QUANTUM MATERIALS: Management report and analysis of the financial position and operating results (form 10-Q)


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 filed March 23, 2021 for the
fiscal year ended June 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.



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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 ended September 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.



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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 developed
its
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 which Solterra 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 the Wet Lab in San Marcos, Texas at Star Park, an
extension of Texas State University. In 2014, the first piece of manufacturing
equipment was delivered to the Wet 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 of Capstan 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 the QMC HealthID and is
operated as a wholly owned subsidiary of Quantum Materials Corp.



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Business Opportunities


Here is a look at the business opportunities the company has sought out over the past few years:

? Extended range of quantum dot base materials to include carbon quantum dots,

water soluble quantum dots, food grade quantum dots and infrared emitting quantum dots

points.

? Initiate collaborations with a number of LED and Micro LED companies, and

set up MTAs to provide samples to collaborate on

solutions;

? Develop stabilized cadmium-free QDs and an encapsulation process for the remote control

phosphorescent LED applications and exceeded 8000 hours continuously on time without

measurable degradation;

? Reduction of the cost of the QD process by more than 45% and annual production doubled

throughput capacity using existing process equipment and extended capacity

to include the Pervoskite quantum dots;

? Dramatically improved emission color purity by shrinking the color

wavelength, tuning the emission wavelength and increasing the quantum efficiency

(brightness) of our display-oriented cadmium-free QD optical materials

applications. These improvements resulted in ITU-T Rec. 2020 excess coverage

    of 90%;

  ? Developed blue cadmium-free high-performance QDs;

  ? Develop the first 100% quantum yield cadmium-free red QDs;

? Obtaining an intellectual property portfolio of more than 50 patents and applications

granted, filed or in preparation, including granted patents acquired from

third parties, including those covering the high volume production of QD,

including cadmium-free quantum dots, quantum dot enhancement technologies and

quantum dot solar cell technologies;

? Increased number of display optical film companies we are in now

collaboration and increased sample deliveries;

? Continuous product development with the world’s leading manufacturers of optical films;

? Creation of a nanomaterials laboratory 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.



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How quantum dots are produced

Large volume production of QD is usually achieved by one of the following methods:



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 in South 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 the USA.


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 taken to complete the FDA EUA or FDA 510 (k) approval process can vary widely, and approval is not guaranteed, as are regulatory approvals outside of the industry. United States.


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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.



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The Company received advanced payments from Amtronics India LLC related to its
exclusive license and development agreement related to the production of quantum
dots in Assam, 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 of September 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 ended September 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 in Assam, 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 ended June 30, 2019 filed with the SEC on March 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 information security policies within an organization.

Confidentiality: The protection of confidentiality depends on the ability to define and enforce certain levels of access to 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 the QMC HealthID ™ and QDX Platform cybersecurity measures currently in place.

? Penetration test: simulates a malicious attack in order to perform in depth

business logic tests and determine the feasibility and impact of an attack.

    The testing is performed internally and externally to the system.



? Development, test, and production environments tested when generally, 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 to ensure that 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

code quality inspection 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 for research and analysis of 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 containers

    images and artifacts anywhere.




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  ? 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 ones

    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



? The production environment is logically and physically isolated from development / testing

? Each item is contained in 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 applied in systems requiring higher levels

    of access control



? Standards for the security and availability of health data used in

    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 allows you to quickly connect existing data sources, such as

    electronic health record systems and research database




  ? HITRUST



? The Common Security Framework of the Health Information Trust Alliance (HITRUST CSF)

operates 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.



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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 during June 2019 in order to further reduce overhead
cost and has made additional cost cutting measures.



The accompanying consolidated financial statements do not include any adjustment relating to the recoverability and classification of recognized assets, or to the amounts and classification of liabilities that may be required if the company is unable to continue as a going concern.



As of September 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 through September 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 of September 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 ($ 159,684) (184,090) $
Investing activities (7059)

            -

Fundraising activities $ 175,000 $ 203,900




Operating Activities. Net cash used in operating activities was $159,684 for the
three months ended September 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 ended September 30, 2019 or 2018.
During the three months ended September 30, 2019, purchases primarily relate to
computers and lab equipment whereas there were no purchases of capital equipment
during the three months ended September 30, 2018.



Financing Activities. Net cash provided by financing activities was $175,000 for
the three months ended September 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 at September
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 $ 222,350 promissory notes held by SBI

LLC Investments, 2014-1, and L2 Capital, LLC issued in return for a

non-closed equity line of credit in the form of promissory notes,

which bear interest at the rate of 8% per year, due on December 29, 2017 and are

considered overdue at the time of writing. Promissory notes are

convertible into unregistered and restricted shares of the

Ordinary shares of the company only if there is an event of default, as defined in

the notes. These amounts are the subject of ongoing litigation and the company

does not intend to pay balances or honor a conversion until the

the dispute is over. See note 11 of the condensed consolidation notes

Financial state. (2) As of the date of this report, with the exception of April 2018 $ 100,000

debt instrument and July 2019 $ 175,000 debt instrument, the banknotes are

suffering. (3) As of the date of this report, the company has received a signed extension

chords for the following notes. The due date of April 2018 Note

for $ 70,000 and the July 2019 note for $ 175,000 were extended until April

    2022 and July 2021, respectively.




Results of Operations



Three months ended September 30, 2019, Compared to three months ended September 30, 2018.

General and administrative expenses



During the three months ended September 31, 2019, the Company incurred
$1,043,085 of general and administrative expenses compared with $1,361,732
incurred in the three-month period ended September 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
September 30, 2019 and 2018 are as follows:


                                   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 costs



During the three months ended September 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 ended September 30, 2018. The decrease is
primarily due to decreased expenditures for lab equipment, repairs and
maintenance, and chemicals and consumables in the San Marcos facility.



Beneficial conversion function on convertible debenture

During the three months ended September 30, 2019 the company has not incurred any advantageous conversion expense compared to $ 16,870 registered for the three months ended September 30, 2018. The reduction in the beneficial conversion costs of
$ 16,870, or 100% was primarily attributable to the issuance of non-convertible debentures.



Interest expense, net



Interest expense recorded for the three months ended September 30, 2019 was
$196,915 compared to $51,085 in the three months ended September 30, 2018, an
increase of $145,830, or 74.1%. The increased interest expense recorded in the
three months ending September 30, 2019 was primarily related an increase in
charges related to default interest.



Change in value of derivative liability



During the three months ended September 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 ended
September 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 ended September 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 ended September 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 liability for actions



During the three months ended September 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 ended September 30, 2018. As of September
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 of September 30,
2018, there was no insufficient share liability.

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