not
absorbed by traditional solar cells. These attributes make the theoretical
maximum efficiency of QD solar cells substantially higher that of traditional
silicon solar cells. We believe the use of QDs in solar cells will create the
opportunity for a step change in efficiency and performance in printed
photovoltaic cells.
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. QDs remain an expensive product,
but we anticipate rapid growth of the QD market.
History of the Company
QMC was formed in January 2007 , as a Nevada corporation under the name "Hague
Corp. " and its shares began trading in the over-the-counter market in the fourth
calendar quarter of 2008. The original business of Hague Corp. was the
exploitation of mineral interests. Solterra , a Delaware corporation, was formed
in May 2008 by Mr. Stephen Squires , our Chief Executive Officer, and other
shareholders to develop quantum dot applications in the solar cell industry.
Solterra was acquired by Hague Corp. in November 2008 , pursuant to a merger
transaction wherein the shareholders of Solterra exchanged their shares of
common stock in Solterra for shares of common stock in Hague Corp. , and Solterra
became a wholly-owned operating subsidiary of Hague Corp. Upon the closing of
the merger, Hague Corp. changed its business from the exploitation of minerals
to the development of QDs, and subsequently changed its name to "Quantum
Materials Corp. " in 2010.
34
In October 2008 , Solterra also entered into a license agreement with the
University of Arizona , which was later amended, (the "UA License") pursuant to
which Solterra has been granted exclusive rights to use the University of
Arizona's patented screen-printing techniques in the production and sale of
organic light emitting diodes ("OLEDs") incorporating QDs in printed electronic
displays and other printed electronic components. This technology was developed
at University of Arizona by Dr. Ghassan Jabbour , a member of the Company's Board
of Directors. In 2020, the Company determined that the U of A patented
technology was not optimal for its printed solar cell product and developedits own solution.
In 2010,Solterra entered into an agreement with a third-party provider of industrial process equipment to develop a proprietary process for continuous flow production of QDs and TQDs under whichSolterra retained all ownership and rights to the design and any related intellectual property. The development work has since been completed and the first two units have been delivered and placed into operation.
In 2013, the Company opened theWet Lab inSan Marcos, Texas atStar Park , an extension ofTexas State University . In 2014, the first piece of manufacturing equipment was delivered to theWet Lab . The capacity of the initial unit was approximately 250kg of QDs or TQDs per year and was intended to be used for internal research and development purposes although it also can be used for commercial production. In 2014, the Company acquired a patent portfolio from Bayer AG that included patents and patent applications covering the high-volume manufacture of QDs, including heavy metal-free compositions, various methods for enhancing quantum dot performance, and a quantum dot based solar cell technology (the "Bayer Patents"). The Bayer Patents, the UA License, organically developed technologies and our proprietary continuous flow manufacturing process comprise our fundamental asset platform. We believe that the intellectual property and proprietary technologies position the Company to become a leader in the overall nanomaterials and quantum dot industry, and a preferred supplier of high performance QDs and TQDs to an expanding range of applications. In 2016,Mr. Squires returned as President and CEO and implemented a cost reduction initiative streamlining the G&A overhead and devoting more resources to R&D and commercialization readiness. These efforts have resulted in further optimization of the chemistry and the products. Through this refinement, we have been able to double the through put of our current production equipment from 2000 Kg of QDs per year to 4,000 Kg of QDs per year. All of our discoveries are purposely developed to be compatible with our patented flow manufacturing process. Management believes that this and a number of other material performance enhancement discoveries made by us provide us with the ability to provide industry leading material performance at a very competitive price point. In 2019 the Company developed the QDX Ledger, which is based on technology acquired the blockchain-based technology assets ofCapstan Platform, Inc. to provide an immutable, scalable and shared data store for consistent tracking and visibility among participants in a product supply chain. The identity and access credentials of participants, be they individuals, corporations or machines is also secured on the platform, providing mechanisms to control and restrict the supply of products as might be required by regulatory mandates and socially conscious business practices. QDX Quantum Dots can be incorporated into almost any physical product so that its authenticity can be verified and tracked from point of manufacture through to sale to an end customer. Unlike existing approaches to establishing product identity, including QR code stickers and RFID tags, we believe that QDX Quantum Dots are more tamper proof, resistant to environmental extremes and low cost. We believe that they may be incorporated into products as diverse as auto parts, consumer electronics, apparel and luxury fashion accessories, industrial IoT devices, bank notes and even liquids, such as gasoline and lubricants. In early 2020 and in the advent of the Covid 19 pandemic, the company recognized a need for a secure method for the validation and reporting of the Covid 19 testing process. The Company leveraged its existing QDX Ledger platform technology to launch the QDX HealthID later rebranded theQMC HealthID and is operated as a wholly owned subsidiary ofQuantum Materials Corp. 35 Business Opportunities
The following outlines the business opportunities that the Company has pursued over the last few years:
? Expanded range of quantum dot base materials to include carbon quantum dots,
water soluble quantum dots, food grade quantum dots and IR emitting quantum
dots.
? Initiated collaborations with a number of LED and Micro LED companies, and
have MTA's in place to provide samples to collaborate in commercially viable
solutions;
? Developed stabilized cadmium free QDs and encapsulation process for remote
phosphor LED applications and surpassed 8,000 hours continuous on time without
measurable degradation;
? Reduced QD process cost by more than 45% and doubled annual production
throughput capacity using existing process equipment and expanded capability
to include Pervoskite quantum dots;
? Significantly improved emission color purity by narrowing the color
wavelength, tuning the emission wavelength and increasing the quantum yield
(brightness) of our cadmium-free QD optical materials focused on display
applications. These improvements have resulted in Rec. 2020 coverage in excess
of 90%;
? Developed blue cadmium-free high-performance QDs;
? Develop the first 100% quantum yield cadmium-free red QDs;
? Obtained an intellectual property portfolio of 50+ patents and applications
granted, filed, or in preparation, including issued patents acquired from
third parties, including those covering high volume production of QDs,
including cadmium-free quantum dots, quantum dot enhancement technologies and
quantum dot solar cell technologies;
? Expanded the number of display optical film companies that we are now in
collaboration with and increased sample deliveries;
? Continued product development with leading global optical film manufacturers;
? Established a nanomaterials laboratory facility for research, development and
production in Texas .
The Company can provide no assurances that its efforts to date will result in
the grant of patents for proprietary processes or result in future sales and/or
profitable operations.
A uniquely performing variant of QDs are TQDs, which have a molecular
configuration consisting of a center portion and four arms extending from the
center that are equally spaced in three dimensions. TQDs have material
advantages over standard spherical QDs where both absorption of photons and
charge transport are enhanced by the legs of the tetrapod which effectively
serve as trillions of antennae for light. Their unique architecture and shape
also promotes more uniform distances between the dots, which helps to eliminate
the problem of aggregation. TQDs are more costly and difficult to produce in
quantity using known methods, with the exception of our patented flow
technology.
Initially, our principal business emphasis was on the development of tetrapod
quantum dots ("TQDs") for solar cell applications through Solterra . TQDs are a
variant of QDs with material advantages over standard spherical QDs,
particularly in solar panel applications. The solar cell market became
increasingly volatile, with prices eroding due to the influx of subsidized
products from outside the United States . We believe that we are well-positioned
to bring a solar cell to market with sufficiently high conversion efficiency
that, when combined with our low- cost proprietary manufacturing process, will
result in a product capable of producing energy at a competitive cost per watt
compared to existing solar cell technology and at a scale that will meet growing
market demand for distributed, sustainable energy.
36
How Quantum Dots are Produced
High volume production of QDs is typically accomplished through one of several methods including:
Colloidal synthesis: Growth of QDs from precursor compounds dissolved in solutions, much like traditional chemical processes. This manual batch process requires careful control of temperature, mixing and concentration levels of precursor materials. Precise control must be maintained uniformly throughout the solution otherwise non-uniform, irregular QDs are produced. Due to their very small size it is extremely difficult if not impossible to segregate the QDs by size once they have been produced and a conglomeration of varied size QDs are not capable of producing the unique features that are required in most applications. Prefabricated seed growth: QDs are created from chemical precursors in the presence of a molecular cluster compound under conditions whereby the integrity of the molecular cluster is maintained and acts as a prefabricated seed template. This manual batch method can produce reasonable quantities of QDs but can take significant capital resources to achieve significant volume and still results in low yields. QMC's automated continuous process: Unlike the more labor-intensive batch processes described above, we use a continuous manufacturing process to produce QDs and TQDs. We Believe that this patented process and chemistry provides advantages to other methods such as more precise control of process variables which leads to improved quality control. We believe that by using this method yields are higher and manufacturing costs are lower as compared to other methods. We also believe that we are the only company to successfully deploy continuous flow technology in the large-scale manufacturing of highly uniform QDs of both cadmium-based, cadmium-free and a number of other elemental chemistries. Raw materials for the commercial production of QD are purchased in bulk from chemical supply companies. Indium, a component of our cadmium-free QD is considered a rare metal. Indium is primarily found inSouth America ,Canada ,Australia ,China and the Commonwealth of Independent States. There is also a mature and efficient indium recycling process. While our management does not believe that a supply disruption of the indium-containing compounds used in the manufacturing of QDs represents a significant risk, no assurances can be given in this regard. Major Market Segments Life Sciences. The life sciences industry was one of the early areas of adoption of QD technology, especially for QDs used in fluorescent markers in diagnostic applications. This includes both the in vitro use of QDs for marking (illuminating) particular cell types or metabolic processes for understanding diseases, and in vivo imaging made possible by QD fluorescence in near infrared that can be detected in deep tissues. The fluorescent qualities of QDs provide an attractive alternative to traditional organic dyes in bio-imaging. It is estimated that QDs are 20 times brighter and 100 times more stable than standard fluorescent indicators. QD technology is also being used in place of colloidal gold nanoparticles in lateral flow test kits such as those used in the rapid Covid 19 antigen test. QDs have been reported in literature to exponential improve the sensitivity of these test enabling earlier detection.The Federal Drug Administration ("FDA") has issued emergency use authorization ("EUA") for medical tests that diagnose Covid-19. The FDA is responsible for protecting the public health by ensuring safety, efficacy, and security of all human and veterinary drugs, biological products, and medical devices. With regards to medical tests, the FDA usually does this by making manufacturers meet rigorous guidelines in an approval process that can take many months. During an emergency, such as a pandemic, it may not be possible to have all the evidence that the FDA would usually have before approving a medical test. If there's evidence that strongly suggests that patients have benefited from a test, the agency can issue an EUA to make it available. One of the minimum requirements for granting EUA is that the known and potential benefits of the test outweigh the known potential risks. However, this is a minimum requirement and not the standard. The minimum standard can be met and EUA is still not given; there may be additional requirements, such as the test meeting reasonable thresholds for safety and effectiveness and/or people in urgent need of care based on a diagnosis. EUAs are only given during a declared emergency; outside of this, an EUA is never given.
Once the pandemic is over and should FDA EUA of Covid-19 tests be revoked. The 510K approval process which requires validation and submission of the test for FDA 510(k) clearance, which is one of the normally used medical device regulatory pathways for FDA approval would be required to continue to sell
the test kits in theUSA .
It is important to note that QMC is collaborating with a leading university in the medical field and intends to initially pursue the FDA EUA while also pursuing the FDA 510(k) clearance of its test platform for non-covid related testing. QMC also intends to pursue regulatory approvals in one or more foreign jurisdictions.
The time required to complete either the FDA EUA or the FDA 510(k) approval
process can vary widely, and approval is not guaranteed the same holds true for
regulatory approvals outside the
37
TVs, Displays, and Other Optoelectronics. This market is comprised principally
of quantum dot LCD displays ("QDLCDs") for televisions, computers, cell phones,
tablets and various other applications. In QDLCDs, QDs are used to down convert
some of the blue light from the LED backlight directly to green and red light
allowing for the creation of more vibrant colors and energy savings as compared
to a traditional LCD TV/display. Unlike OLEDs which are extremely expensive to
produce and require massive manufacturing capital expenditures, QD films are a
drop-in solution for LCD manufacturers using existing infrastructure allowing
for OLED-like color performance at significantly lower capital investment. LCD
TVs make up the vast majority of new TV shipments, and we expect this proportion
to grow. Samsung and several other OEMs are currently shipping televisions using
QDs to enhance the color quality and power efficiency.
Lighting. In the lighting market, companies began to commercialize quantum dot
LEDs in 2013 with significant R&D occurring among manufacturers of solid-state
lighting. While companies have launched quantum dot LED lamps, the market for
quantum dot LED lamps and the other lighting products is still relatively small.
We believe QD-based LED lighting will be a highly competitive replacement for
currently available compact florescent and LED lighting, as QD technology
provides greater power efficiency and the ability to tune the light spectrum to
emit light that is the most pleasing and/or appropriate for the application.
Solar Energy. QDs are capable of producing energy from a broad spectrum of solar
and radiant energy, including the ultraviolet and infrared frequencies
conventional silicon solar cells generally do not convert to electricity. QD
solar cells have theoretical conversion potentials of approximately twice that
of conventional solar cells, and applications are being developed to "print"
highly efficient photovoltaic solar cells in mass quantities at low cost.
Management believes that QD solar cells and panels will be the next evolutionary
development in the field of solar energy. Management also believes that
increased conversion efficiencies will be realized with the use of TQDs
resulting from their unique shape and that our low-cost proprietary continuous
production process and printing technology will permit Solterra to offer solar
electricity solutions that can compete on a non-subsidized basis with the price
of retail electricity in key markets around the world. We believe that global
energy consumption trends that include the need for distributed energy
generation (non-grid and especially in developing markets) and the desire for
non-fossil fuel generated energy even at increased costs will drive market
demand for solar. Management believes this will be especially true if existing
generation by nuclear and coal is decommissioned due to age-related, safety, or
environmental concerns or global governmental policy.
Other applications. Current and future applications of QDs and other
nanoparticles may impact a broad range of other industrial markets. These
potentially include batteries and energy storage, commercial glass, water
purification, improved thermoelectric components, biohazard detection sensors,
diode lasers, and others. We intend to monitor these uses as they mature from
basic research and plan for specific compositions as market opportunities
develop.
We anticipate that the biggest growth sectors for QDs will be in Life Science,
anti-counterfeiting, and photovoltaics. Other current and potential applications
for QD include nano-bio, commercial glass, batteries, sensors, lasers, and
paints. QDs remain an expensive product. Although the high cost has slowed
market growth, we believe the recent growth of mass manufacturing is quickly
easing the cost constraints.
License Agreement
In November 2018 , the Company entered into a license and development agreement
with Amtronics India LLC related to the volume production of quantum dots in
Assam, India . The agreement is part of a larger project for the design,
training, research and development of a quantum dot manufacturing facility in
Assam . This project has been under discussion for nearly three years. A
ground-breaking ceremony took place in Assam on January 16, 2019 , and the
Company anticipated operations being established and operational prior to
year-end 2019. In addition to an upfront fee and royalty, the agreement provides
for the Company to sell equipment and training services, which the Company
expects will provide additional revenues. The project was delayed due to
historic flooding in the region during 2019 and 2020. The project was and
continues to be delayed due to the severe Covid-19 outbreak and subsequent
quarantine occurring throughout India . Construction on the project has resumed
and planning for a new timeline has begun.
The Company believes that the terms of the licensing agreement will enable the
Company to begin to leverage its intellectual property portfolio and to begin
generating revenues without overburdening the Company's scientific staff in a
manner that would disrupt new discovery. The other participants in the Assam
project have the responsibility of, among other things, developing the site,
constructing the facilities and hiring staff. The Company has agreed to
construct and supply the proprietary equipment, assisting in the development and
scale up of the 3rd generation solar, display and SSL products, training and
providing a broad range of consulting services at additional cost, representing
a potential ongoing revenue opportunity for the Company.
38
The Company received advanced payments fromAmtronics India LLC related to its exclusive license and development agreement related to the production of quantum dots inAssam, India ("License Agreement"), which have been recorded as contract liabilities and will be recognized as revenue in accordance with ASC Topic 606 once the performance obligations are met. As ofSeptember 30, 2019 , and 2018 contract liabilities were$1,197,973 and$500,000 , respectively. The current liability represents the next twelve months' portion of the license fees revenue. For each of the period endedSeptember 30, 2019 and 2019, no revenue was recorded related to the License Agreement. In addition to Company's efforts to commercialize its QD-LED remote phosphor technology for displays, the Company plans for its core focus in the first half of 2019 to be research and development for the optimization of its 3rd generation perovskite QD based solar technology in preparation of scaling up to commercial production levels inAssam, India . We have continued to maintain aggressive cost control measures, never forgetting this is a marathon and not a sprint. We are continuing to focus more resources on developing our continuous flow technology. We also have utilized investment funds to further develop our QDX Ledger anti-counterfeiting technology as well as related HeathID platform for pandemic and other diagnostic testing analysis, tracking and reporting. To further streamline our operations, we have continued to analyze our operating costs and make reductions whenever and wherever possible.
Recent Developments - COVID-19 pandemic
The recent COVID-19 pandemic and the measures being taken to address and limit the spread of the virus have adversely affected the economies and financial markets of many countries, resulting in an economic downturn that has negatively impacted, and may continue to negatively impact, global demand for our products and services. See part Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 filed with theSEC onMarch 23, 2021 , for further discussion. Cybersecurity Cybersecurity refers to a set of practices and techniques used to protect the integrity of networks, applications and data from attack, damage, loss or unauthorized access. The use of cybersecurity measures can help prevent cyber-attacks, data breaches, and identity theft and can aid in risk management.
Confidentiality, integrity and availability, also known as the CIA triad, is a model designed to guide policies for information security within an organization.
Confidentiality: Protecting confidentiality is dependent on being able to define and enforce certain access levels for information.
Integrity: Integrity is defined as protecting data from deletion or modification from any unauthorized party, and it ensures that when an authorized person makes a change that should not have been made the damage can be reversed. Availability: Authentication systems, access vectors and systems functionality are all paramount for the information they protect and ensure it's available when it is needed.
The following is a brief representation of QMC HealthID™ and QDX Platform Cybersecurity measures currently in place.
? Penetration testing: simulates a malicious attack in order to perform in-depth
business logic testing and determine the feasibility and impact of an attack.
The testing is performed internally and externally to the system.
? Tested development, testing and production environments when typically, only
production environments are tested.
? Cold test results were very good with only one critical and one high
vulnerability very few medium and low vulnerabilities.
? Application security testing:
? Currently, a relatively manual process of assuring our applications are more
resistant to security threats, by identifying security weaknesses and
vulnerabilities in source code.
? Code static analysis
? Sonarqube is an open-source platform developed by SonarSource for continuous
inspection of code quality to perform automatic reviews with static analysis
of code to detect bugs, code smells, and security vulnerabilities on
20+ programming languages.
? Library vulnerability reporting
? Partially automated process of researching and scanning third-party software
components in use.
? Container vulnerability scanning (ECR)
? Amazon Elastic Container Registry (ECR) is a fully managed container registry
that makes it easy to store, manage, share, and deploy verified container
images and artifacts anywhere.
39
? Virtual machine vulnerability scanning (AlertLogic)
? Alert Logic service is MDR (Managed Detection & Response), which is an
always-on always-aware breach detection/response system
? Containers always get security updates when they are built
? All Kubernetes containers automatically notify the team when there are new
security updates to be completed.
? Encryption
? All data is encrypted at rest and in transit.
? No PII or PHI data is stored on any end-user device.
? Segregation/Isolation
? Production environment is logically and physically isolated from dev/test
? Each element is contained within a separate VPC (virtual private cloud)
? Each separate VPC requires a VPN (virtual private network) connection in order
to access.
? Access
? Complex password policies are enforced
? Role based access control within dev/text/production environments? Multi-Factor Authentication is enforced within systems requiring higher levels
of access control
? Healthcare data security and availability standards in use within appropriate
deployed platforms
? FHIR
? Rapidly exchange data in the HL7 FHIR standard format with a single,simplified data management solution for protected health information (PHI).
Azure API for FHIR lets you quickly connect existing data sources, such as
electronic health record systems and research database
? HITRUST
? The Health Information Trust Alliance Common Security Framework (HITRUST CSF)
leverages nationally and internationally accepted standards and regulations
such as GDPR, ISO, NIST, PCI, and HIPAA to create a comprehensive set of
baseline security and privacy controls
Liquidity and Capital Resources
Going Concern The Company recorded losses from continuing operations in the 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. 40 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, if at all. The Company has continued to maintain aggressive cost control measures, although we plan on increasingly to focus more resources on research and development as we did during the last half of fiscal year 2019 and fiscal year 2020. To further streamline operations, the Company has continued to analyze its operating costs and to make reductions where management believes prudent. To that end, we changed transfer agents duringJune 2019 in order to further reduce overhead cost and has made additional cost cutting measures.
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 ofSeptember 30, 2019 , we had a working capital deficit of$9,758,002 , with total current assets and liabilities of$32,260 and$9,790,262 respectively. Included in the liabilities are$793,151 owed to our officers, directors and employees for services rendered and accrued throughSeptember 30, 2019 ,$2,516,766 of debentures, net of unamortized discount and$20,000 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 ofSeptember 30, 2019 , we had cash and cash equivalent assets of$8,735 . 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:
Three Months Ended
September 30,
2019 2018
Operating activities
-
Financing activities
Operating Activities. Net cash used in operating activities was$159,684 for the three months endedSeptember 30, 2019 compared to$184,090 for the same period of 2018, a decrease in cash used of$24,406 . The decrease was primarily attributable to an increase in the cash provided by working capital accounts of$156,961 offset in part by an increase in cash used of$135,278 from an increase in net loss and non-cash reconciling items. Investing Activities. Net cash used in investing activities was primarily related to purchases of equipment. Purchases of capital equipment were$7,059 and$0 , respectively in the three months endedSeptember 30, 2019 or 2018. During the three months endedSeptember 30, 2019 , purchases primarily relate to computers and lab equipment whereas there were no purchases of capital equipment during the three months endedSeptember 30, 2018 . Financing Activities. Net cash provided by financing activities was$175,000 for the three months endedSeptember 30, 2019 compared to$203,900 for the same period of 2018, a decrease of$28,900 . The decrease is primarily due to a decrease in proceeds from the issuance of stock and notes payable of$109,900 offset in part by an increase in proceeds from convertible debentures of$75,000 . Our condensed 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 condensed 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. Our primary sources of liquidity have historically been the issuance of common stock and debentures. The Company may raise additional capital through future equity raises or debt. Until the Company generates positive cash flow from operations, the Company anticipates that its primary sources of liquidity will continue be cash on hand and the issuance of additional debentures. Additional financing may not be available on acceptable terms or at all. If the Company issues additional equity securities to raise funds, the ownership percentage of its existing stockholders would be reduced. New investors may demand rights, preferences, or privileges senior to those of existing holders of common stock. The Company believes that it has sufficient cash and capital resources to operate its business for at least the next twelve months. 41 Financing Arrangements
Over the course of meeting our capital needs, we have entered into various debentures and debt instruments, which generally have short maturity terms, typically 6 to 24 months. Many of these instruments were accompanied by shares of the Company's common stock and warrants to purchase shares of the Company's common stock. The outstanding principal amount of these instruments atSeptember 30, 2019 was$2,547,116 . The terms of the instruments are set forth in the
following table.
No. of
Shares
Outstanding Exercisable Warrant
Issuance Principal Conversion Maturity Under Warrants Strike Exercise
Date Amount ($) (1) Interest Rate Price ($) Term (2) Related Warrants Price ($) Period
September
2019 -
September October September
2014 25,050 6 % 0.15 2019 3,333,667 0.30 2019
March
2018 -
April - April
June 2016 1,060,716 8 % 0.012 2019 2,686,590 0.15 August 2021
August August
2016 200,000 8 % 0.012 2018 833,200 0.15 August 2021
January -
January - March January 2022
March 2017 60,000 8 % 0.12 2019 10,831,600 0.15 - March 2022
February
July 2017 100,000 8 % 0.12 2019 250,000 0.12 July 2020
September February September
2017 150,000 8 % 0.12 2019 375,000 0.12 2020
November November
2017 27,000 8 % 0.12 2019 416,600 0.15 November 2022
December March
2017 75,000 8 % 0.12 2019 250,000 0.12 December 2020
February February
2018 45,000 8 % 0.12 2019 500,000 0.12 December 2020
March
March 2018 65,000 8 % 0.12 2019 500,000 0.12 March 2021
March
April 2018 100,000 8 % 0.12 2019 500,000 0.12 March 2021
April April
2018(3) 70,000 8 % 0.12 2021 200,000 0.12 April 2021
April
April 2018 20,000 8 % 0.12 2020 1,166,660 0.15 April 2023
January
July 2018 45,000 8 % 0.12 2019 1,000,000 0.12 June 2021
August March
2018 30,000 8 % 0.12 2019 1,000,000 0.12 August 2021
September April September
2018 25,000 8 % 0.12 2019 1,000,000 0.12 2021
December December
2018 52,000 8 % 0.08 2020 262,458 0.15 December 2023
July
2019(3) 175,000 10 % - July 2020 700,000 0.025 July 2022
(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 11 to the Notes to Condensed Consolidated
Financial Statements.
(2) As of the date of this report, with the exception of the
debt instrument and the
past due. (3) As of the date of this report the Company has received executed extension
agreements for the following notes. The maturity date for the
for
2022 and July 2021 , respectively.
Results of Operations
Three Months Ended
General and administrative expenses
During the three months endedSeptember 31, 2019 , the Company incurred$1,043,085 of general and administrative expenses compared with$1,361,732 incurred in the three-month period endedSeptember 30, 2018 , a decrease of$318,647 , or 23.4%. The decrease in general and administrative expenses was primarily due to decreases in professional fees, stock-based compensation, legal and audit expenses offset in part by increases in general corporate expenses and compensation expense. 42
Included in general and administrative expenses for the three months ended
Three Months Ended
September 30, Increase/
2019 2018 (Decrease) %
Compensation $ 197,795 $ 155,533 $ 42,261 27.2 %
Stock-based compensation 37,336 207,452 (170,116 ) -82.0 %
Legal and audit expenses 55,404 137,748 (82,344 ) -59.8 %
Travel expenses 16,670 5,180 11,491 221.8 %
Corporate expenses 322,977 183,578 139,399 75.9 %
Other professional fees 381,157 640,372 (259,215 ) -40.5 %
Depreciation 24,834 25,006 (172 ) -0.7 %
Amortization 6,911 6,864 47 0.7 %
Total General and
Administrative Expenses 1,043,085 1,361,732 $ (318,647 ) -23.4 %
Research and development expenses
During the three months endedSeptember 30, 2019 , the Company incurred$27,212 of research and development expenses, a decrease of$4,125 , or 15.2% from the$23,087 recorded for the three months endedSeptember 30, 2018 . The decrease is primarily due to decreased expenditures for lab equipment, repairs and maintenance, and chemicals and consumables in theSan Marcos facility.
Beneficial conversion feature on convertible debenture
During the three months ended
Interest expense, net Interest expense recorded for the three months endedSeptember 30, 2019 was$196,915 compared to$51,085 in the three months endedSeptember 30, 2018 , an increase of$145,830 , or 74.1%. The increased interest expense recorded in the three months endingSeptember 30, 2019 was primarily related an increase in charges related to default interest.
Change in value of derivative liability
During the three months endedSeptember 30, 2019 the Company recorded a benefit of$28,712 related to the change in value of derivative liability. The benefit is primarily related to the change in value at the settlement of a convertible debenture feature issued in March and May of 2017. During the three months endedSeptember 30, 2018 the Company recorded an expense of$82,162 related to the change in value of derivative liability. The expense is related to the change in value of the "make-whole" provision issued in relation to debenture extensions during the fourth quarter of 2018. Accretion of debt discount During the three months endedSeptember 30, 2019 the Company recorded$2,895 of accretion of debt discount expense, a decrease of$87,115 from the$90,010 recorded for the three months endedSeptember 30, 2018 . The decrease in accretion of debt discount expense is primarily related to the issuance of the convertible debentures during the quarter. 43
Change in value of insufficient shares liability
During the three months endedSeptember 30, 2019 , the company recorded a$1,785,261 loss related to the change in value of insufficient shares liability compared to$0 during the three months endedSeptember 30, 2018 . As ofSeptember 30, 2019 , the Company has 750,000,000 shares authorized resulting in approximately 23,756,489 of insufficient shares and the recording of a$1,785,261 loss for the fair value of insufficient shares. As ofSeptember 30, 2018 , there was no insufficient share liability.
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