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, 2021for 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. 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 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 Nevadacorporation 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 Delawarecorporation, was formed in May 2008by Mr. Stephen Squires, our Chief Executive Officer, and other shareholders to develop quantum dot applications in the solar cell industry. Solterrawas acquired by Hague Corp.in November 2008, pursuant to a merger transaction wherein the shareholders of Solterraexchanged their shares of common stock in Solterrafor shares of common stock in Hague Corp., and Solterrabecame 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, Solterraalso entered into a license agreement with the University of Arizona, which was later amended, (the "UA License") pursuant to which Solterrahas been granted exclusive rights to use the University of Arizona'spatented 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 Arizonaby 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.
Solterraentered 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 Solterraretained 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 Labin San Marcos, Texasat 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. Squiresreturned 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 HealthIDand is operated as a wholly owned subsidiary of Quantum Materials Corp.35 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
? Initiate collaborations with a number of LED and Micro LED companies, and
set up MTAs to provide samples to collaborate on
? Develop stabilized cadmium-free QDs and an encapsulation process for the remote control
phosphorescent LED applications and exceeded 8000 hours continuously on time without
? 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
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
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, Chinaand 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
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.
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
Solterrato 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 LLCrelated 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 Assamon 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 Assamproject 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 from
Amtronics India LLCrelated 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 $1,197,973and $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, 2019and 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, 2019filed with the SECon 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. 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 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. 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 during
June 2019in 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.
September 30, 2019, we had a working capital deficit of $9,758,002, with total current assets and liabilities of $32,260and $9,790,262respectively. Included in the liabilities are $793,151owed to our officers, directors and employees for services rendered and accrued through September 30, 2019, $2,516,766of debentures, net of unamortized discount and $20,000of 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, 20192018
Investing activities (7059)
Operating Activities. Net cash used in operating activities was
$159,684for the three months ended September 30, 2019compared to $184,090for 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 $156,961offset in part by an increase in cash used of $135,278from 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 $7,059and $0, respectively in the three months ended September 30, 2019or 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 $175,000for the three months ended September 30, 2019compared to $203,900for 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 $109,900offset 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, 2019was $2,547,116. The terms of the instruments are set forth in the
following table. No. of Shares Outstanding Exercisable Warrant Issuance Principal Conversion Maturity Under Warrants Strike Exercise Date Amount ($) (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
non-closed equity line of credit in the form of promissory notes,
which bear interest at the rate of 8% per year, due on
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
debt instrument and
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
July 2021, respectively. Results of Operations
Three months ended
General and administrative expenses
During the three months ended
September 31, 2019, the Company incurred $1,043,085of general and administrative expenses compared with $1,361,732incurred 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
Three Months Ended September 30, Increase/ 2019 2018 (Decrease) % Compensation
$ 197,795 $ 155,533 $ 42,26127.2 % 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 $27,212of research and development expenses, a decrease of $4,125, or 15.2% from the $23,087recorded 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 Marcosfacility.
Beneficial conversion function on convertible debenture
During the three months ended
Interest expense, net Interest expense recorded for the three months ended
September 30, 2019was $196,915compared to $51,085in 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, 2019was primarily related an increase in charges related to default interest.
Change in value of derivative liability
During the three months ended
September 30, 2019the Company recorded a benefit of $28,712related 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, 2018the Company recorded an expense of $82,162related 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, 2019the Company recorded $2,895of accretion of debt discount expense, a decrease of $87,115from the $90,010recorded 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 $1,785,261loss related to the change in value of insufficient shares liability compared to $0during 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 $1,785,261loss for the fair value of insufficient shares. As of September 30, 2018, there was no insufficient share liability.
© Edgar Online, source