SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2013
or
[ ]
 TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  ____ to ___

Commission File Number:  0-52956

                  QUANTUM MATERIALS CORP.              
(Exact name of Registrant as specified in its charter)
 
Nevada 
20-8195578 
(State of jurisdiction of
incorporation or organization) 
(I.R.S. Employer 
Identification Number) 
   
3055 Hunter Road, San Marcos, TX 
78666
(Address of principal executive offices) 
(Zip Code) 
   
Registrant’s telephone number, including area code: 
(214) 701-8779  
                                                                                                                                  
12526 Scott Drive, Kingston, OH 
73439
(Former address of principal executive offices, if changed since last report) 
(Zip Code) 

Securities registered pursuant to Section 12 (b) of the Act:  None
 
Securities registered pursuant to Section 12 (g) of the Act:  Common Stock, $.001 Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act  Yes  No [X]

Check whether the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [  ]

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X .   No ___.

Indicate by check mark whether the Registrant has submitted electronically and posted on it’s corporate Web site, if any, every Interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [X ]   No [  ]

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [  ].

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined by Rule 12b-2 of the Exchange Act: smaller reporting company [X].
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [  ] No [X]

As of December 31, 2012, of the 140,849,952 outstanding shares of Common Stock,the number of shares held by non-affiliates was approximately 116,700,000 shares with a market value of $10,503,000 based upon a last sale for our Common Stock of $.09 as of the close of business on December 31, 2012.

As of October 9, 2013, the issuer had 182,988,347 shares of common stock, $0.001 par value per share outstanding. 

 
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FORWARD-LOOKING STATEMENTS

Some of the statements under this Form 10-K contain forward-looking statements. All statements other than statements of historical facts contained in this Form 10-K, including statements regarding our plans, objectives, goals, strategies, future events, capital expenditures, future results, our competitive strengths, our business strategy and the trends in our industry are forward-looking statements. The words “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “appear,” “forecast,” “future,” “likely,” “probably,” “suggest” and similar expressions, as they relate to the Company, are intended to identify forward-looking statements.
 
Forward-looking statements reflect only our current expectations. We may not update these forward-looking statements, even though our situation may change in the future. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements due to a number of uncertainties, many of which are unforeseen, including, without limitation:

 
•
our reliance on our exclusive licensing agreement with William Marsh Rice University;
     
 
•
we are a development stage company with no history of profitable operations;
     
 
•
we will need substantial additional capital to finance our business;
     
 
•
our products may not gain market acceptance;
     
 
•
we need to build a manufacturing plant which could have cost overruns and implement plans to hire sales and marketing personal, establish distribution relationships and channels and strategic alliances for market penetration and revenue growth;
     
 
•
competition within our industry;
     
 
•
reduction or elimination of government subsidiaries and economic incentives for solar technology could cause our anticipated revenues to decline; and
     
 
• 
the availability of additional capital on terms acceptable to us.
     
 
 In addition, you should refer to the “Risk Factors” section of this Form 10-K for a discussion of other factors that may cause our actual results to differ materially from those implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-K will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, if at all. Accordingly, you should not place undue reliance on these forward-looking statements.

We qualify all the forward-looking statements contained in this Form 10-K by the foregoing cautionary statements.
 

 
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PART I

Item 1.  Business

Introduction

 
Quantum Materials Corp. (OTC:QTMM) (“QMC”) is a nanotechnology company specializing in the design, development, production and supply of tetrapod quantum dots (“TQDs”), a high performance variant of quantum dots, for a range of applications in the life sciences, optoelectronics, photovoltaics, lighting, security ink and sensor sectors of the market. QMC owns 100% of Solterra Renewable Technologies, Inc. (“Solterra”), an operating subsidiary that is focused on the photovoltaic (solar cell) market.  For convenience, the term “Company” is used to refer to both QMC and Solterra unless the context otherwise requires.
 

Quantum dots are tiny nanoparticles of a semiconductor material which emit light, or fluoresce, when excited with energy. The color of light emitted varies depending on the size of the quantum dot so that photonic emissions can be tuned by the creation of quantum dots of different sizes. Their unique properties as highly efficient, next generation semiconductors have led to the use of quantum dots in a range of electronic and other applications, including in the biomedical, display and lighting industries. Quantum dots 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 quantum dots in printed photovoltaic cells.

Quantum dots were first discovered in the early 1980’s and the industry has developed to the point where quantum dots are now being used in an increasing range of applications, including the television and display industries, the light emitting diode (“LED”) lighting industry and the biomedical industry. Sony, for example, has recently launched its first televisions using quantum dots to enhance the picture quality and power efficiency of its products, a number of major lighting companies are developing product applications using quantum dots to create a more natural light for LEDs, the biomedical industry is using quantum dots in diagnostic and therapeutic applications, and applications are being developed to “print” highly efficient photovoltaic solar cells in mass quantities at low cost.

According to a recent market research report, “Quantum Dots (QD) Market - Global Forecast & Analysis (2012 - 2022)” published in May 2012 by MarketsandMarkets (http://www.marketsandmarkets.com), the total market for quantum dots is expected to reach $7.48 billion by 2022, at a compound annual growth rate (CAGR) of 55.2% from 2012 to 2022. The key challenge for the quantum dot industry will be its ability to scale up production volumes sufficiently to meet growing demand for quantum dots while maintaining product quality and consistency and reducing the overall costs of supply to stimulate new applications. Quantum dots remain an extremely expensive commodity, with high cost small batch production processes constraining growth.

The Company has the exclusive license to a patented chemical process that permits it to produce high performance, heavy metal-free TQDs using a lower cost and environmentally friendly solvent for greater manufacturing flexibility.  The Company has developed a proprietary method that it believes will allow it to mass produce consistent quantities of TQDs in a continuous process at lower costs than other existing processes, and has filed a provisional patent application on same. It also has the exclusive license to a patented screen printing technique for manufacture of quantum dot enhanced electronic displays and other electronic components. The Company believes that these three proprietary technologies position the Company to become a leader in the overall quantum dot industry, and a preferred supplier of high performance tetrapod quantum dots to an expanding range of applications.

History of the Company
 

QMC was formed in January, 2007, as a Nevada corporation under the name “Hague Corporation” and its shares began trading in the over the counter market in the first quarter of 2008. The original business of Hague Corporation was the exploitation of mineral interests.

Solterra, a Delaware corporation formed in May, 2008, by Mr. Stephen Squires (present Chief Executive Officer of QMC) and other shareholders, was founded to develop quantum dot applications in the solar cell industry. Solterra was acquired by Hague Corporation 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 Corporation, and Solterra became a wholly-owned operating subsidiary of Hague Corporation. Upon the closing of the merger, Hague Corporation changed its business from the exploitation of minerals to the development of a quantum dots, and subsequently changed its name to “Quantum Materials Corp.” in 2010.
 
 
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Shortly after formation, Solterra began to develop its solar cell business by licensing technology key to its business.  In August 2008, Solterra was granted a license to develop, manufacture and exploit TQDs by William Rice Marsh University (“Rice“) of Houston, Texas, and in September 2011, the license was amended (the “Solterra Rice License”) and a new license was entered into between Rice and QMC (the “QMC Rice License”)(together with the Solterra Rice License, the “Rice Licenses“).The Rice Licenses grant to QMC and Solterra, respectively, the right to exploit a simplified and cost effective synthesis process for the production of TQDs of high quality and uniformity, which was invented in the Rice laboratory of Dr. Michael Wong, currently a director of QMC. Under the Rice Licenses, Solterra and QMC have been granted exclusive rights to develop, manufacture, market and exploit TQDs for photovoltaic applications (in the case of Solterra) and for electronic and medical applications (in the case of QMC). In October, 2008, Solterra also entered into a license agreement (the “UA License”) with the University of Arizona under which Solterra has been granted exclusive rights to use University of Arizona’s patented screen printing techniques in the production and sale of organic light emitting diodes incorporating quantum dots in printed electronic displays and other printed electronic components. This technology was developed at University of Arizona by Dr Ghassan Jabbour, also a director of QMC, and will be sub-licensed to QMC for utilization in its business.

Also in 2010, Solterra entered into an agreement with a third party provider of industrial process equipment to develop a proprietary process for continuous production of quantum dots under which Solterra retained all ownership and rights to the design and any related intellectual property. The initial development and pilot testing has been completed, a provisional patent application on the process has been filed and is pending, and the Company is in discussions regarding the purchase of two initial equipment units – one lower capacity unit primarily for internal research and development purposes, and one higher capacity unit for initial commercial production of TQDs. In the Company’s opinion, the design of this manufacturing process will uniquely position the Company to scale up and mass produce TQDs for commercial sale, allowing it to readily meet further increases in volume demand by simply adding additional equipment units to its manufacturing line. The Company is in the process of arranging the capital necessary to order the two initial units for its proposed manufacturing facility (as discussed in more detail below).

The Rice Licenses and the UA License, together with the proprietary manufacturing process, comprise the fundamental asset platform of the Company. Assuming the Company is successful in obtaining appropriate funding for the launch of an initial commercial production facility and for its continuing operations, the Company believes that this technology platform positions it to compete effectively in the global quantum dot production and supply market.
 
Business Accomplishments 
 
            The following is an outline of the business accomplishments of the Company since July 2010:
 
·
Developed a process and produced sample quantities of dual emission and extremely narrow emission Tetrapod Quantum Dots (TQDs)
 
·
Established a new laboratory facility for research, development and initial production (“Wet Lab”) in Texas and negotiated a collaboration with Texas State University
 
·
Developed and produced sample quantities of heavy metal-free TQDs
 
·
Completed pilot testing of the design of the proprietary manufacturing process to produce TQDs
 
·
Filed a provisional patent application for the proprietary process
 
·
Completed pilot testing of the manufacturing process’ ability to achieve a run-rate production of 30 grams per week of TQDs
 
·
Successfully developed a production process and shelling techniques that produce extremely high quantum yield TQDs for potential applications in the life science, display  and lighting markets
 
·
Developed and produced samples for a variety of potential customers covering a range of applications
 
·
Negotiated rights to sub-license technologies licensed from Rice University
 
·
Re-negotiated the Rice License to modify minimum royalty payment dates and extend certain milestone dates
 
·
Developed a technique for the controlled growth of the arms and legs of the TQDs in order to ensure consistency of length, width and aspect ratio between length and width (Management believes this size control can provide superior charge transfer in electronic applications)
 
·
Achieved measurable improvement in conversion efficiency of the Company’s TQD based solar cell
 
·
Recognized by Frost & Sullivan and awarded 2012 North American Advanced Quantum Dot Manufacturing Enabling Technology Award
 
·
Identified and initiated negotiations with several national laboratories and universities to license additional intellectual property relating to a  range of quantum dot processes and applications
 

 
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·
Negotiated a memorandum of understanding to establish TQD and solar cell production in the Kingdom of Saudi Arabia
 
·
Negotiated and consummated an alliance agreement with Nanoaxis for the joint development of nanobio products with initial focus on invitro diagnostic kits and drug delivery technologies using TQDs
 
·
Negotiated a memorandum of understanding to establish TQD and solar cell production in India
 
The Company can provide no assurances that its accomplishments to date will result in the grant of patents for proprietary processes or result in future sales and/or profitable operations.  See "Risk Factors." 

 
Previously, the Company’s principal business emphasis was on the development of TQDs for solar cell applications through Solterra. Over the past year, the solar cell market has become increasingly volatile, with prices eroding due to the influx of subsidized products from abroad.  Although the Company still intends to complete the development of its TQD solar cell technology and attempt to bring a competitive product to market, it has decided not do so in the current environment. The Company intends to wait until it can produce solar cells with sufficiently high conversion efficiency that, when combined with its low cost proprietary manufacturing process, will result in a product capable of producing energy at a cost per watt significantly below existing solar cell technology and competitive with non-renewable energy sources such as natural gas. In the meantime the Company has experienced a significant increase in interest in its materials and technologies for other applications such as life sciences, displays and lighting. Management believes that these markets present the best near term opportunities for the Company’s exploitation of its TQDs on a commercial scale. The Company will continue to pursue the solar cell market along with other energy uses for TQDs, but as indicated above, it has implemented a more balanced approach that addresses the potential demand for high performance TQDs in the other emerging markets. See “Major Market Segments” below.

Industry Overview

The Product: Quantum Dots

Quantum dots are nanoparticles of a semiconductor material, typically between 2 and 10 nanometers (a billionth of a meter) in diameter or mean dimension, which emit light fluorescence or electrons when excited with energy. Emission or absorption wavelength can be tuned by the creation of quantum dots of different sizes. The smaller the quantum dot, the closer it is to the blue end of the spectrum, and the larger the quantum dot, the closer it is to the red end of the spectrum. The unique physical properties of quantum dots exist as electrons within the quantum dot are confined to a very small space which makes them subject to certain “quantum” effects.  These qualities are driving demand for quantum dots as a performance and efficiency enhancing next generation engineered material, and have led to the use of quantum dots in a range of electronic and other applications, including in the optoelectronic (display), lighting and life sciences industries.

Quantum dots also have applications in solar cells, where their characteristics enable conversion of light energy into electricity, with the potential for significantly higher efficiency (up to 2X) resulting in a lower cost per watt of energy produced when compared with existing technologies. Use of quantum dots in solar cells creates the opportunity for a step change in efficiency and performance in printed photovoltaic cells.

Quantum dots were first discovered in the early 1980’s, by Alexei Ekimov and independently by Louis E. Brus. Following their discovery, other scientists and researchers have developed a deeper understanding of quantum dots and their potential uses, and the industry has continued to develop. Due to their high cost and limited availability, quantum dots have primarily found applications in the life sciences field where they are used to enhance the optical and targeting performance in diagnostic assays. Improved manufacturing techniques are expected to lower costs and increase the availability of quantum dots for applications across a broader range of industries, including solar cells, displays, lighting, security inks and sensors.

A high performance variant of quantum dots is tetrapod quantum dots (TQDs) that have material advantages over standard spherical quantum dots (“SQDs”), including brighter color emissions, greater purity, emissions in more than one color (“dual emissions”)  and the need to employ less volume of quantum dot material in most applications. TQDs have a molecular configuration consisting of a center portion and four arms extending from the center that are equally spaced in three dimensions.  TQDs can be used in virtually every application in which SQDs have been applied, and their unique architecture and shape promote more uniform distances between the dots, eliminating  the problem of aggregation (the tendency of SQDs to clump together and in effect “short out”) which degrades the SQD emissions and effectiveness. But TQDs are more costly and difficult to produce in quantity using known methods, with the exception of the Company’s proprietary chemical process technology licensed exclusively to it under the Rice Licenses.  The Company’s proprietary chemical process for creating TQDs uses lower cost and environmentally benign solvents (which are not toxic, corrosive or volatile) that nevertheless permit greater control for enhanced materials uniformity (>98% acceptable product per batch vs. <50% under other methods), reducing post-production reprocessing costs to attain requisite quality levels. The Company can manufacture cadmium-free TQDs as easily as cadmium based TQDs, so its TQDs are readily adaptable to applications that specify the absence of heavy metals. Thus both the Company’s heavy metal-free TQDs and its unique manufacturing process are the most environmentally responsible in the industry.

 
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How Quantum Dots are Produced

Quantum dots are produced using four basic methods:

Colloidal synthesis :  Growth of quantum dots 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 quantum dots are produced. Due to their very small size it is extremely difficult if not impossible to segregate the quantum dots by size once they have been produced and a conglomeration of varied size quantum dots are not capable of producing the unique features that are required in most applications.

Prefabricated seed growth :  Quantum dots 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 quantum dots, but can take significant capital resources to achieve significant volume and still results in low yields, typically less than 50%.

Bacterial or viral synthesis :  Formation of quantum dots from specific organisms that recognize specific semiconductor base materials and through uptake and process can produce highly uniform quantum dots.  This batch method has certain limits on quantum dot shape and composition and remains very labor intensive thus difficult to scale.

Company’s proprietary continuous process method : Unlike the three processes above, the Company has developed a proprietary (patent pending) continuous process manufacturing technique to produce TQDs that has the potential to overcome the cost and performance challenges presented by other manufacturing methods. The patented chemistry of the Company’s process eliminates conventional solvents and substitutes cheaper solvents that are not toxic, corrosive or volatile, thus enabling a significant reduction in the overall temperature required for manufacturing and eliminating any gassing of the solvents. The significant reduction in the manufacturing temperature and elimination of gassing enabled the Company to develop a proprietary manufacturing technology that also eliminates the creation of hazardous wastes in the production process. By using these solvents, the Company was also able to improve the manufacturing yield of its TQDs significantly. The Company believes that these increases in the quantum dot yields and the use of cost-efficient continuous manufacturing techniques will enable the Company to scale production more readily (by simply adding more equipment units to its manufacturing line), thus reducing the produced cost of the TQDs significantly compared to current quantum dot manufacturing methods. Note that the Company can also produce small quantities of its TQDs using a batch process employing the chemistry and other techniques under the Rice Licenses, and has done so for sample development purposes.

Market for Quantum Dots

According to a recent market research report, “Quantum Dots (QD) Market - Global Forecast & Analysis (2012 - 2022)” published in August 2012 by MarketsandMarkets ( http://www.marketsandmarkets.com ), the total market for quantum dots is expected to reach $7.48 billion by 2022, at a CAGR of 55.2% from 2012 to 2022. The global market for quantum dots, which in 2010 was estimated to be $67 million in revenues, is projected to grow over the next 5 years at a CAGR of 58.3%, reaching almost $670 million by 2015, a tenfold increase. Following the initially modest revenues generated by standalone colloidal quantum dots—primarily serving the life sciences, academic, and other industrial research and development (R&D) communities—within the next 2 years several significant product launches are expected. The biggest growth sectors are forecast to be in optoelectronics, solar energy, optics and electronics, adding to the growth already established in the life sciences sector. Specific quantum dot-based products are expected to include lasers, sensors, flash memory, lighting and displays, second and third-generation solar panels, security deterrents, and several enhancements to portable devices.

Quantum dots remain an extremely expensive commodity, with costs in the range of $3,000-$10,000 per gram. The price of quantum dots is directly affected by the high cost of producing quantum dots in relatively small batch quantities.  As with other nanomaterials, these relatively high prices have been supported by favorable performance of the quantum dots at very low concentrations. Prices for quantum dots are expected to moderate over time as greater production efficiencies are discovered and implemented, resulting in higher volumes. This is expected to support greater adoption of quantum dots for use in end products and further support the growth of the quantum dot market. Under current production methods, rigorous processing has been required from batch method synthesis to produce a consistently pure and tightly size-controlled quantum dot product. To significantly grow the market, the industry will need to achieve much lower production costs for quantum dots, while maintaining strict control over quality and uniformity.
 

 
 
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Major Market Segments

Life Sciences .  The life sciences industry is one of the early areas for adoption of quantum dot technology, especially for “stand-alone” quantum dots used in fluorescent markers in diagnostic and therapeutic applications. This includes the use of quantum dots for marking (illuminating) particular cell types or metabolic processes for understanding diseases and conditions as well as the use of quantum dots to act as delivery agents for drug treatments or therapy for a wide range of ailments. The fluorescent qualities of quantum dots provide an attractive alternative to traditional organic dyes in bio-imaging procedures and are able to image a number of different color wavelengths simultaneously. Quantum dots are able to withstand irradiation from high powered microscopes for longer periods than organic dyes, and have been widely adopted in the bio-imaging sector. Applications in the life sciences field are expected to further increase as quantum dot performance vs. conventional fluorescing material and organic dyes continues to be proven. Quantum dots offer a host of benefits when compared to organic fluorophores such as biological dyes, including:

·
Increased photo-stability
·
Longer shelf life
·
Resilience to photo bleaching
·
Increased sensitivity
·
Narrow emission peaks
·
Broad excitation profile
·
Multiplexing capability

QMC is currently the only company capable of producing highly uniform tetrapod quantum dots. In addition QMC has developed the technology required to produce TQDs with very narrow emission peaks as well as TQDs with dual emissions. Both of these features are highly desirable for a broad range of life science applications.  Management believes its licensed patented chemistry and proprietary continuous production process will enable QMC to produce TQDs in volume and at a price point that will make them a very compelling choice for these applications.

Optoelectronics . This market is comprised principally of quantum dot displays (QDD) for televisions, computers, cell phones, PDAs and various other applications. A QDD provides better optical performance when compared to cathode ray tubes (CRT) and conventional liquid crystal displays (LCDs):

·
50 to 100 times more brightness in comparison with CRTs and LCDs
·
pure colors due to size tunability and narrow color-band frequency emission of the quantum dots
·
significant energy savings, with power consumption being 1/5th to 1/10th that of an OLED or LCD displays
 
 
Sony, for example, has recently launched its first televisions using quantum dots to enhance the picture quality and power efficiency of its products. It is expected that quantum dots may also be used to improve the performance of other optoelectronic devices and lasers and optical components used in telecommunications.
 
QMC is currently the only company capable of producing highly uniform tetrapod quantum dots. In addition, QMC has developed the technology required to produce TQDs with very narrow emission peaks as well as TQDs with high quantum yield (high brightness). Both of these features are highly desirable for a broad range of display applications. In Management’s experience, TQDs are far less likely to aggregate due to their unique shape. Aggregation typically leads to self-extinguishing of the quantum dots, resulting in loss of emissions. This resistance to aggregation by TQDs results in the need to use fewer quantum dots in optoelectronic applications to achieve the same performance levels. It also allows TQDs to achieve higher optical densities.   Management believes its licensed patented chemistry and proprietary continuous production process will enable it to produce TQDs in volume and at a price point that will make them a very compelling choice for these applications.
 
 
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Lighting . In the lighting market, quantum dot LEDs have begun to be commercialized in 2013, with significant R&D occurring among manufacturers of solid-state lighting. While companies have launched quantum dot LED lamps, the current market for quantum dot LED lamps and the other lighting products is still very small. The Company believes quantum dot based lighting will be the best replacement for currently available compact florescent lighting (CFL)  and LED lighting, as quantum dot technology provides better efficiency and high power intensity, and the ability to tune the light spectrum to emit light that is the most pleasing and/or appropriate for the application.
 
As stated above, QMC is currently the only company capable of producing highly uniform tetrapod quantum dots.
In addition, QMC has developed the technology required to produce TQDs with very narrow emission peaks as well as TQDs with high quantum yield (high brightness). Both of these features are highly desirable for a broad range of lighting applications. For lighting applications, narrow emission peaks is a key feature that is necessary in order to produce a highly tuned light source. In Management’s experience, TQDs are far less likely to aggregate due to their unique shape. Aggregation typically leads to self-extinguishing of the quantum dots resulting in loss of emissions. This resistance to aggregation by TQDs results in the need to use fewer quantum dots in lighting applications to achieve the same performance levels. It also allows TQDs to achieve higher optical densities.  Management believes its licensed patented chemistry and proprietary continuous production process will enable it to produce TQDs in volume and at a price point that will make them a very compelling choice for these applications.

Solar Energy . Quantum dots are capable of producing energy from a broad spectrum of solar and radiant energy, including ultraviolet and infrared frequencies. They have conversion potentials of approximately twice that of conventional solar cells, and can be developed out of a variety of materials. Applications are being developed to “print” highly efficient photovoltaic solar cells in mass quantities at low cost.  Management believes that quantum dot solar cells and panels will be the next evolutionary development in the field of solar energy, and that commercialization will begin in 2014.
 
Management further believes that the increased conversion efficiencies of TQDs, its low cost continuous production method and the screen print technology obtained under the UA License will permit QMC’s subsidiary Solterra to offer solar electricity solutions that can compete on a non-subsidized basis with the price of retail electricity in key markets in North America, Europe, the Middle East and Asia.

Other applications .  Current and future applications of quantum dots may impact a broad range of other industrial markets. These potentially include computing and memory, improved thermoelectric components, security applications such as covert identification tagging, biohazard detection sensors and other uses. Quantum dots have the theoretical potential to enable batteries to increase charge capacity up to ten fold, reduce re-charge cycle time by half and double usable life by replacing the current graphite anodes with silicon quantum dots.

The Company intends to position itself to provide lower cost, higher volume, higher quality TQDs that will benefit from one or more of these potential market trends.
 
Business Development Overview
 
In the past year, the Company has entered into an increased number of non-disclosure agreements (“NDAs”) and sample supply agreements with a several product manufacturers in different industries as well as universities and independent research laboratories. In most cases, the NDAs with manufacturers are for exploring joint development of specific products in the liquid crystal display (LCD) and light-emitting diode (LED) industries, solid state lighting industry, life sciences and for quantum dot adaptable printing equipment and other new technologies. The focus of the Company is on those sectors of the market in which utilization of quantum dots will have a transformational effect on the quality of end use products and their performance. The Company believes that its advantages in delivery of high quality, high performance TQDs (utilizing the chemistry under the Rice Licenses), continuous production techniques (provisional patent application filed) and screen printing techniques (to which it has exclusive rights under UA License) make it an attractive supplier to these markets.
 
 
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Solterra has taken certain initial steps to develop two solar pilot plants overseas, one in India and one in the Kingdom of Saudi Arabia. In both cases the Company has experienced delays in advancing from memoranda of understanding to binding contracts. The Company has been informed that these delays are largely attributable to difficulties in arranging the funding necessary to initiate these projects. In addition, the Indian project has experienced delays in gaining certain regulatory approvals.  There can be no assurance that either of these projects will advance beyond the present preliminary stage of development, or that they will result in any revenues or profits to the Company. See “Risk Factors.”

To maintain control of quantum dot production and quality, the Company’s preferred business relationship is a joint venture that evolves from a collaborative development effort where the parties agree to cooperate in the design and production of a range of new end products utilizing the Company’s TQDs and screen printing processes, with the other party contributing industry expertise and substantial marketing, distribution and sales capabilities. In most cases, the Company envisions that the industry joint venture party would provide the financial resources to underwrite the project. In some cases, the joint venture may need to seek outside financing for the commercialization phase of the project. In either case, the Company would continue to control the production of the TQDs for incorporation into the end products.

Alternatively, the Company may choose to license a manufacturer of end products to incorporate the Company’s TQDs into one or more specific products on an exclusive or non-exclusive basis. In some cases, it may be appropriate to dedicate an equipment unit to a single product line (for example, silicon nanocrystals for energy storage) for a single licensee, whether sited at the Company’s facilities or at the facilities of the licensee. In all cases, the license would contain provisions restricting the use of the Company’s technology and protecting its intellectual property.

In advancing these development activities, the Company follows a disciplined process to protect its intellectual property and foster collaborative arrangements. First, NDAs are entered into, followed by sample agreements. The Company then formulates, manufactures and supplies product samples to the counterparty’s specifications for evaluation and testing. If successful, this then leads to discussions on the form of a possible commercial relationship. Each step takes time, and the Company is increasing its sample production capacity to satisfy the backlog of requests for TQDs of different compositions. TQD sample production is currently accommodated through use of the lab facilities at Rice, Texas State University and the Company’s Wet Lab described below.

In seeking to expand its customer base, the Company’s marketing strategy will be to engage in joint ventures or other strategic arrangements with manufacturers and others to jointly develop applications using its proprietary TQDs, continuous production process and licensed screen printing technology to maximum effect. Such joint collaborations will involve the Company working closely with the industry counterpart to optimize the performance of the Company’s TQDs in each application or device, and to use the results from product development and testing to further enhance product specifications to meet the requirements of the market. These collaborations will support the Company’s internal research and development activities, which will continue to be a primary part of the Company’s business. The principal revenue streams for the Company are expected to be from (i) sales of TQDs, (ii) royalties from sales of products and components by third parties incorporating the Company’s TQDs, (iii) milestone payments under joint development arrangements with product developers and manufacturers, and (iv) sub-licensing fees where the Company engages in sub-licensing arrangements for its technology.

As of this date, the Company has not entered into any formal commercial joint ventures or licensing agreements, but has executed the following array of agreements and taken the following steps toward commercialization of its TQDs in various market sectors:

 
 
Product Manufacturers
Universities,
Researchers, Other
NDAs
25
7
Sample Agreements
8
2
Initial Samples Delivered
8
2
Commercial Discussions Underway
3
1

However, there can be no assurance that the above activities will result in sales of the Company’s products or that such sales will result in profits to the Company. See “Risk Factors.”
 
 
9
 
 
The Company’s existing business development team is led by its director of marketing, who handles the North American, U.K. and European Union markets, supported by two staff employees responsible for Asia and the Middle East, respectively. The Company’s marketing and sales capabilities, considered to be critical to the success of the business, will also be expanded with the recruitment of one additional full time person during the next twelve months.
 
Operational Overview
 
The Company has to date been a research and development business operating out of temporary facilities. It has now entered the commercialization stage of its business with the launch of the Wet Lab in July, 2013, its first permanent facility. The Wet Lab is located in San Marcos, Texas, approximately 30 miles south of Austin, Texas. This facility is part of the Star Park Technology Center, an extension of Texas State University, the fifth largest university in Texas and one of eight Texas Emerging Research Universities. This arrangement provides the Company with the opportunity to expand its operations within this 30 acre technology park. The Company has a year to year lease agreement and the option to add additional lab and office space on an as-needed basis. This location provides the Company with convenient access to an experienced faculty and specialized laboratory facilities that can support joint research and development efforts with Texas State University, and is in proximity to a number of leading companies in the life sciences, lighting, solar and electronics markets.

The Wet Lab will be the center of operations of the Company and will be used by the Company to produce small sample quantities of TQDs (via batch method) and larger quantities of TQDs (via its proprietary process units, once this equipment is acquired) for supply to research facilities, customers and potential customers, and potential development joint ventures.  The facility will be used to support test production runs, to fine tune the characteristics of the quantum dots for optimized performance in the customer's specific application, and for continued R&D activities. The Wet Lab was established through funds raised in a private placement of common shares of the Company completed in early June 2013. The Company obtained $250,000 to finance the build out and costs of operation of the Wet Lab for the balance of 2013.

The primary short term objective of the Company is to establish its first continuous manufacturing process at the Wet Lab and produce volumes of TQDs for supply to customers on a commercial scale. The Company has completed a joint development effort with a non-affiliated third party provider of industrial process equipment which resulted in the design and successful proof of concept testing of a scalable production unit for manufacturing the Company’s proprietary TQDs on a low cost, continuous basis.  The Company has negotiated an agreement with the equipment provider for the delivery of a lab scale equipment unit capable of producing 2 grams per hour. This first unit will be used to validate synthesis protocols for customized TQDs developed to meet customer specification and will also be used to produce samples and to fulfill small to medium-size orders. The Company has also negotiated an agreement with the equipment provider for the delivery of a production scale equipment unit capable of producing 2 kilograms per hour. This unit is intended to be used to fulfill additional commercial orders. Subject to the Company obtaining financing for both of these equipment acquisitions, the sample size and production size equipment units are expected to be delivered to the Wet Lab during the first and third quarters of 2014, respectively. Each unit will be commissioned and tested upon delivery, with a view towards commencing initial production runs of TQDs within 30-60 days after installation. While the Company plans to work extensively with this  provider of equipment units , the Company owns all rights to the designs and intellectual property resulting from the development project, and could contract with one or more other competent suppliers of equipment if that became necessary.

The Company is preparing to enter the next phase of its development – production and supply of commercial scale volumes of TQDs to potential customers and joint ventures in order to develop a platform of initial customers in various industries. In order to finance the development of its business, including the establishment of its continuous process manufacturing facility, purchase of the first two equipment units and the expansion of its marketing and sales capabilities, the Company will be seeking additional investment capital. Provided this capital raise is successful and can be accomplished in the fourth quarter of 2013, the Company expects to commence generating limited revenues from the production of TQDs at the Wet Lab in the first quarter of 2014. Such revenues are expected to be modest at first and will be dependent upon the Company generating purchase orders from potential customers currently under NDAs and evaluating the Company’s technology. As part of this strategy, the Company has engaged in discussions with numerous target customers and has signed a number of NDAs and Sample Agreements to increase the probability of receiving firm orders from one or more of these entities.
 
 
10
 

 
The Company’s ongoing research and development functions are considered key to maintaining and enhancing its competitive position in the growing quantum dot market. Quantum dot technology continues to evolve, with new discoveries and refinements being made on an ongoing basis. The Company intends to be at the forefront of technological development, and will focus a significant part of its efforts on this, as it has done historically. Continuing R&D activities at the Wet Lab will be an important aspect of the Company’s strategy, as will the Company’s collaboration with Rice, University of Arizona, Texas State University and the numerous research centers and departments with which the Company has relationships.

The key assets of the Company are its licenses and intellectual property rights, its knowhow and the expertise, capabilities and relationships brought to the Company by its management team. The Company will continue to develop its intellectual property portfolio and licensing rights, and currently has two patents pending for continuous process production of quantum dots. The Company will also work closely with Rice and University of Arizona to develop and expand its intellectual property portfolio. As the business progresses, the Company will continually build out its portfolio of owned and licensed intellectual property, and take all appropriate steps to protect these rights.

The Licenses with Rice and University of Arizona include provisions for milestones and milestone payments. To date, these have been waived and extended by both Rice and University of Arizona, respectively, illustrating the support each university has given to the Company as it has attempted to advance its business with limited resources. As the Company moves forward, it expects to be able to meet all payment and other obligations under the Licenses, and the Company’s funding strategy takes account of these requirements.

The business of the Company is subject to various types of government regulations, including restrictions on the chemical composition of quantum dots used in life sciences and other sensitive applications, and regulation of hazardous materials used in or produced by the manufacture or use of quantum dots. Management believes that its licensed patented chemistry and proprietary manufacturing process allow the Company to comply with current regulations by producing heavy metal-free TQDs (where required for the intended applications), and by using environmentally friendly solvents, which are nevertheless contained and recycled in the production process. However, new regulations or requirements may develop that could adversely affect the Company or its products in the future. See “Risk Factors.”

Management and Personnel

The Company has traditionally operated with limited resources and infrastructure. It has a total of eight employees, including the management team, all of whom, apart from Mr. Stephen Squires, the Chief Executive Officer, Mr. David Doderer, Vice President of Research and Development and a staff chemist, work part time for the Company.

The board of directors and management team of the Company are comprised of individuals from a range of backgrounds, with a strong representation from the scientific community. This includes Dr. Michael Wong the inventor of our TQD dot chemistry and Dr. Ghassan Jabbour, the inventor of our printed electronics technology. Each of these individuals brings significant value to the Company through his connections and relationships with Rice University, University of Arizona and various other university, research and industry contacts.

As the Company moves into the next stage of its business, the board of directors and management team will be strengthened by the recruitment of additional members, and by restructuring the present board into a corporate governance board and a separate advisory board comprised of individuals with strong scientific backgrounds. The Company will also seek, at the appropriate time, to build out the corporate board by the addition of one or more directors in non-executive positions to add independence, depth of experience and strategic support as the business of the Company grows.

Once additional funding is raised and the Company commences commercial manufacturing operations, the business will add additional employees in operating management, sales/marketing, R&D, production and administration. Additional staffing would be added from time to time, as necessary, when the business expands and the scale up of production accelerates.


 
11
 
 
Competition

The commercial quantum dot industry is relatively young and undeveloped, with a number of small competitors attempting to establish themselves in different segments employing one or more competitive strategies. Competition among these companies is based on the following factors:

·  
Product quality and performance characteristics : Manufacturers who will incorporate quantum dots in specific applications will carefully consider the quality, characteristics and physical properties of the quantum dots for efficacy in their targeted applications. This includes the purity and consistency of dots from batch to batch, brightness, clarity and consistency of emissions, energy consumption, effective life spans, volume of dots necessary to produce the intended result, whether the dots have dual emission capabilities, whether their application or their customers’ preferences require that dots to be free of heavy metals or other hazardous compounds, the end product manufacturing techniques supported by the dots, etc.
·  
Volume : Before a manufacturer makes the commitment and dedicates capital and marketing resources to incorporate quantum dots in its end product, it must be confident that the volume of quantum dots it can obtain from a supplier will be sufficient to meet production needs short term and long term, including substantial growth following a successful new product launch. The strategies employed by a quantum dot company to scale production rapidly are critical to its attracting commercial users for its product, regardless of the quality of its quantum dots.
·  
Price : The price at which quantum dots can be delivered for incorporation in a new product will dictate the rate at which new applications can be developed and supported. High prices restrict the market for quantum dots to only the highest value uses, while the potential for lower prices of supply can open new markets.
·  
Continuing R&D and Product Improvements : Research and industry relationships are important to ensure a quantum dot company stays on the leading edge of technological development and commercialization. R&D is supported by collaboration with academic institutions or industrial companies, and having a close relationship with a major industry player provides a young quantum dot company with access to product development, marketing and distribution resources.

The Company believes it is well positioned in all four areas described above. The Company’s TQDs offer higher performance than spherical quantum dots in virtually all applications, and purity and consistence from batch to batch exceeds 98% (versus 50% or less with most other quantum dot processes), minimizing the need for intensive post-production processing to maintain quality of the delivered product. The Company’s TQDs have dual emission capabilities and can be produced free of cadmium and other heavy metals or hazardous materials. The Company can also combine its TQDs with the proprietary screen printing methods licensed from University of Arizona to deliver an engineered solution in certain applications (displays and solar cells, for example) that will reduce the production cost for the end product manufacturer.  The Company believes that implementation of its proprietary manufacturing process will allow it to scale up production to reliably meet commercial supply demands while reducing price, opening up the potential for new applications. Lastly, its continuing relationships with Rice, University of Arizona and Texas State University and its approach to joint development ventures should allow the Company to achieve and maintain a leading position in R&D and commercialization of new products.

The Company is subject to other competitive risks of early stage and commercial businesses generally, and of advanced technology businesses in particular, including competing in an environment where other companies may be  better financed or have more experience that the Company. See “Risk Factors.”

Licenses and Intellectual Property

As noted above, under the Rice Licenses, Solterra and QMC have been granted exclusive rights to develop, manufacture, market and exploit tetrapod quantum dots, in the case of Solterra, for photovoltaic applications, and in the case of QMC, for all electronic and life sciences applications (other than photovoltaics). During the term of the Rice Licenses, Rice is entitled to royalties ranging from 2% to 4% on sales of quantum dots for photovoltaic cells and 7.5% on sales of quantum dots for other electronic and life sciences applications. Rice is also entitled to certain milestone payments under each of the Rice Licenses. The milestone payments, payable on successive annual dates, were due to commence in August 2012. Certain key milestones, such as commencement of initial and scaled production by particular dates, were also required to be achieved by certain dates in 2013. As all of the milestones were not achieved by the originally anticipated dates, Rice has agreed to amend the minimum payment dates as set forth below, and extend the time for achievement of remaining key milestones to August 15, 2014. The Company believes that, subject to receiving the funding it is presently pursing, it will be able to meet these revised milestones and payment requirements. Rice is also entitled to fees in the event of certain liquidity events occurring in relation to the Company and its business.
 
 
12
 

 
QMC/ Amended Due Dates under Rice Licenses
 
Minimum Royalty Due
 
January 1, 2015   $ 29,450  
January 1, 2016   $ 117,000  
January 1, 2017   $ 292,500  
January 1, 2018 and forward
  $ 585,000  

Solterra / Amended Due Dates under Rice Licenses
 
Minimum Royalty Due
 
January 1, 2016   $ 100,000  
January 1, 2017   $ 356,250  
January 1, 2018   $ 1,453,500  
January 1, 2019 and forward
  $ 3,153,600  

As noted above, Solterra is also a party to the UA License with the University of Arizona under which Solterra has been granted exclusive rights to use University of Arizona’s patented screen printing techniques in the production and sale of organic light emitting diodes in printed electronic displays and other printed electronic components. Under the UA License, University of Arizona is entitled to royalties on sales of products within the scope of the UA License of 2% on net sales of licensed products in non-display electronic products and 2.5% on net sales of licensed products for printed electronic displays, subject to certain minimum annual payments.  University of Arizona had agreed to amend the first minimum royalty payment of $5,000 to June 30, 2013, and this payment has been made. University of Arizona also agreed to amend the time for future minimum payments as indicated below. The Company believes that, subject to receiving the funding it is presently pursing, it will be able to meet these revised payment requirements.

Amended Due Dates under UA License
 
Minimum Royalty Due
 
December 31, 2013   $ 25,000  
December 31, 2014   $ 25,000  
June 30, 2015   $ 50,000  
June 30, 2016   $ 125,000  
Each June 30 thereafter
  $ 200,000  
 
The Company’s intellectual property is comprised of both owned and licensed technology for the production and application of quantum dots. The Company has the exclusive worldwide license to the patented chemistry process developed by Rice University for the development, manufacturing, marketing and exploitation of  TQDs for photovoltaic applications (in the case of Solterra) and for electronic and medical applications (in the case of QMC). The Company also has the exclusive worldwide license to the University of Arizona’s patented screen printing techniques in the production and sale of organic light emitting diodes incorporating quantum dots in printed electronic displays and other printed electronic components. Leveraging the unique features of Rice’s patented chemistry process, the Company has developed a proprietary process for continuous production of TQDs via custom designed equipment units, and has filed a provisional patent application with the U.S. Patent and Trademark Office and expects to pursue a final patent on same. The Company also owns additional intellectual property in the form of trademarks, trade names, copyrights, scientific and technical know-how and “trade secrets” that it intends to further develop and apply in its business, seeking to protect same with appropriate governmental filings and/or secrecy agreements. See “Risk Factors.”
 

 
13
 
 
  Item 1.A.  Risk Factors
 
             You should carefully consider the following risk factors, in addition to the other information presented in this Form 10-K, in evaluating us and  our business. Any of the following risks, as well as other risks and uncertainties, could harm our business and financial results and cause the value of our securities to decline, which in turn could cause you to lose all or part of your investment.
 
RISKS ASSOCIATED WITH INVESTING IN OUR COMPANY
 
 Our business, operations and financial condition are subject to various risks. Some of these risks are described below and you should take these risks into account in making a decision to invest in our common stock. If any of the following risks actually occurs, we may not be able to conduct our business as currently planned and our financial condition and operating results could be seriously harmed. In that case, the market price of our common stock could decline and you could lose all or part of your investment in our common stock.
 
We need to continue as a going concern if our business is to succeed, if we do not we will go out of business.
 
 Our independent auditors’ report to our audited consolidated financial statements for the past three years indicate that there are a number of factors that raise substantial doubt about our ability to continue as a going concern.  Such factors identified in the report are our accumulated deficit since inception, our failure to attain profitable operations and our dependence upon financing to pay our liabilities.  If we are not able to continue as a going concern, it is likely investors will lose their investments.
 
We will need additional funds to meet our obligations under our Secured Debentures which become due and payable upon the earlier of November13, 2014 or a default under the Transaction Documents.  
 
 Pursuant to certain loan and related documents (the “Transaction Documents), we borrowed $1,500,000 from certain (then) non-affiliated parties on November 4, 2008 and issued Debentures secured by a pledge of stock from Mr. Squires, our Chief Executive Officer and by our assets. Recently, the Debenture holders agreed to extend the due date of these Debentures to November 4, 2014.  We can provide no assurances that we will be able to meet our obligations under the Transaction Documents, the failure of which could materially adversely affect our operations and business prospects and our ability to meet our obligations as they become due and payable under the Debentures. Aside from the Debentures, the Company owes approximately $2,000,000 in accounts payable and accrued liabilities and expenses. Without immediate and additional financing, the Company may not be able to meet its obligations and to remain a going concern.
 
We will need to raise significant and immediate additional capital for working capital purposes and to grow our business.
 
 Our business plans are based upon the immediate need to raise substantial immediate funds estimated at $3,000,000 to support our operational and business objectives as described in Item 1 and plans for expansion and growth. As such, we can provide no assurances that we will be able to successfully raise additional financing as needed, on terms satisfactory to us, if at all. Any additional financing will also likely cause substantial dilution to our stockholders.
 
We have a limited operating history and limited historical financial information upon which you may evaluate our performance.
 
 We continue to be a development stage company and face risks associated in a growth industry. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment. Even if we accomplish these objectives, we may not generate positive cash flows or the profits we anticipate in the future.
 

 
14
 
 
Our business plans for the sale of quantum dots may not materialize.
 
“Business Development” overview in Item 1 of this Form 10-K described various potential business opportunities for the production and sale of quantum dots. We can provide no assurances that these opportunities will have the desired end result which is most favorable or beneficial to the Company, if at all, or that the Company will achieve profitable operations.

Our intended business is based on rights granted to Solterra pursuant to a license agreement with William Marsh Rice University.
 
 We have entered into exclusive license agreements, as amended (the “Rice License”) with Rice University to use, develop, manufacture, market and exploit certain inventions, patent applications and issued patents of licensor with respect to the manufacture and sale of photovoltaic cells and the manufacture and sale of quantum dots for electronic and medical applications. Our license agreements with Rice University require us to be financially solvent, meet certain milestones and other obligations, conditions and to make certain royalty and other payments during the term of the license agreements.  Any default under the terms of our license agreements, which if not cured or waived by Rice University, could result in the loss of our exclusive license agreements and the right to manufacture and sell our intended products. While Rice has waived certain milestone dates and extended certain payment dates, there is no assurance that the Company will meet the new milestones or payment requirements or that Rice will agree to waive any future requirements. The loss of our exclusive license agreement with Rice University would have a material adverse effect on our operations and investors could lose their entire investment. See “Item 1 – Licenses and Intellectual Property.”
 
Our intended business is dependent on our patent license agreement with University of Arizona.  Our ability to print electronics, such as solar cells, is based upon our Agreement with the University of Arizona.
 
 Solterra has entered into an exclusive Patent License Agreement with the University of Arizona to license US Patent # 7,015,052, which was issued on March 21, 2006, entitled Screen Printing Techniques for the Fabrication of Organic Light - Emitting Diodes. Pursuant to the UA License, Solterra has an exclusive license to market, sell and distribute licensed products within the field of use which is defined as organic light emitting diodes in printed electronic displays and all other printed electronic components. Solterra has the right to grant sublicenses with respect to the licensed product and the license method (as defined in the UA License). Pursuant to said agreement, as amended, we are obligated to pay minimum annual royalties. While University of Arizona has waived certain milestone dates and extended certain payment dates, there is no assurance that the Company will meet the new milestones or payment requirements or that University of Arizona will agree to waive any future requirements. Termination of our Agreement with University of Arizona could materially adversely affect our operations. See “Item 1 – Licenses and Intellectual Property.”
 
  Market for quantum dots is expected to grow significantly over the next ten years.
 
“Item 1 – Market for Quantum Dots” and “Item 1 – Market Segments” cite various estimates for the expected growth of the market for quantum dots and discuss their potential applications. No assurances can be given that the quantum dots industry will grow as forecasted, that these potential applications will develop as discussed or that the Company will be able to capitalize on the growth and developments that do occur.

The Company’s production method is expected to enable the Company to scale production more readily thereby reducing the production costs of the TQDs significantly.

Quantum dots remain an extremely expensive commodity, and the price of quantum dots is directly affected by the high cost of producing quantum dots in relatively small batch quantities.  As with other nanomaterials, these relatively high prices have been supported by favorable performance of the quantum dots at very low concentrations. Prices for quantum dots are expected to moderate over time as greater production efficiencies are discovered and implemented, resulting in higher volumes. This is expected to support greater adoption of quantum dots for use in end products and further support the growth of the quantum dot market. Under current production methods, rigorous processing has been required from batch method synthesis to produce a consistently pure and tightly size-controlled quantum dot product. To significantly grow the market, the industry will need to achieve much lower production costs for quantum dots, while maintaining strict control over quality and uniformity. The Company has developed a proprietary manufacturing technique to produce TQDs that it believes has the potential to overcome the cost and performance challenges presented by other manufacturing methods, but there can be no assurances that the process will allow the Company to become competitive or to remain competitive against other manufacturing techniques that may be developed and applied.
 
 
15
 
 
Management believes that QMC is currently the only company capable of producing highly uniform tetrapod quantum dots.

Management believed that QMC is currently the only company capable of producing highly uniform tetrapod quantum dots. In addition QMC has developed the technology required to produce TQDs with very narrow emission peaks as well as TQDs with dual emissions. Both of these features are highly desirable for a broad range of life science, optoelectronics, lighting and solar energy applications.  Management believes its licensed patented chemistry and proprietary manufacturing process will enable QMC to produce TQDs in volume and at a price point that will make them a very compelling choice for these and other applications. No assurances can be given that Management’s beliefs and expectations will be realized or that competitors will not develop techniques capable of producing highly uniform TQDs that are competitive or functionally better than those produced (or to be produced) by QMC.
 
The Company has entered into a number of non-disclosures agreements and sample supply agreements with several product manufacturers as well as others. No assurances can be given that sales, joint venture agreements and/or license agreements will result from these agreements.
 
In the past year, the Company has entered into a number of non-disclosure agreements (“NDAs”) and sample supply agreements with a several product manufacturers in different industries as well as universities and independent research laboratories. In most cases, the NDAs with manufacturers are for exploring joint development of specific products or applications. While the Company’s preferred business relationship is a joint venture that evolves from a collaborative effort where the parties agree to cooperate in the design and production of a range of new end products utilizing the Company’s TQDs and screen printing processes, with the other party contributing industry expertise and substantial marketing, distribution and sales capabilities, no assurances can be given that joint venture agreements will be entered into on terms satisfactory to the Company, if at all. Further, no assurances can be given that the non-disclosure agreements and sample supply agreements entered into by the Company as described above will result in sales of the Company’s products. Also, in the event the Company decides to become a licensed manufacturer of end products to incorporate the Company’s TQDs into one or more specific products on an exclusive or non-exclusive basis, no assurances can be given that the Company will successfully enter into license agreements satisfactory to the Company, if at all.
 
The Company opened up a wet lab in June 2003 to produce TQDs. Subject to obtaining additional financing, the Company intends to purchase certain equipment units to produce higher volume of the TQDs.
 
The Company opened up a wet lab in June 2003 to produce TQDs on a small scale and then, subject to the Company obtaining financing for the purchase of certain equipment units, on a larger scale. The first equipment unit will be capable of producing 2 grams per hour of TQDs and the second equipment unit will be capable of producing 2 kilograms per hour of TQDs. The Company anticipates each unit being commissioned and tested upon delivery with a view towards commencing initial production runs of TQDs within 30 to 60 days of installation. No assurances can be given that the Company will be able to raise the necessary financing to carry out the Company’s plan of operation as described herein, or that the commissioning and start-up of the equipment units will progress as described.
 
The Company’s ongoing research and development functions are considered key to maintaining and enhancing its competitive position in the growing quantum dot market.
 
The Company’s ongoing research and development functions are considered key to maintaining and enhancing its competitive position in the growing quantum dot market. Quantum dot technology continues to evolve, with new discoveries and refinements being made on an ongoing basis. The Company intends to be at the forefront of technological development, and will focus a significant part of its efforts on this, as it has done historically. Continuing R&D activities at the Wet Lab will be an important aspect of the Company’s strategy, as will the Company’s collaboration with Rice, University of Arizona, Texas State University and the numerous research centers and departments with which the Company has relationships. No assurances can be given that the Company will be able to successfully maintain and enhance its competitive position in the growing quantum dot market.
 
Solterra has encountered difficulties in establishing solar pilot plants overseas.
 
Solterra has taken certain initial steps to develop two solar pilot plants overseas, one in India and one in the Kingdom of Saudi Arabia. In both cases the Company has experienced delays in advancing from memoranda of understanding to binding contracts. The Company has been informed that these delays are largely attributable to difficulties in arranging the funding necessary to initiate these projects. In addition, the Indian project has experienced delays in gaining certain regulatory approvals.  There can be no assurance that either of these projects will advance beyond the present preliminary stage of development, or that they will result in any revenues or profits to the Company.
 
 
16
 

 
Our future success is dependent upon our licenses and intellectual property rights and know-how and protecting these rights.

The key assets of the Company are its licenses and intellectual property rights, its knowhow and the expertise, capabilities and relationships brought to the Company by its management team. The Company will continue to develop its intellectual property portfolio and licensing rights, and currently has two patents pending for continuous flow production of quantum dots. The Company will also work closely with Rice and University of Arizona to develop and expand its intellectual property portfolio. As the business progresses, the Company will continually build out its portfolio of owned and licensed intellectual property, and take all appropriate steps to protect these rights. No assurances can be given that the Company will be successful in building out its portfolio of owned and licenses intellectual property and in protecting these rights.
 
The Company’s business is subject to environmental and other regulations.
 
The business of the Company is subject to various types of government regulations, including restrictions on the chemical composition of quantum dots used in life sciences and other sensitive applications, regulation of hazardous materials used in or produced by the manufacture or use of quantum dots. Management believes that its licensed patented chemistry and continuous manufacturing process allow the Company to comply with current regulations by producing heavy metal-free TQDs (where required for the intended applications), and by its use of environmentally friendly solvents, which are nevertheless contained and recycled in the production process. However, new regulations or requirements may develop that could adversely affect the Company or its products in the future.
 
As the Company grows, it will need to obtain and retain additional qualified management and personnel.
 
The Company has traditionally operated with limited resources and infrastructure. It has a total of eight employees, including the management team, all of whom, apart from Mr. Stephen Squires, the Chief Executive Officer, Mr. David Doderer, Vice President of Research and Development and a staff chemist, work part time for the Company.  The board of directors and management team of the Company are comprised of individuals from a range of backgrounds, with a strong representation from the scientific community. This includes Dr. Michael Wong the inventor of our TQD dot chemistry and Dr. Ghassan Jabbour, the inventor of our printed electronics technology. Each of these individuals brings significant value to the Company through his connections and relationships with Rice University, University of Arizona and various other university, research and industry contacts. As the Company moves into the next stage of its business, the board of directors and management team will be strengthened by the recruitment of additional members, and by restructuring the present board into a corporate governance board and a separate advisory board comprised of individuals with strong scientific backgrounds. The Company will also seek, at the appropriate time, to build out the corporate board by the addition of one or more directors in non-executive positions to add independence, depth of experience and strategic support as the business of the Company grows.  Once additional funding is raised and the Company commences continuous flow manufacturing operations, the business will add additional employees in operating management, sales/marketing, R&D, production and administration. Additional staffing would be added from time to time, as necessary, when the business expands and the scale up of production accelerates. No assurances can be given that the Company will be successful in hiring and retaining additional qualified management and staff personnel from time-to-time as necessary.
 
Our future success depends upon our ability to compete in the market place.
 
The commercial quantum dot industry is relatively young and undeveloped, with a number of small competitors attempting to establish themselves in different segments employing one or more competitive strategies. Competition among these companies is based on product quality and performance characteristics, volume, price and continuing research development and product improvements. The Company believes that it is well positioned to compete in each of the aforementioned four areas, each of which is more fully described under “Item 1.” Nevertheless, the Company is subject to other competitive risks of early stage and commercial businesses generally, and of advanced technology businesses in particular, including competing in an environment where other companies may be  better financed or have more experience that the Company.
 
 
 
17
 
 
Our future success depends on our ability to develop our manufacturing capacity. If we are unable to achieve our capacity expansion goals, it would limit our growth potential and impair our operating results and financial condition.
 
In the future, we may seek to establish large scale production facilities. Our ability to complete the planning, construction and equipping of large scale manufacturing facilities is subject to significant risk and uncertainty, including:
 
•
We will need to raise significant additional capital in order to finance the costs of constructing and equipping of large scale manufacturing facilities, which we may be unable to do so on reasonable terms or at all, and which could be dilutive to our existing stockholders;
 
•
The build-out of any facilities will be subject to the risks inherent in the development of a manufacturing facility, including risks of delays and cost overruns as a result of a number of factors, many of which may be out of our control, such as delays in government approvals, burdensome permit conditions and delays in the delivery of manufacturing equipment from numerous suppliers;
 
                •
We may be required to depend on third parties or strategic partnerships that we establish in the development and operation of additional production capacity, which may subject us to risks that such third parties do not fulfill their obligations to us under our arrangements with them; and
 
•
We may be required to obtain licenses, permits or authorizations from regulatory authorities, the failure of which to obtain, could delay or prevent the construction or opening of large scale manufacturing facilities.
 
 If we are unable to develop and successfully operate manufacturing facilities, or if we encounter any of the risks described above, we may be unable to scale our business to the extent necessary to improve results of operations and achieve profitability. Moreover, there can be no assurance that if we do expand our manufacturing capacity that we will be able to generate customer demand for our quantum dot products at these production levels or that we will increase our revenues or achieve profitability.
 
  We may be unable to effectively manage the expansion of our operations.
 
            We expect to expand our business in order to satisfy demand for our quantum dots and obtain market share. To manage the development and expansion of our operations, we will be required to improve our operational and financial systems, procedures and controls and expand, train and manage a larger employee base. Our management will also be required to maintain and expand our relationships with customers, distribution partners, suppliers and other third parties and attract new customers, distribution partners and suppliers. In addition, our current and planned operations, personnel, systems and internal procedures and controls might be inadequate to support our future growth. If we cannot manage our growth effectively, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures, and our business and results of operations could be harmed.
 
  Our products may not gain market acceptance, which would prevent us from achieving increased revenues and market share.
 
 The development of a successful market for our products may be adversely affected by a number of factors, many of which are beyond our control, including:
 
·
our failure to produce products that compete favorably against other products on the basis of cost, quality and performance;
 
·
whether or not customers will accept our new technology; and
 
·
our failure to develop and maintain successful relationships with distributors, project developers and other resellers, as well as strategic partners.
 

 
18
 
 
 If our products fail to gain market acceptance, we would be unable to increase our revenues and market share and to achieve and sustain profitability .
 
 Technological changes in the quantum dots and end-user industries could render our products uncompetitive or obsolete, which could reduce our market share and cause our revenues to decline .
 
 The nanotechnology market is characterized by continually changing technology requiring improved features. Our failure to further refine our technology and develop and introduce new products could cause our products to become uncompetitive or obsolete, which could reduce our market share and cause our revenues to decline. The nanotechnology industry is rapidly evolving and competitive. We will need to invest significant financial resources in research and development to keep pace with technological advances in the industry and to effectively compete in the future. A variety of competing technologies are under development by other companies that could result in lower manufacturing costs or higher product performance than those expected for our products. Our development efforts may be rendered obsolete by the technological advances of others, and other technologies may prove more advantageous for the commercialization of products.
 
Our ability to develop market share and revenues depends on our ability to successfully grow our distribution relationships and distribution channels.
 
 If we are unable to develop successfully our distribution relationships and distribution channels, our revenues and future prospects will be materially harmed. As we seek to grow our revenues by entering new markets in which we have little experience selling our products, our ability to increase market share and revenues will depend substantially on our ability to expand our distribution channels by identifying, developing and maintaining relationships with resellers. We may be unable to enter into relationships with resellers in the markets we target or on terms and conditions favorable to us, which could prevent us from entering these markets or entering these markets in accordance with our plans. Our ability to enter into and maintain relationships with resellers will be influenced by the relationships between these resellers and our competitors, market acceptance of our products and our low brand recognition as a new entrant.
 
  We face risks associated with the marketing, distribution and sale of our products and if we are unable to effectively manage these risks, it could impair our ability to develop expand our business.
 
 Significant management attention and financial resources will be required to develop successfully our sales channels. In addition, the marketing, distribution and sale of our products outside the United States expose us to a number of markets in which we have limited experience. If we are unable to manage effectively these risks, it could impair our ability to grow our business abroad. These risks include:
 
· 
difficult and expensive compliance with the commercial and legal requirements;
 
· 
encountering trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could affect the competitive pricing of our products and reduce our market share in some countries;
 
·
unavailability of government grants from foreign sources, or for government grants that have been approved, risk of forfeiture or repayment in whole or in part:
 
·
fluctuations in currency exchange rates relative to the U.S. dollar;
 
·
limitations on dividends or restrictions against repatriation of earnings;
 
·
difficulty in recruiting and retaining individuals skilled in international business operations; and
 
·
increased costs associated with maintaining international marketing efforts.
 
  Problems with product quality or product performance may cause us to incur warranty expenses and may damage our market reputation and prevent us from achieving increased sales and market share.
 
 Consistent with standard practice in the industry, the duration of our product warranties could be lengthy. We believe our warranty periods are consistent with industry practice. The possibility of future product failures could cause us to incur substantial expenses to repair or replace defective products. Furthermore, widespread product failures may damage our market reputation and reduce our market share and cause sales to decline.
 
 
 
19
 
 
  Our success in the future may depend on our ability to establish and maintain strategic alliances, and any failure on our part to establish and maintain such relationships could adversely affect our market penetration and revenue growth.
 
 Our ability to establish strategic relationships will depend on a number of factors, many of which are outside our control, such as the competitive position of our technology and our products relative to our competitors. We can provide no assurance that we will be able to establish new strategic relationships in the future. In addition, strategic alliances that we may establish, will subject us to a number of risks, including risks associated with sharing proprietary information, loss of control of operations that are material to our business and profit-sharing arrangements. Moreover, strategic alliances may be expensive to implement, require us to issue additional shares of our common stock and subject us to the risk that the third party will not perform its obligations under the relationship, which may subject us to losses over which we have no control or expensive termination arrangements. As a result, even if our strategic alliances with third parties are successful, our business may be adversely affected by a number of factors that are outside of our control.
 
If we are unable to protect our intellectual property adequately, we could lose our competitive advantage in the nanotechnology market.
 
 Our ability to compete effectively against competing technologies will depend, in part, on our ability to protect our current and future licensed and other proprietary technology, product designs and manufacturing processes by obtaining, maintaining, and enforcing our intellectual property rights through a combination of licenses, patents, copyrights, trademarks, and trade secrets and also through unfair competition laws. We may not be able to obtain, maintain or enforce adequately our intellectual property and may need to defend our products against infringement or misappropriation claims, either of which could result in the loss of our competitive advantage in our marketplace and materially harm our business and profitability. We face the following risks in protecting our intellectual property and in developing, manufacturing, marketing and selling our products:
 
• 
possible loss of our exclusive licenses with Rice and the University of Arizona;
 
• 
we cannot be certain that Rice’s  patent will be sufficient to prevent others from developing or using technology similar to ours or in developing, using, manufacturing, marketing or selling products similar to ours;
 
• 
given the costs of obtaining patent protection, we may choose not to file patent applications for or not to maintain issued patents for certain innovations that later turn out to be important, or we may choose not to obtain foreign patent protection at all or to obtain patent protection in only some of the foreign countries, which later turn out to be important markets for us;
 
• 
although we intend to have a number of foreign patents and applications as well as the two held by Rice ,  the laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as laws in the United States, and we may encounter difficulties in protecting and defending our rights in such foreign jurisdictions;
 
• 
third parties may design around our licensed technologies, and there is no assurance that any licensed patents and other intellectual property rights will be sufficient to deter infringement or misappropriation of our intellectual property rights by others;
 
• 
third parties may seek to challenge or invalidate any licensed patents, which can result in a narrowing of or invalidating our patents, or rendering our licensed patents unenforceable;
 
• 
we may have to participate in proceedings such as interference, cancellation, or opposition, before the United States Patent and Trademark Office, or before foreign patent and trademark offices, with respect to our licensed patents, patent applications, trademarks or trademark applications or those of others, and these actions may result in substantial costs to us as well as a diversion of management attention;
 
• 
although we are not currently involved in any litigation involving intellectual property rights, we may need to enforce our intellectual property rights against third parties for infringement or misappropriation or defend our intellectual property rights through lawsuits, which can result in significant costs and diversion of management resources, and we may not be successful in those lawsuits;
 
• 
we rely on trade secret protections to protect our interests in proprietary know-how and processes for which patents are difficult to obtain or enforce; however, we may not be able to protect our trade secrets adequately; and
 
• 
the contractual provisions on which we rely to protect our trade secrets and proprietary information, such as our confidentiality and non-disclosure agreements with our employees, consultants and other third parties, may be breached, and our trade secrets and proprietary information may be disclosed to competitors, strategic partners and the public, or others may independently develop technology equivalent to our trade secrets and proprietary information.
 

 
20
 
 
Our technology and products could infringe intellectual property rights of others, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages and disrupt our business.
 
 In recent years, there has been significant litigation involving patents and other intellectual property rights in many technology-related industries. There may be patents or patent applications in the United States or other countries that are pertinent to our products or business of which we are not aware. The technology that we incorporate into and use to develop and manufacture our intended products may be subject to claims that they infringe the patents or proprietary rights of others. The success of our business will also depend on our ability to develop new technologies without infringing or misappropriating the proprietary rights of others. Third parties may allege that we infringe patents, trademarks or copyrights, or that we misappropriated trade secrets. These allegations could result in significant costs and diversion of the attention of management.
 
 If a successful claim were brought against us and we are found to infringe a third party’s intellectual property right, we could be required to pay substantial damages, including treble damages if it is determined that we have willfully infringed such rights, or be enjoined from using the technology deemed to be infringing or using, making or selling products deemed to be infringing. If we have supplied infringing products or technology to third parties, we may be obligated to indemnify these third parties for damages they may be required to pay to the patent holder and for any losses they may sustain as a result of the infringement. In addition, we may need to attempt to license the intellectual property right from such third party or spend time and money to design around or avoid the intellectual property. Any such license may not be available on reasonable terms, or at all. Regardless of the outcome, litigation can be very costly and can divert management’s efforts. An adverse determination may subject us to significant liabilities and/or disrupt our business.
 
We may be unable to protect adequately or enforce our proprietary information, which may result in its unauthorized use, reduced revenues or otherwise reduce our ability to compete.
 
 Our business and competitive position depend upon our ability to protect our licensed and other proprietary technology, including any manufacturing processes and products that we develop. Despite our efforts to protect this information, unauthorized parties may attempt to obtain and use information that we regard as proprietary. Any patents issued to our licensor or us in connection with our efforts to develop new technology for our products may not be broad enough to protect all of the potential uses of the technology.
 
In addition, when we do not control the prosecution, maintenance and enforcement of certain important intellectual property, such as a technology licensed to us, the protection of the intellectual property rights may not be in our hands. If the entity that controls the intellectual property rights does not adequately protect those rights, our rights may be impaired, which may impact our ability to develop, market and commercialize our products.
 
 Our means of protecting our proprietary rights may not be adequate, and our competitors may:
 
        •       independently develop substantially equivalent proprietary information, products and techniques;
 
        •       otherwise gain access to our proprietary information; or
 
        •       design around our licensed patents (if any) or other intellectual property.
 
 We intend to pursue a policy of having our employees, consultants and advisors execute proprietary information and invention agreements when they begin working for us. However, these agreements may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. If we fail to maintain trade secret and patent protection, our potential, future revenues may be decreased.
 
  Licenses for technologies and intellectual property may not be available to us.
 
 We have entered into license agreements for technologies and intellectual property rights, including quantum dots. Our license agreements with Rice, which currently permit us to grant sublicenses, is subject to other terms and conditions which may limit our ability to use the licensed intellectual property under certain circumstances. For example, our quantum dot license may terminate if we materially breach the license agreement or if we abandon the construction of a manufacturing facility to exploit the licensed technology. We may need to enter into additional license agreements in the future for other technologies or intellectual property rights of third parties. Such licenses, however, may not be available to us on commercially reasonable terms or at all.
 
 We anticipate that our products could be subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to safety, environmental protection, and related matters. There is also a burden in having to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or industry or corporate policies pertaining to our products may result in significant additional expenses to us and our resellers and their customers and, as a result, could cause a significant reduction in demand for our  products.
 
 
21
 
 
  Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in potentially significant monetary damages and penalties and adverse publicity.
 
 If we fail to comply with present or future environmental laws or regulations we may be required to pay substantial civil or criminal penalties, incur significant capital expenditures, suspend or limit production or cease operations. Any failure by us to control the use of or generation of, or to restrict adequately the discharge or disposal of, hazardous substances or wastes or to otherwise comply with the complex, technical environmental regulations governing our activities could subject us to potentially significant monetary damages and penalties, criminal proceedings, third party property damage or personal injury claims, natural resource damage claims, cleanup costs or other costs, or restrictions or suspensions of our business operations. In addition, under some foreign, federal and state statutes and regulations governing liability for releases of hazardous substances or wastes to the environment, a governmental agency or private party may seek recovery of response costs or damages from generators of the hazardous substances or operators of property where releases of hazardous substances have occurred or are ongoing, even if such party was not responsible for the release or otherwise at fault. Also, federal, state or international environmental laws and regulations may ban or restrict the availability and use of certain hazardous or toxic raw materials that are or may be used in producing our products, and substitute materials may be more costly or unsatisfactory in performance. We believe that we either have all environmental permits necessary to conduct our business or have initiated the process to obtain additional or modified environmental permits needed to conduct our business. While we are not aware of any outstanding, material environmental claims, liabilities or obligations, future developments such as the implementation of new, more stringent laws and regulations, more aggressive enforcement policies, or the discovery of unknown environmental conditions associated with our current or past operations or properties may require expenditures that could have a material adverse effect on our business, results of operations or financial condition. Any noncompliance with or incurrence of liability under environmental laws may subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of our products.
 
Compliance with occupational safety and health requirements and best practices can be costly, and noncompliance with such requirements may result in potentially significant monetary penalties and adverse publicity.
 
 Our intended manufacturing operations and research and development activities involve the use of mechanical equipment which involve a risk of potential injury to our employees. These operations are subject to regulation under the Occupational Safety and Health Act, or OSHA. If we fail to comply with OSHA requirements, or if an employee injury occurs, we may be required to pay substantial penalties, incur significant capital expenditures, suspend or limit production or cease operations. Also, any such violations, employee injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of our products.
 
Product liability claims against us could result in adverse publicity and potentially significant monetary damages.
 
 Like other retailers, distributors and manufacturers of products that are used by consumers, we face an inherent risk of exposure to product liability claims in the event that the use of our products we sell results in injury. Since some of our products are used in electricity producing devices, it is possible that consumers could be injured or killed by our products, whether by product malfunctions, defects, improper installation or other causes. In addition, since revenues generated from our existing products have been modest and the products we are developing incorporate new technologies and use new installation methods, we cannot predict whether or not product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. We intend to rely on our general liability insurance to cover product liability claims and currently do not expect to obtain separate product liability insurance. The successful assertion of product liability claims against us could result in potentially significant monetary damages and if our insurance protection is inadequate to cover these claims, they could require us to make significant payments. Also, any product liability claims and any adverse outcomes with respect thereto may subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of our products.
 
Our sales, marketing and distribution plans may substantially rely on the efforts and abilities of third parties and such plans may not be successful.
 
 We intend to sell our products to product manufactures, domestic and international distributors, and other resellers. Most of our distribution partners will have a geographic or applications focus.
 
 We expect to collaborate closely with a number of manufacturers and distributors, both domestically and in the future internationally. We are actively working to recruit our distribution partners by very careful selection of a few accounts and channel partners. We intend to selectively pursue additional strategic relationships with other companies worldwide for the joint marketing, distribution and manufacturing of our products. These resellers are expected to range from large, multinational corporations to small, development-stage companies, each chosen for their particular expertise. We believe that these relationships will enable us to leverage the marketing, manufacturing and distribution capabilities of other companies, explore opportunities for additional product development and more easily enter new geographic markets in a cost effective manner, attract new distribution partners and develop new  applications for our products.  Our sales, marketing and distribution plans may substantially rely on the efforts and abilities of third parties and such plans may not be successful. Moreover, we face risks associated with the marketing, distribution and sale of our products internationally 
 
RISKS RELATED TO OUR COMMON STOCK

Our common stock trades in the OTCQB and there can be no assurance that an established trading market will develop.

Our common stock trades in the over-the-counter marketplace in the OTCQB under the symbol “QTMM.” The OTCQB marketplace offers trading for securities of smaller reporting companies like the Company that are reporting to the Securities and Exchange Commission. The OTCQB has no financial standards. The OTCQB marketplace has effectively replaced the FINRA operated OTC Bulletin  Board (OTCBB) as the primary market for SEC reporting securities that trade off exchanges. We can provide no assurances that our common stock will continue to trade on the OTCQB and there can be no assurance that an established trading market will develop or continue. The market price of our shares of common stock may be based on factors that may not be indicative of future market performance. Consequently, the market price of our common stock may vary greatly. There is a significant risk that our stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control:

 
·  
variations in our quarterly operating results;
 
·  
announcements that our revenue or income/loss levels are below analysts' expectations;
 
·  
general economic slowdowns;
 
·  
changes in market valuations of similar companies;
 
·  
announcements by us or our competitors of significant contracts; and/or acquisitions, strategic partnerships, joint ventures or capital commitments.
 
 
22
 
 
  We are subject to the reporting requirements of the federal securities laws, which can be expensive .

We are a public reporting company in the United States and, accordingly, subject to the information and reporting requirements of the Securities Exchange Act of 1934 and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports and other information with the SEC will cause our expenses to be higher than they would be if we were a privately-held company.

Our common stock may be considered to be a “penny stock” and, as such, the market for our common stock may be further limited by certain Commission rules applicable to penny stocks.

To the extent the price of our Common Stock remains below $5.00 per share or we have a net tangible assets of $5,000,000 or less, our common shares will be subject to certain “penny stock” rules promulgated by the Commission. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000).  For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale.  Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm.  These rules and regulations adversely affect the ability of brokers to sell our common shares in the public market and they limit the liquidity of our shares.

The issuance or sale of equity, convertible or exchangeable securities in the market, or the perception of such future sales or issuances, could lead to a decline in the price, if any, of our common stock.
 
Any issuance of equity, convertible or exchangeable securities, including for the purposes of expansion of our business, may have a dilutive effect on our existing stockholders. In addition, the perceived risk associated with the possible issuance of a large number of shares or securities convertible or exchangeable into a large number of shares could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline. Subsequent sales of our common stock in the open market or the private placement of our common stock or securities convertible or exchangeable into our common stock could also have an adverse effect on the market price, if any, of our shares. If our stock price declines, it may be more difficult for us to or we may be unable to raise additional capital.
 
In addition, future sales of substantial amounts of our currently outstanding common stock in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. We cannot predict what effect, if any, future sales of our common stock, or the availability of shares for future sales, will have on the market price of our stock.

Our operating results will be subject to quarterly fluctuations which could lead to uncertainty in the marketplace.
 
Our revenue may fluctuate significantly from quarter to quarter in the future due to a variety of factors, including, without limitation:
 
 
• 
the size and timing of orders and shipments of our products;
 
 
 
• 
the rate and cost at which we are able to expand our manufacturing capacity to meet product demand, including the rate and cost at which we are able to implement advances in our quantum dot technologies;
 
 
 
• 
our ability to establish and expand key distribution partners;
 
 
 
• 
our ability and the terms upon which we are able to raise capital sufficient to finance the expansion of our manufacturing capacity and our sales and marketing efforts;
 
 
 
• 
our ability to establish strategic relationships with third parties to accelerate our growth plans;
 
 
 
• 
the amount and timing of expenses associated with our research and development programs and our ability to develop enhancements to our manufacturing processes and our products;

 
• 
developments in the competitive environment, including the introduction of improved products or technological advancements by our competitors; and
 
 
 
•  
the timing of adding the personnel necessary to execute our growth plan.
 
 
23
 
 
We anticipate that our operating expenses will continue to increase significantly, particularly as we develop our internal infrastructure to support our anticipated growth. If our product revenues in any quarter do not increase correspondingly, our net losses for that period will increase. Moreover, given that a significant portion of our operating expenses is largely fixed in nature and cannot be quickly reduced, if our product revenues are delayed or below expectations, our operating results are likely to be adversely and disproportionately affected. For these reasons, quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and you should not rely on results of operations in any particular quarter as an indication of future performance. If our quarterly revenue or results of operations fall below the expectations of investors or public market analysts in any quarter, the market value of our common stock would likely decrease, and it could decrease rapidly and substantially.
 
THE FOREGOING RISK FACTORS DO NOT PURPORT TO BE A COMPLETE EXPLANATION OF THE RISKS INHERENT IN AN INVESTMENT IN THE COMPANY.


Item 1B.
Unresolved Staff Comments
 
Not applicable.

Item 2.
Description of Property
 
Since inception of Solterra, Solterra utilizes the home of Stephen Squires in Arizona as an executive office.  During each of the past five years, the Company has reimbursed Stephen Squires approximately $11,500 for the use of his premises.   In June 2013, the Company opened a wetlab and principal executive office facility in San Marcos, TX for development and sample production of tetrapod quantum dots .

Item 3.
Legal Proceedings
 
We are not a party to any pending legal proceedings. Our property is not the subject of any pending legal proceedings. To our knowledge, no governmental authority is contemplating commencing a legal proceeding in which we would be named as a party.

Item 4.
Mine Safety Disclosures
 
Not applicable.


 
24
 

PART II

Item 5.
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our Common Stock trades in the over-the-counter marketplace in the OTCQB under the symbol “QTMM.” The OTCQB marketplace offers trading for securities of smaller reporting companies like the Company that are reporting to the Securities and Exchange Commission. The OTCQB has no financial standards. The OTCQB marketplace has effectively replaced the FINRA operated OTC Bulletin  Board (OTCBB) as the primary market for SEC reporting securities that trade off exchanges.,

The table below sets out the range of high and low sales information for our common stock for each quarterly period from July 1, 2011 through June 30, 2013.

Quarter Ended
 
High
   
Low
 
June 30, 2013
    .09       .06  
 March 31, 2013     .10       .07  
December 31, 2012     .10       .04  
September 30, 2012     .10       .05  
June 30, 2012     .12       .04  
March 31, 2012     .13       .09  
December 31, 2011     .19       .12  
September 30, 2011     .24       .14  

These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Holders

As of September 01, 2013, there were 117 record holders accounting to the Company’s transfer agent. However, Management believes that there are over 900 beneficial holders of our common stock.

Dividends

We have not paid dividends on our common stock, and do not anticipate paying dividends on our common stock in the foreseeable future.
 
Issuer Repurchases of Equity Securities

During fiscal 2013, there were no repurchases of our equity securities.

Issuer Sales of Restricted Securities

(a)
From July 1, 2012 to June 30, 2013, we had the following sales of unregistered Common Stock.
 
 
 
25
 

Recent Sales of Unregistered Securities
 
Date of Sale   Title of Security   Number Sold   Consideration Received and Description of Underwriting or Other Discounts to Market Price or Convertible Security, Afforded to Purchasers    
Exemption from Registration Claimed
   
If Option, Warrant or Convertible Security, terms of exercise or conversion
                     
July  2012
 
Common Stock
 
343,750
 
$27,500 cash received;
no commissions paid
 
Section 4(2); and/or
Rule 506
 
 
Not applicable.
                     
September 2012   Common Stock   125,000   $10,000 cash received;
no commissions paid
  Section 4(2); and/or
Rule 506
  Not applicable.
                     
September 2012   Common Stock   561,729   Shares issued in
exchange for $30,333
of interest through
September 1, 2012
  Section 4(2); and/or
Rule 506
  Not applicable.
                     
October 2012   Common Stock   3,320,000   $83,000 cash received;
no commissions paid
  Section 4(2); and/or
Rule 506
  Not applicable.
                     
November 2012   Common Stock   1,000,000   $25,000 cash received;
no commissions paid
  Section 4(2); and/or
Rule 506
  Not applicable.
                     
November 2012   Common Stock   3,000,000   Shares issued for services;
no commissions paid
  Section 4(2); and/or
Rule 506
  Not applicable.
                     
November 2012   Common Stock   4,300,000   Shares issued for services;
no commissions paid
  Section 4(2); and/or
Rule 506
  Not applicable.
                     
December 2012   Common Stock   3,500,000   $87,500 cash received;
no commissions paid
  Section 4(2); and/or
Rule 506
  Not applicable.
                     
December 2012   Common Stock   585,586   Shares issued in
exchange for $30,333
of interest through
December 1, 2012
  Section 4(2); and/or
Rule 506
  Not applicable.
                     
January 2013   Common Stock   14,540,589   Shares issued in
exchange for $538,540
of accrued salaries as of June 30, 2012
  Section 4(2); and/or
Rule 506
  Not applicable.
                     
January 2013   Common Stock   137,400   Shares issued in
exchange for $4,122
of services through
June 30, 2012
  Section 4(2); and/or
Rule 506
  Not applicable.
                     
January thru March 2013   Common Stock   5,190,625   $175,415 cash received; no commissions paid   Section 4(2); and/or
Rule 506
  Not applicable.
                     
March 2013   Common Stock   452,490   Shares issued in
exchange for $30,000
of interest through
March 1, 2013
 
Section 4(2); and/or
Rule 506
  Not applicable.
                     
April 2013   Common Stock   15,000,000   Shares issued for services; no commissions paid   Section 4(2); and/or
Rule 506
  Not applicable.
                     
May 2013   Common Stock   2,000,000   Shares issued for services; no commissions paid   Section 4(2); and/or
Rule 506
  Not applicable.
                     
June 2013   Common Stock   576,442   Shares issued in
exchange for $30,667
of interest through
June 1, 2013
  Section 4(2); and/or
Rule 506
  Not applicable.
                     
June 2013   Common Stock   750,000   $26,250 cash received; no commissions paid   Section 4(2); and/or
Rule 506
  Not applicable.
                     
June 2013   Common Stock   1,500,000   Shares issued for services; no commissions paid   Section 4(2); and/or
Rule 506
  Not applicable.
                     
June 2013   Common Stock   3,318,000   $199,080 cash received; no commissions paid   Section 4(2); and/or
Rule 506
  Not applicable.

 
 
26
 
 
Item 6.
Selected Financial Data

Not applicable.

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-K. All statements contained herein that are not historical facts, including, but not limited to, statements regarding anticipated future capital requirements, our future plan of operations, our ability to obtain debt, equity or other financing, and our ability to generate cash from operations, are based on current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties that may cause the Company’s actual results in future periods to differ materially from forecasted results.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of our Company. Our Company and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in this report and other Company filings with the Securities and Exchange Commission and in our reports to stockholders. Statements that relate to other than strictly historical facts, such as statements about the Company's plans and strategies and expectations for future financial performance are forward-looking statements within the meaning of the Act. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will” and other similar expressions identify forward-looking statements. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and operating performance, and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See “Risk Factors” for a discussion of events and circumstances that could affect our financial performance or cause actual results to differ materially from estimates contained in or underlying our forward-looking statements.

Business Overview
 
QMC is a nanotechnology company specializing in the design, development, production and supply of tetrapod quantum dots (“TQDs”), a high performance variant of quantum dots, for a range of applications in the life sciences, optoelectronics, photovoltaics, lighting, security ink and sensor sectors of the market. QMC owns 100% of Solterra Renewable Technologies, Inc. (“Solterra”), an operating subsidiary that is focused on the photovoltaic (solar cell) market. 
 
Quantum dots are tiny nanoparticles of a semiconductor material which emit light, or fluoresce, when excited with energy. The color of light emitted varies depending on the size of the quantum dot so that photonic emissions can be tuned by the creation of quantum dots of different sizes. Their unique properties as highly efficient, next generation semiconductors have led to the use of quantum dots in a range of electronic and other applications, including in the biomedical, display and lighting industries. Quantum dots 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 quantum dots in printed photovoltaic cells.
 
 
 
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The Company has the exclusive license to a patented chemical process that permits it to produce high performance, heavy metal-free TQDs using a lower cost and environmentally friendly solvent for greater manufacturing flexibility.  The Company has developed a proprietary method that it believes will allow it to mass produce consistent quantities of TQDs in a continuous process at lower costs than other existing processes, and has filed a provisional patent application on same. It also has the exclusive license to a patented screen printing technique for manufacture of quantum dot enhanced electronic displays and other electronic components. The Company believes that these three proprietary technologies position the Company to become a leader in the overall quantum dot industry, and a preferred supplier of high performance tetrapod quantum dots to an expanding range of applications.

Critical Accounting Policies

Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents, prepaid expenses, accounts payable and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.

Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates

Long-lived assets
We review our long-lived assets, which include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as “the asset”) may not be recoverable.  Such circumstances include, but are not limited to:
 
· a significant decrease in the market price of the asset;
· a significant change in the extent or manner in which the asset is being used;
· a significant change in the business climate that could affect the value of the asset;
· a current period loss combined with projection of continuing loss associated with use of the asset; and
· a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life
 
 
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Beneficial conversion
 
Debt instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible debt instruments. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the debt instrument limited to the value received. The beneficial conversion amount is recorded as a deemed dividend or interest expense and an increase to additional paid-in-capital.  The beneficial conversion has been fully accreted to the face value of the original loan and interest expense has been recognized.
 
Plan of Operation

The Company has to date been a research and development business operating out of temporary facilities. It has now entered the commercialization stage of its business with the launch of the Wet Lab in July, 2013, its first permanent facility. The Wet Lab is located in San Marcos, Texas, approximately 30 miles south of Austin, Texas. This facility is part of the Star Park Technology Center, an extension of Texas State University, the fifth largest university in Texas and one of eight Texas Emerging Research Universities. This arrangement provides the Company with the opportunity to expand its operations within this 30 acre technology park. The Company has a year to year lease agreement and the option to add additional lab and office space on an as-needed basis. This location provides the Company with convenient access to an experienced faculty and specialized laboratory facilities that can support joint research and development efforts with Texas State University, and is in proximity to a number of leading companies in the life sciences, lighting, solar and electronics markets.

The Wet Lab will be the center of operations of the Company and will be used by the Company to produce small sample quantities of TQDs (via batch method) and larger quantities of TQDs (via its proprietary process units, once this equipment is acquired) for supply to research facilities, customers and potential customers, and potential development joint ventures.  The facility will be used to support test production runs, to fine tune the characteristics of the quantum dots for optimized performance in the customer's specific application, and for continued R&D activities. The Wet Lab was established through funds raised in a private placement of common shares of the Company completed in early June 2013. The Company obtained $250,000 to finance the build out and costs of operation of the Wet Lab for the balance of 2013.

The primary short term objective of the Company is to establish its first continuous manufacturing process at the Wet Lab and produce volumes of TQDs for supply to customers on a commercial scale. The Company has completed a joint development effort with a non-affiliated third party provider of industrial process equipment which resulted in the design and successful proof of concept testing of a scalable production unit for manufacturing the Company’s proprietary TQDs on a low cost, continuous basis.  The Company has negotiated an agreement with the equipment provider for the delivery of a lab scale equipment unit capable of producing 2 grams per hour. This first unit will be used to validate synthesis protocols for customized TQDs developed to meet customer specification and will also be used to produce samples and to fulfill small to medium-size orders. The Company has also negotiated an agreement with the equipment provider for the delivery of a production scale equipment unit capable of producing 2 kilograms per hour. This unit is intended to be used to fulfill additional commercial orders. Subject to the Company obtaining financing for both of these equipment acquisitions, the sample size and production size equipment units are expected to be delivered to the Wet Lab during the first and third quarters of 2014, respectively. Each unit will be commissioned and tested upon delivery, with a view towards commencing initial production runs of TQDs within 30-60 days after installation. While the Company plans to work extensively with this  provider of equipment units , the Company owns all rights to the designs and intellectual property resulting from the development project, and could contract with one or more other competent suppliers of equipment if that became necessary.
 
 
 
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The Company is preparing to enter the next phase of its development – production and supply of commercial scale volumes of TQDs to potential customers and joint ventures in order to develop a platform of initial customers in various industries. In order to finance the development of its business, including the establishment of its continuous process manufacturing facility, purchase of the first two equipment units and the expansion of its marketing and sales capabilities, the Company will be seeking additional investment capital. Provided this capital raise is successful and can be accomplished in the fourth quarter of 2013, the Company expects to commence generating limited revenues from the production of TQDs at the Wet Lab in the first quarter of 2014. Such revenues are expected to be modest at first and will be dependent upon the Company generating purchase orders from potential customers currently under NDAs and evaluating the Company’s technology. As part of this strategy, the Company has engaged in discussions with numerous target customers and has signed a number of NDAs and Sample Agreements to increase the probability of receiving firm orders from one or more of these entities.

The Company’s ongoing research and development functions are considered key to maintaining and enhancing its competitive position in the growing quantum dot market. Quantum dot technology continues to evolve, with new discoveries and refinements being made on an ongoing basis. The Company intends to be at the forefront of technological development, and will focus a significant part of its efforts on this, as it has done historically. Continuing R&D activities at the Wet Lab will be an important aspect of the Company’s strategy, as will the Company’s collaboration with Rice, University of Arizona, Texas State University and the numerous research centers and departments with which the Company has relationships.

The key assets of the Company are its licenses and intellectual property rights, its knowhow and the expertise, capabilities and relationships brought to the Company by its management team. The Company will continue to develop its intellectual property portfolio and licensing rights, and currently has two patents pending for continuous process production of quantum dots. The Company will also work closely with Rice and University of Arizona to develop and expand its intellectual property portfolio. As the business progresses, the Company will continually build out its portfolio of owned and licensed intellectual property, and take all appropriate steps to protect these rights.

The Licenses with Rice and University of Arizona include provisions for milestones and milestone payments. To date, these have been waived and extended by both Rice and University of Arizona, respectively, illustrating the support each university has given to the Company as it has attempted to advance its business with limited resources. As the Company moves forward, it expects to be able to meet all payment and other obligations under the Licenses, and the Company’s funding strategy takes account of these requirements. See “Item 1” and “Item 1.A.”

Liquidity and Capital Resources

At June 30, 2013 the Company had a working capital deficit of approximately $2,490,000 with total liabilities of approximately $4,162,000. Approximately $1,514,000 of these liabilities is owed to our officers, directors and employees for services rendered and accrued through June 30, 2013.  The Company has been in the development stage since inception.  As a result, the Company has relied on financing through the issuance of common stock and a convertible debenture as well as advances from a director, shareholder and employees’ wages being partially or fully accrued but not paid.

As of June 30, 2013, the Company lacks cash or cash equivalent assets and continues to incur losses in its development stage operations.  Over the past five years, the Company relied on sales of its Common Stock to support its operations and on various universities performing work and providing U.S. licensing rights under business agreements in which the Company has at times been in arrears in payments 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 the securities of the Company.   Currently, the Company is seeking additional financing in excess of $3,000,000; however, no definitive agreements for additional financing have been received and the Company cannot provide any assurance that additional funding will be available to finance our operations on terms acceptable to us, if at all, in order to support our plan of operations.  If we are unable to achieve the financing necessary to continue our plan of operations, then our stockholders may lose their entire investment in the Company.  See "Notes to Financial Statements."

Cash was used in operating activities of $540,428 for fiscal 2013. This is a result of a net loss of $4,905,788 partially offset by stock issued for services of $1,582,975, options issued for services of $911,863, stock issued for debenture interest of $151,707, and changes in accounts payable of $143,820 and changes in accrued liabilities for related parties of $1,033,573. There were no cash flows used in investing activities in 2013. Cash flows from financing activities during 2013 were $697,598 which consisted of proceeds of the sale of common stock.   In 2010, our board approved granting Mr. Squires the two year right to convert loans made by him of up to $200,000 into a maximum 5% interest in the common stock of Solterra, which option has expired unexercised. As of June 30, 2013, Mr. Squires does not have any unreimbursed cash advances due to him, and has accrued payroll and expenses totaling $197,125 owed to him and accrued payroll of $182,577 owed to his wife in her role as a bookkeeper for the Company.
 
 
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Cash was used in operating activities of $429,837 for fiscal 2012. This is a result of a net loss of $1,365,690 partially offset by stock issued for services of $870,000, option and warrant expenses recognized in the amount of $215,530, stock issued for debenture interest of $161,544, consideration of convertible debenture discount of $586,729 and amortization of deferred finance cost of $36,167. There were no cash flows used in investing activities in 2012. Cash flows from financing activities during 2012 were $445,000 which consisted of proceeds of the sale of common stock.   As of June 30, 2012, Mr. Squires does not have any unreimbursed cash advances due to him, and has accrued payroll and expenses totaling $68,933 owed to him and accrued payroll of $60,000 owed to his wife in her role as a bookkeeper for the Company.

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.  Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying value and classification of assets and liabilities should the Company be unable to continue as a going concern.  At June 30, 2013, the Company had not yet achieved profitable operations, has accumulated losses of $16,372,805 since its inception, at June 30, 2013, has a working capital deficit of $3,361,529 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company’s ability to continue as a going concern.  The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company requires immediate and substantial additional financing (estimated at $3,000,000)during fiscal 2014 to maintain and expand its development stage operations. The Company is exploring all reasonable avenues of financing at this time, including, without limitation, the sale of equity, debt borrowing and/or the receipt of product licensing fees and royalties. We can provide no assurances that such financing will be obtained on terms satisfactory to the Company, if at all. Further, we can provide no assurances that one or more mutually acceptable licensing agreement(s) will be entered into on terms satisfactory to us, if at all. In this respect, see “Note 2” in our notes to the consolidated financial statements for additional information as to the possibility that we may not be able to continue as a “going concern.”

Off-balance sheet arrangements

We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.

Officers and employees convert accrued salaries and bonus into warrants

In November 2010, Steven Squires ($125,000), Brian Lukian ($234,375), David Doderer ($62,500), Robert Glass ($37,500), Ghassan Jabbour ($243,750), Andrew Robinson ($50,000) and Toshinon Ando ($35,000) converted the amount of monies set forth beside their names into five-year warrants to purchase 1,666,666 shares, 3,125,000 shares, 833,333 shares, 500,000 shares, 3,250,000 shares, 666,666 shares and 466,666 shares, respectively, In summary, a total of $788,125 was converted into warrants to purchase 10,508,331 shares exercisable at $.075 per share through the expiration date of November 4, 2015.

In May 2011, David Doderer ($81,250), Robert Glass ($61,250), Ghassan Jabbour ($62,500), Andrew Robinson ($50,000) and Toshinon Ando ($65,000) converted the amount of monies set forth beside their names into five-year warrants to purchase  738,636 shares, 556,818 shares, 568,181 shares, 454,545 shares and 590,909 shares, respectively, In summary, a total of $320,000 was converted into warrants to purchase 2,909,089 shares exercisable at $.11 per share through the expiration date of May 18, 2016.
 
In January 2013, Chris Benjamin ($39,825), Art Lamstein ($101,139), Toshinon Ando ($125,000), Robin Squires ($122,577), and Ghassan Jabbour ($150,000) converted the amount of monies set forth beside their names into 1,075,275 common shares, 2,730,744 common shares, 3,375,000 common shares, 3,309,570 common shares and 4,050,000 common shares, respectively,
 
 
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In January 2013, David Doderer ($120,000), and Robert Glass ($96,629) converted the amount of monies set forth beside their names into five-year warrants to purchase 3,000,000 common shares and 2,415,725 common shares respectively.

Results of Operations – June 30, 2013 versus June 30, 2012

Balance Sheet

Cash

At June 30, 2013, the Company’s balance sheet included cash of $172,431 compared to cash of $15,261 at June 30, 2012, representing an increase in cash of $157,170 for the year.  An amount of $697,598 was raised through the sale of common stock in fiscal 2013 as compared to $445,000 in the prior year, however operating costs have consumed the majority of the amount leaving the current cash balance of $172,431.

The Company has been in a development stage since inception.  As a result, the Company has relied on financing through the issuance of common stock and a convertible debenture in November 2008 as well as advances from related parties.

License

QMC and Solterra are parties to the Rice Licenses with Rice University. As noted herein, under the Rice Licenses, Solterra and QMC have been granted exclusive rights to develop, manufacture, market and exploit tetrapod quantum dots, in the case of Solterra, for photovoltaic applications, and in the case of QMC, for all electronic and medical applications.

During the term of each Rice License, Rice is entitled to royalties ranging from 2% to 4% on sales of quantum dots for photovoltaic cells and 7.5% on sales of quantum dots for other electronic and Life Sciences applications. Rice is also entitled to certain milestone payments under each of the Rice Licenses. The milestone payments, payable on successive annual dates, and escalating from $129,412 up to $3,738,600 (subject to certain adjustments) were due to commence in August 2012. Certain key milestones, such as commencement of initial and scaled production by particular dates, were also required to be achieved by dates in 2013. As all of the milestones were not achieved by the originally anticipated dates, Rice has agreed to amend the first royalty payment date to November 15, 2014, and extend the time for achievement of remaining key milestones to August 15, 2014.

Rice is also entitled to fees in the event of certain liquidity events occurring in relation to the Company and its business.

As noted above, Solterra is also party to the UA License with the University of Arizona under which Solterra has been granted exclusive rights to use UA’s patented screen printing techniques in the production and sale of organic light emitting diodes in printed electronic displays and other printed electronic components. Under the UA License, UA is entitled to royalties on sales of products within the scope of the UA License, of 2% on net sales of licensed products in non-display electronic products and 2.5% on net sales of licensed products for printed electronic displays, subject to certain minimum annual payments.

Patent license costs have been expensed as professional fees in general and administrative expenses and amounted to $14,804 and $4,281, respectively in the year ended June 30, 2013 and June 30, 2012.

Furniture and equipment

During the years ended June 30, 2013 and June 30, 2012, the company did not have any acquisitions or disposals of office equipment and furniture. The company is amortizing the office equipment and furniture on a straight line basis over 3 and 7 years, respectively, and has charged operations with $1,160 of amortization for this year and $2,660 in the prior year.

 
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Deferred financing costs

Deferred finance cost, net were $0 at June 30, 2013.  This amount relates to the $315,000 of expenses associated with the $1,500,000 convertible debenture financing raised in November 2008.  The deferred financing cost is being amortized using the effective interest method over the thirty-six month life of the debenture.  The balance at June 30, 2012 was $0.  

Accounts payable and accrued liabilities
 
The balance at June 30, 2013 was $1,801,561.  Included in accounts payable is accrued liabilities to related parties of $1,513,978 for unpaid wages, legal fees of $173,432, research & development fees of $68,000, and accounting fees of $39,641.  The balance at June 30, 2012 was $1,170,518.  Included in accounts payable is accrued liabilities to related parties of $1,018,945 for unpaid wages, legal fees of $125,432, accounting fees of $19,000, and other operating expenses of $7,141.  During the year ended June 30, 2013 the Company wrote off $0 of accounts payable, previously recorded, upon confirmations with certain vendors related to the concluded license agreements, that there is no expectation of payments and matters have been closed.

Fair value of embedded conversion feature

The Company has evaluated the application of ASC 815 to the Convertible Note issued November 4, 2008.  Based on the guidance in ASC 815, the Company concluded these instruments were required to be accounted for as derivatives as of July 1, 2009 due to the down round protection feature on the conversion price and the exercise price.  The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected in the statements of operations as “Gain (loss) on derivative liabilities.”  Further explanation can be found in Note 7.

As part of implementing ASC 815-40-14 the Company adjusted accumulated deficit by $162,643 and additional paid in capital by $212,184.  The fair value of the derivatives as of June 30, 2013 was estimated by management to be $787,000 as compared to the estimated fair value at June 30, 2012 of $346,000. The decrease of $187,000 has been charged to operations in the current year.
 
Convertible debenture

On November 4, 2008, the Company entered into a Securities Purchase Agreement, Debenture, Security Agreement, Subsidiary Guarantee Agreement, Registration Rights Agreement, Escrow Agreement, Stock Pledge Agreement and other related transactional documents to obtain $1,500,000 in gross proceeds from three non-affiliated parties in exchange for 3,525,000 restricted shares of Common Stock of Hague Corp and Debentures in the principal amount aggregating $1,500,000. Each Debenture currently matures on November 4, 2014 bearing interest at the rate of 8% per annum and is pre payable by the Company at any time without penalty, subject to the Debenture holders’ conversion rights.  The Company recorded a discount of $1,155,826 associated with the 3,525,000 shares issued.  The discount was amortized over the original three year life of the debenture.   Each Debenture is currently convertible at the option of each Lender into Hague Corp’s Common Stock, at a conversion price of $.06 per share.  The Debentures are secured by the assets of Hague Corp and are guaranteed by Solterra as Hague Corp’s subsidiary and through a pledge of 20,000,000 shares by Stephen Squires, the Company’s Chief Executive Officer. In the event the Debentures are converted in their entirety, the Company would be required to issue and aggregate of 25,000,000 shares of Quantum Material Corp’s Common Stock, subject to anti-dilution protection for stock splits, stock dividends, combinations, reclassifications and sale of the Company’s Common Stock at a price below the Conversion Price.  Certain changes of control or fundamental transactions such as a merger or consolidation with another company or other material event could cause an event of default under the Transaction Documents.  

Common Stock

During the fiscal year ended June 30, 2012 according to the provisions of the Convertible Debenture agreement, the Company elected to issue 1,316,608 restricted shares of the Company’s Common Stock to pay accrued interest on the debentures.  The Company also issued 11,395,833 restricted shares of common stock at between $0.08 per share and $0.12 per share for a total of $965,000. Common stock increased from 110,651,446 shares at June 30, 2011 to 123,544,034 shares at June 30, 2012.
 
 
 
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During the fiscal year ended June 30, 2013 according to the provisions of the Convertible Debenture agreement, the Company elected to issue 2,176,247 shares of the Company’s Common Stock to pay accrued interest on the debentures.  The Company also issued 22,388,375 restricted shares of common stock at between $0.035 per share and $0.12 per share for a total of $697,598. Common stock increased from 124,113,887 shares at June 30, 2012 to 182,988,347 shares at June 30, 2013.

Statement of operations – June 30, 2013

General and administrative expenses

During the twelve months ended June 30, 2013 the Company incurred $4,122,016 of general and administrative expenses compared to the $1,898,839 recorded for the twelve months ended June 30, 2012.  The increase of $2,223,177 can be attributed to an increase in stock based compensation expense of $1,063,093, travel expense of $64,097 and an increase in executive compensation of $755,110.

Included in the expenses for the current twelve months were stock based compensation of $1,582,974, office & general expense of $911,863, executive compensation of $796,004, non-executive compensation of $460,442, legal and audit of $101,037, travel expense of $130,915, and meeting expense of $11,635.
 
Research and development expenses.

The Company incurred research and development expenses of $91,804 in the twelve months ended June 30, 2013, as compared to $16,649 in the twelve months ended June 30, 2012.  The Company has two development agreements in place with major universities.  One development agreement is to optimize the printing process of solar cells and the other development agreement is to optimize the manufacturing process for quantum dots. 

Amortization of convertible debenture discount

The convertible debenture discount of $1,500,000 was amortized over the original 36 month term of the debenture using the effective interest method.  The debenture was issued on November 4, 2008.  Amortization recorded for the twelve month period ended June 30, 2013 was $0.  The amortized balance of the discount at June 30, 2013 is $0 resulting in the convertible debenture value on the balance sheet net of the discount $1,500,000.  At June 30, 2012 the amortization for the twelve months was $586,322.

Amortization of deferred finance cost

This amount relates to the $315,000 of expenses associated with the $1,500,000 convertible debenture financing raised in November 2008.  The deferred financing cost was amortized using the effective interest method over the thirty-six month life of the debenture.  Amortization expense recorded for the twelve month period ended June 30, 2013 and 2012 was $0 and $36,167, respectively.

Interest expense on the convertible debenture

This amount relates to the 8% interest associated with the $1,500,000 convertible debenture issued in November 2008.  Interest expense recorded for the period ended June 30, 2013 was $151,707 compared to $161,544 in the prior year ended June 30, 2012.  

According to the provisions of the Convertible Debenture agreement the Company has elected to issue shares of the Company’s Stock to pay accrued interest on the debentures.   In the year ended June 30, 2013, the Company issued 2,176,247 shares of the Company’s restricted Common Stock to pay $121,333 of accrued interest.   As the provision to pay stock for interest discounts the market price of the stock the Company has attributed this discount to interest expense and additional paid in capital.  The effect of this extra interest expense for the twelve months ended June, 30 2012 is $40,877.  During the year ended June 30, 2012, the company issued 1,316,608 shares of the Company’s restricted Common Stock to pay $161,544 of accrued interest.  The effect of the reduced interest expense for the year ended June 30, 2013 is $40,211.

 
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Change in fair value of warrants and embedded conversion feature

This amount relates to the change in value of the derivative liabilities.  The change recorded in the year ended June 30, 2013 was $441,000 as compared to the change in value recorded in the year ended June 30, 2011 of ($877,000).

Option and Warrant expense

During the year ended June 30, 2012, the Company issued 3,750,000 options to two individuals for services.  Options were valued using the Black Scholes Model, resulting in a valuation of $471,023 to be ratably recognized over the vesting period of the grants.  Expense, in the amount of $383,530 was recognized in the current year and included in operating expense.

The Company issued 2,000,000 common stock warrants related to the debenture extension and has attributed $138,800 to the warrant value using the Black Scholes price model during the year ended June 30, 2013.  The value will be expensed over the duration of the debenture extension, as such, $99,252 of the warrant value was recognized as expense in current fiscal year, with the remainder of $39,548 to be recognized in the subsequent fiscal year.

The Company issued 5,415,725 common stock options to employees in exchange for salaries owed and has attributed $440,840 to the options value using the Black Scholes price model during the year ended June 30, 2013.  As $216,629 was previously recognized as salary expense, the remainder of $224,211 was recognized in the current year and included in operating expense.

The Company issued 15,000,000 shares of common stock and options to purchase an additional 15,000,000 shares to executives as part of their employment agreements entered into during the fiscal year and has attributed $1,036,500 to the options value using the Black Scholes price model.  The expense will be recognized over the terms of the employment agreements.  $52,790 was recognized in the current year and included in operating expense.

The Company issued 2,000,000 common stock options to two individuals for services.  The options were valued using the Black Scholes Model, resulting in a valuation of $136,200, to be recognized over the vesting period of the grants.  Expense, in the amount of $34,703, was recognized in the current year and included in operating expense.


Significant Accounting Pronouncements

Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification™ (“ASC”) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company.  Management has reviewed the aforementioned rules and releases and believes any effect will not have a material impact on the Company's present or future financial statements.

Item 8 .
Consolidated Financial Statements

Consolidated Financial Statements

The report of the Independent Registered Public Accounting Firm on the Consolidated Financial Statements and Schedules are set forth beginning on the next page of this Annual Report on Form 10-K following this page.

 
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Messineo & Co, CPAs LLC
2471 N. McMullen Booth Rd Ste. 302
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

Board of Directors
Quantum Materials Corp.
San Marcos, TX

We have audited the accompanying consolidated balance sheets of Quantum Materials Corp., a development stage company, as of June 30, 2013 and 2012 and the related consolidated statements of operations, stockholders' deficit and consolidated cash flows for the years then ended and for the period May 19, 2008 (date of inception) through June 30, 2013. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that were appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.   Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements, referred to above, present fairly, in all material respects, the consolidated financial position of Quantum Materials Corp. as of June 30, 2013 and 2012, and the results of its consolidated operations and its consolidated cash flows for the years then ended and for the period May 19, 2008 (date of inception) through June 30, 2013, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has had no revenues, has incurred recurring losses resulting in a stockholders’ deficit, has negative cash flows from operating activities, and a working capital deficit. The Company requires additional equity funding or financing to commence its operating plan. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

GRAPHIC
Messineo & Co., CPAs, LLC
Clearwater, Florida
October 3, 2013



 
36
 
 
Quantum Materials Corp.
(A Development Stage Company)
Consolidated Balance Sheets
For the years ending June 30, 2013 and June 30, 2012
             
   
June 30
   
June 30
 
   
2013
   
2012
 
             
ASSETS
           
Current
           
Cash
  $ 172,431     $ 15,261  
                 
  Total current assets     172,431       15,261  
                 
Furniture and equipment, net of deprecation of $13,072 and $11,912
    -       1,160  
Licenses
    55,000       55,000  
                 
  Total other assets     55,000       56,160  
                 
Total assets
  $ 227,431     $ 71,421  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities
               
Accounts payable and accrued Liabilities
  $ 287,583     $ 151,573  
Accrued liabilities - related party
    1,513,978       1,018,945  
Accrued expenses
    72,500       72,500  
Deferred revenue
    899       899  
Fair value of derivative liabilities
    787,000       346,000  
Convertible debenture, net of discount
    -       1,500,000  
                 
Total current liabilities
    2,661,960       3,089,917  
                 
Convertible debenture, net of discount
    1,500,000       -  
  Total liabilities     4,161,960       3,089,917  
                 
Stockholders' deficit
               
Common stock, $0.001 par value,
               
400,000,000 shares authorized,
               
Issued and outstanding 182,988,347 and 124,113,887, respectively
    182,988       124,114  
Additional paid-in capital
    12,255,288       8,324,417  
Deficit accumulated during the development stage
    (16,372,805 )     (11,467,027 )
                 
Total stockholders' deficit
    (3,934,529 )     (3,018,496 )
                 
Total liabilities and stockholders' deficit
  $ 227,431     $ 71,421  
                 
                 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
 
 
37
 
Quantum Materials Corp.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ending June 30, 2013 and June 30, 2012
For the period from May 19,2008 (inception) to June 30, 2013

               
Inception
 
   
Year Ended
         
through
 
   
June 30
         
June 30
 
   
2013
   
2012
   
2013
 
                   
Operating expenses:
                 
General and administrative
  $ 4,122,016     $ 1,898,839     $ 12,712,016  
Research and development
    91,803       16,649       875,345  
                         
Total operating expenses
    4,213,819       1,915,488       13,587,361  
                         
Loss from operations
    (4,213,819 )     (1,915,488 )     (13,587,361 )
                         
Other expenses (income):
                       
Amortization of convertible debenture discount
    -       586,730       1,468,837  
Amortization of deferred finance cost
    -       36,167       315,000  
Change in fair value of derivative liabilities
    441,000       (877,000 )     291,088  
Gain on accounts payable writedowns
    -       (652,505 )     (652,505 )
Interest expense
    151,707       161,544       765,785  
Warrant expense
    99,252       195,266       597,239  
                         
Total other expenses (income)
    691,959       (549,798 )     2,785,444  
                         
Net loss
  $ (4,905,778 )   $ (1,365,690 )   $ (16,372,805 )
                         
Basic and diluted loss per common share
  $ (0.03 )   $ (0.01 )        
                         
Weighted average number of common
                 
shares outstanding
    145,520,782       115,627,670          


The accompanying notes are an integral part of these consolidated financial statements.
 
38
 
 
Quantum Materials Corp.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
For the period from May 19,2008 (inception) to June 30, 2013

                     
Deficit
       
                     
accumulated
       
               
Additional
   
during the
   
Total
 
   
Common Stock
   
paid in
   
development
   
Stockholders
 
   
Shares
   
Amount
   
capital
   
stage
   
Equity
 
                               
Inception, May 19, 2008
    -     $ -     $ -     $ -     $ -  
Issuance of common stock
    37,000,000       37,000       (33,300 )     -       3,700  
Net loss to June 30, 2008
                            (3,700 )     (3,700 )
                                         
Balance June 30, 2008
    37,000,000       37,000       (33,300 )     (3,700 )     -  
                                         
Common stock sold at $0.01 per share
    4,250,000       4,250       38,250       -       42,500  
Issuance of common stock in connection
                                       
     with recapitalization
    24,600,000       24,600       (26,802 )     -       (2,202 )
Common stock issued with debenture
    3,525,000       3,525       574,388       -       577,913  
Beneficial conversion feature of shares
                                       
    issued with debenture
    -       -       577,913       -       577,913  
Common stock issued for debenture interest payable
    506,493       506       38,494       -       39,000  
Warrant issued with standstill agreement
                    34,148       -       34,148  
Net loss year ended June 30, 2009
                            (2,020,485 )     (2,020,485 )
                                         
Balance June 30, 2009
    69,881,493       69,881       1,203,091       (2,024,185 )     (751,213 )
                                         
Cummulative effect of derivative valuation
    -       -       (212,184 )     162,643       (49,541 )
Common stock issued for debenture interest payable
    1,511,937       1,512       194,329       -       195,841  
Stock based compensation
    2,250,000       2,250       1,229,567       -       1,231,817  
Common stock issued for services
    7,100,000       7,100       796,900       -       804,000  
Warrant issued with standstill agreement
    -       -       179,913       -       179,913  
Common stock sold at $0.08 per share
    3,125,000       3,125       246,875       -       250,000  
Net loss year ended June 30, 2010
    -       -       -       (4,423,767 )     (4,423,767 )
                                         
Balance June 30, 2010
    83,868,430     $ 83,868     $ 3,638,491     $ (6,285,309 )   $ (2,562,950 )
                                         
Stock based compensation
    8,499,034       8,499       21,501       -       30,000  
Common stock issued for cash
    3,141,277       3,141       294,359       -       297,500  
Stock warrants issued with common stock
    -       -       122,808       -       122,808  
Common stock issued for services
    11,525,000       11,525       1,202,475       -       1,214,000  
Common stock issued for debenture interest payable
    1,629,239       1,630       206,063       -       207,693  
Common stock issued for settlement of liabilities
    1,988,466       1,989       283,156       -       285,145  
Stock warrants issued for forgiveness of accrued wages
    -       -       876,952       -       876,952  
Net loss to June 30, 2011
    -       -       -       (3,816,028 )     (3,816,028 )
                                         
Balance June 30 2011
    110,651,446     $ 110,652     $ 6,645,805       (10,101,337 )     (3,344,880 )
                                         
Stock based compensation
    -       -       -       -       -  
Common stock issued for cash
    4,895,833       4,896       440,104       -       445,000  
Stock warrants issued with common stock
    -       -       4,866       -       4,866  
Common stock issued for services
    7,250,000       7,250       862,750       -       870,000  
Stock options issued for services
    -       -       20,264       -       20,264  
Stock options issued for extension of debenture terms
    -       -       190,400       -       190,400  
Common stock issued for debenture interest payable
    1,316,608       1,316       160,228       -       161,544  
Net loss to June 30, 2012
    -       -       -       (1,365,690 )     (1,365,690 )
                                         
Balance June 30 2012
    124,113,887     $ 124,114     $ 8,324,417       (11,467,027 )     (3,018,496 )
                                         
Common stock issued for cash
    22,388,375       22,388       609,849               632,237  
Stock warrants attached to common, proceeds allocated
              65,361               65,361  
Common stock issued for debenture interest payable
    2,176,247       2,176       149,531               151,707  
Common stock issued in exchange for accrued salaries
    14,540,589       14,541       523,999               538,540  
Common stock issued in exchange for accounts payable
    137,400       137       7,673               7,810  
Fair market value of shares issued in excess of liabilities
              263,687               263,687  
Common stock issued for employment agreement
    15,000,000       15,000       1,035,000               1,050,000  
Common stock issued for services
    4,631,849       4,632       264,656               269,288  
                                      -  
Stock options issued for services
                    471,023               471,023  
Stock options issued with employment contracts
              440,840               440,840  
Stock options issued for extension of debenture terms
              99,252               99,252  
                                         
Net loss to June 30, 2013
                            (4,905,778 )     (4,905,778 )
                                         
Balance June 30, 2013
    182,988,347     $ 182,988     $ 12,255,288       (16,372,805 )     (3,934,529 )

The accompanying notes are an integral part of these consolidated financial statements.

 
39
 
 
Quantum Materials Corp.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period from May 19,2008 (inception) to June 30, 2013
and period from May 19, 2008 (inception) through June 30, 2012

   
Year
   
Year
   
Inception
 
   
ended
   
ended
   
through
 
   
June 30
   
June 30
   
June 30
 
   
2013
   
2012
   
2013
 
                   
CASH FLOWS FROM OPERATING ACTIVITIES
     
                   
Net loss
  $ (4,905,778 )   $ (1,365,690 )   $ (16,372,805 )
 Adjustments to reconcile net loss to net cash -
 
       
used in operating activities:
    -                  
  Stock issued for services
    1,582,975       870,000       6,966,347  
  Options issued for services
    911,863       -       911,863  
  Stock issued for debenture interest
    151,707       161,544       755,785  
  Warrant expense
    99,252       215,530       617,503  
  Depreciation and amortization
    1,160       2,661       15,539  
  Amortization of convertible debenture discount
    -       586,729       1,468,837  
  Amortization of deferred finance cost
    -       36,167       315,000  
  Change in fair value of embedded derivative
    441,000       (877,000 )     291,088  
Net change in:
    -                  
Deferred revenue
    -       -       899  
Accounts payable and accrued liabilities
    143,820       (632,696 )     601,924  
Accrued liabilities - related party
    1,033,573       572,918       1,757,093  
                         
Cash flows used by operating activities
    (540,428 )     (429,837 )     (2,670,927 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES
       
Purchase of license
    -       -       (55,000 )
Proceeds from disposal of furniture and equipment
    -       5,343  
Purchase of furniture & equipment
    -       -       (20,883 )
                         
Cash flows provided by investing activities
    -       -       (70,540 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
       
Proceeds from issuance of common stock
    697,598       445,000       1,728,898  
Proceeds from related party advances
    -       -       -  
Proceeds from convertible debenture issued
    -       -       1,500,000  
Payment of deferred finance cost
    -       -       (315,000 )
                         
Cash flows provided by financing activities
    697,598       445,000       2,913,898  
                         
NET INCREASE (DECREASE) IN CASH
    157,170       15,163       172,431  
                         
Cash, beginning of the period
    15,261       98       -  
                         
Cash, end of the period
  $ 172,431     $ 15,261     $ 172,431  
                         
Supplemental disclosure with respect to cash flows:
 
Cash paid for income taxes
  $ -     $ -     $ -  
Cash paid for interest
  $ -     $ -     $ -  
Non cash transactions
                       
Issuance of common stock in connection
 
    with recapitalization
  $ -     $ -     $ 2,202  
Cumulative effect of change in accounting
 
  principle on convertible notes
  $ -     $ -     $ (49,541 )
Accounts payable write down
  $ -     $ 652,505     $ -  
Stock issued in exchange for:
                       
   Accrued salaries
  $ 538,540     $ -     $ 538,540  
   Accounts payable
  $ 7,810     $ -     $ 7,810  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
40
 

Notes to Consolidated Financial Statements for year ended June 30, 2013


Note 1. Basis of Presentation

The consolidated balance sheets and the consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years ended June 30, 2013 and 2012 and the period from May 19, 2008 (inception) through June 30, 2013 of Quantum Materials Corp ("Quantum Materials" or the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC").

Since November 4, 2008, the Company has changed its business plans and is no longer intending to pursue the mining of mineral rights located in Nevada. The Company intends to pursue the business plans of its subsidiary, Solterra Renewable Technologies, Inc. (“Solterra”).  The following is a brief business overview of Solterra.

Solterra   is a start-up solar technology and quantum dot manufacturing firm which was founded by Stephen Squires. Mr. Squires perceives an opportunity to acquire a significant amount of both quantum dot and solar photovoltaic market share by commercializing a low cost quantum dot processing technology and a low cost quantum dot based third generation photovoltaic technology/solar cell, pursuant to an exclusive license agreement with William Marsh Rice University (“Rice University” or “Rice”).  Our objective is to become the first bulk manufacture of high quality tetrapod quantum dots and the first solar cell manufacturer to be able to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in North America, Europe, the Middle East and Asia.

Note 2. Nature and Continuance of Operations

In November 2008, the Company acquired Solterra, through an Agreement and Plan of Merger and Reorganization (the “Merger”) by and among Solterra, the Shareholders of Solterra and Quantum Materials Corp and Gregory Chapman as “Indemnitor” which resulted in Solterra becoming a wholly-owned subsidiary of Quantum Materials Corp. Pursuant to the Merger, Mr. Chapman cancelled 40,000,000 shares of Common Stock of Quantum Materials Corp owned by him and issued a general release in favor of Quantum Materials Corp terminating its obligations to repay Mr. Chapman approximately $34,000 in principal owed to him. In accordance with the Merger, Quantum Materials Corp issued 41,250,000 shares of its Common Stock to the former stockholders of Solterra. Certain existing stockholders of Quantum Materials Corp in consideration of Solterra and its shareholders completing the transaction, issued to Quantum Materials Corp a Promissory Note in the amount of $3,500,000 due and payable on or before January 15, 2009, through the payment of cash or, with the consent of Quantum Materials Corp, the cancellation of up to 12,000,000 issued and outstanding shares of Quantum Materials Corp owned by them.  The Company has recorded the note receivable in equity as a subscription receivable which is offset by additional paid in capital, thus this entry has a zero net effect in the financial statements. As of November 6, 2009, the $3,500,000 Promissory Note has not been collected and the Company has made demand for payment or the cancellation of 12,000,000 shares per agreement. The Company is considering all legal options to pursue collection of the funds or cancellation of the shares. However, management believes that it is unlikely to collect monies under this Note.

Quantum Materials Corp. ceased the mining business that we had previously conducted, we closed our offices in Canada, and we moved our offices to the offices of Solterra in Arizona.
 
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.  Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying value and classification of assets and liabilities should the Company be unable to continue as a going concern.  At June 30, 2013, the Company had not yet achieved profitable operations, has accumulated losses of $16,372,805 since its inception, has a working capital deficit of $1,861,529, and expects to incur further losses in the development of its business, all of which raise substantial doubt about the Company’s ability to continue as a going concern.  The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company requires immediate and substantial additional financing estimated at $3,000,000 during fiscal 2014 to maintain and expand its development stage operations. The Company is exploring all financing options at this time, including, without limitation, the sale of equity, debt borrowing and/or the receipt of product licensing fees and royalties. We can provide no assurances that such financing will be obtained on terms satisfactory to the Company, if at all. Further, we can provide no assurances that one or more mutually acceptable licensing agreement(s) will be entered into on terms satisfactory to us, if at all.

 Note 3. Summary of Significant Accounting Policies

Cash and cash equivalents
Cash and cash equivalents include cash and all highly liquid financial instruments with original purchased maturities of three months or less. At various times during the year, the Company maintained cash balances in excess of FDIC insurable limits. Management feels this risk is mitigated due to the longstanding reputation of these banks.
 
 
41
 
 
Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents, accounts payable and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.

Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates

Deferred Finance Costs
Deferred finance costs which arose from the Company’s convertible debenture financing are amortized using the effective interest method over the three year term of the debentures.
 
Equipment
Office furniture and office equipment are stated at cost less accumulated depreciation.  Major renewals and improvements are capitalized: minor replacements, maintenance and repairs are charged to current operations.  Depreciation is computed by applying the straight-line method over the estimated useful lives which are generally three to seven years.

 
 Method
Period
     
Office furniture
Straight line
7 years
Office equipment
Straight line
3 years

Long-lived assets
We review our long-lived assets, which include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as “the asset”) may not be recoverable.  Such circumstances include, but are not limited to:

 
·   a significant decrease in the market price of the asset:
 
·   a significant change in the extent or manner in which the asset is being used:
 
·   a significant change in the business climate that could affect the value of the asset:
 
·   a current period loss combined with projection of continuing loss associated with use of the asset: and
 
·   a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life.

Beneficial conversion
Debt instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible debt instruments. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the debt instrument limited to the value received. The beneficial conversion amount is recorded as a deemed dividend or interest expense and an increase to additional paid-in-capital.  The beneficial conversion has been fully accreted to the face value of the original loan and interest expense has been recognized.

Derivative financial instruments
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value at the balance sheet date. These instruments are presented under ‘Fair value of derivative liabilities’ in current liabilities when they are expected to mature within 12 months of the balance sheet date or conversion option is available to holder. The method of recognizing the resulting gain or loss is a charge or credit to other operating expense ‘Change in fair value of derivative liabilities’.  Derivatives are calculated using the Black-Sholes method.
 
Research and development costs
Research and development costs are expensed as they are incurred.  Research and development expense was $91,803, $16,649 and $875,345 for the years ended June 30, 2013 and 2012 and from May 19, 2008 (inception) to June 30, 2013, respectively.

Stock compensation awards
The Company follows ASC 718 when accounting for stock compensation awards to employees. Compensation cost is based on the stock’s fair value at grant date by the board of directors.  Compensation costs, which includes shares issued in exchange for services and options and warrants issued to employees and consultants, are valued at fair market value and charged to operations.  Options and warrants issued to debt holders are valued at fair market value and charged to other expense, as a financing cost.  Total expenses recognized for all options and warrants, at a fair value calculated using the Black-Scholes method, was $2,745,797 in the year ended June 30, 2013 and $1,247,074 in the year ended June 30, 2012.  Option and warrant expense is recognized over the vesting period.

Basic and diluted loss per share
The Company reports basic loss per share in accordance with the ASC 260, “Earnings Per Share”. Basic loss per share is computed using the weighted average number of shares outstanding during the period.  Diluted loss per share has not been provided as it would anti-dilutive.  Dilution is computed by applying the treasury stock method.  There were approximately 26,165,725 common stock equivalents as of June 30, 2013, resulting from options and warrant issuances.


 
42
 
 
Recently Adopted Accounting Standards

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company's consolidated financial position, consolidated results of operations or consolidated cash flow.

Note 4. Furniture and equipment

Components of furniture and equipment consist of the following items as of June 30, 2013 and 2012:
 
    2013     2012  
             
Office equipment
  $ 11,448     $ 11,448  
Office furniture
    1,624       1,624  
      13,072       13,072  
Accumulated amortization
    13,072       11,912  
    $ -     $ 1,160  
                 

Note 5.   Related party transactions

The Company expensed management fees to the CEO / major shareholder as well as other related party executives of $538,540 and $843,405 in the years ended June 30, 2013 and 2012, respectively.  The Company was not able to pay the majority of these fees with cash; however, in November 2010, May 2011 and January 2013 the Company’s executive officers and directors converted accrued salaries of $726,500 and bonuses of $181,625 totaling $908,125 into warrants to purchase 9,374,999 shares, exercisable at $0.075 per share over a period of five years expiring November 4, 2015, warrants to purchase 1,863,635 shares, exercisable at $0.11 per share over a period of five years expiring May 18, 2016, and warrants to purchase 5,415,725 shares, exercisable at $0.05 per share over a period of five years expiring Jan 22, 2018 and 14,540,588 shares of common stock.  The excess of the fair market value of the shares issued in exchange for the accrued salaries was $263,687 for the year ending June 30, 2013, which has been charged to compensation expense.  Additionally, the fair market value of the warrants to purchase shares have been charged to compensation expense in the period issued.

As a result the accrued liabilities related party was $1,513,978 and $1,108,945 as of June 30, 2013 and 2012, respectively.

During the twelve months ended June 30, 2013 the Company recorded $11,520 of rent expense for the use of executive office space in the home of the CEO / major shareholder, all of which was included in the accrued liabilities for related parties.

In January 2011 the Company issued 10,000,000 restricted shares to Stephen Squires the CEO in recognition of his support of the Company and in cancellation of all outstanding cash loans and payments made on behalf of the Company totaling $270,145.


Note 6.   Convertible debentures

Balance of convertible debentures consist of the following as of June 30, 2013 and 2012:

   
2013
   
2012
 
             
Convertible debenture
  $ 1,500,000     $ 1,500,000  
Debenture discount amortized
    -       -  
Debenture warrant value amortized
    -       -  
                 
    $ 1,500,000     $ 1,500,000  
                 
 
On November 4, 2008, Quantum Materials Corp entered into a Securities Purchase Agreement, Debenture, Security Agreement, Subsidiary Guarantee Agreement, Registration Rights Agreement, Escrow Agreement, Stock Pledge Agreement and other related transactional documents (the “Transaction Documents”) to obtain $1,500,000 in gross proceeds from three non-affiliated parties (collectively hereinafter referred to as the “Lenders”) in exchange for 3,525,000 restricted shares of Common Stock of Quantum Materials Corp (the “Restricted Shares”) and Debentures in the principal amount aggregating $1,500,000. Each Debenture originally had a term of three years maturing on November 4, 2011 bearing interest at the rate of 8% per annum and is prepayable by Quantum Materials Corp at any time without penalty, subject to the Debenture holders’ conversion rights.  Beginning in 2011, the Company has obtained a series of annual one year extensions of the original maturity date of the Debentures, and is currently extended through November 4, 2014. In partial consideration of such a loan extension, the Company agreed to issue to the Debenture holders warrants to purchase an aggregate of 2,000,000 shares, for each extension, of Common Stock exercisable at $.10 per share. These Warrants contain cashless exercise provisions in the event that there is no current registration statement filed. The maturity date was extended to November 4, 2014 in June 2013 and the conversion price per share was lowered as described below.
  
  
 
43
 
 
In recognition of the 3,525,000 shares issued at origination, the Company recorded a discount of $1,155,826.  The discount is made up of two components: $577,913 related to the discount for the relative fair value of the shares issued; and $577,913 related to a beneficial conversion feature. The discount was amortized over the 3 year life of the debenture, using the interest rate method, and recorded as interest expense.   Each Debenture is convertible at the option of each Lender into Quantum Materials Corp’s Common Stock (the “Debenture Shares”, which together with the Restricted Shares shall collectively be referred to as the “Securities”) at a conversion price of $.2667 per share (the “Conversion Price”).   In October 2010, the conversion price was decreased to $0.12 per share and in June 2013, the conversion price was lowered to $.06 per share.

The Registration Rights Agreement requires Quantum Materials Corp to register the resale of the Securities within certain time limits and to be subject to certain penalties in the event Quantum Materials Corp fails to timely file the Registration Statement, fails to obtain an effective Registration Statement or, once effective, to maintain an effective Registration Statement until the Securities are saleable pursuant to Rule 144 without volume restriction or other limitations on sale.  The Debentures are secured by the assets of Quantum Materials Corp and are guaranteed by Solterra as Quantum Materials Corp’s subsidiary. To date, no registration statement has been filed by the Company or demanded by the Debenture Holders

In the event the Debentures are converted in their entirety, Quantum Materials Corp would be required to issue an aggregate of 25,000,000 shares of Quantum Materials Corp’s Common Stock, subject to anti-dilution protection for stock splits, stock dividends, combinations, reclassifications and sale of Quantum Materials Corp’s Common Stock a price below the Conversion Price.  Certain changes of control or fundamental transactions such as a merger or consolidation with another company could cause an event of default under the Transaction Documents.  As of the filing date of this Form 10-K, the Company believes it is in compliance with terms of the Transaction Documents and Debenture Holders have taken no action under the Transaction Documents to accelerate the payment date under the Debentures or any other rights or remedies that they may have thereunder

In connection with the Standstill Agreement, the Company recorded $34,148 as additional debt discount for the modification of terms, which will be amortized over the life of the debt. The Company determined the conversion feature issued to the Noteholders to convert their interest into the common stock of Solterra was a derivative liability. The Company determined the value of the derivative liability was nominal due to the low probability of the Company or Solterra raising $2.0 million during the Standstill Agreement.

The deferred financing costs related to the issuance of the debenture are recorded as deferred charges and are being amortized over 36 months using the effective interest method.  Amortization expense was $0 and $36,167 respectively for the years ended June 30, 2013 and June 30, 2012.  Interest, attributable to the deferred financing costs have been fully accreted and charged to expense.

The Transaction Documents include a Stock Pledge Agreement pursuant to which Stephen Squires, the Company's Chief Executive Officer, has pledged 20,000,000 shares of our Common Stock to the Debenture holders (the “Holders”) until such time as the Debentures are paid in their entirety.  

Note 7. Derivatives and Fair Value

The Company has evaluated the application of ASC 815 to the Convertible Note issued November 4, 2008.  Based on the guidance in ASC 815, the Company concluded these instruments were required to be accounted for as derivatives as of July 1, 2009 due to the down round protection feature on the conversion price and the exercise price.  The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected in the statements of operations as “Gain (loss) on derivative liabilities.”  These derivative instruments are not designated as hedging instruments under ASC 815 and are disclosed on the balance sheet under Derivative Liabilities.
 
ASC 825-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 825-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 describes three levels of inputs that may be used to measure fair value:  Level 1   – Quoted prices in active markets for identical assets or liabilities;   Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and   Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company’s Level 3 liabilities consist of the derivative liabilities associated with the November 4, 2008 note.  At June 30, 2012, all of the Company’s derivative liabilities were categorized as Level 3 fair value assets. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
 
 
44
 
 
  Level 3 Valuation Techniques
 
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.  Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation.  At the date of the original transaction, we valued the convertible note that contains down round provisions using a lattice model, with the assistance of a valuation consultant, for which management understands the methodologies. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of July 1, 2009.  Using assumptions, consistant with the original valuation, the Company has subsequently used the Black-Scholes model for calculating the fair value, as of June 30, 2013 and 2012.   The fair value of the derivatives as of July 1, 2009 upon implementation of ASC 815-40-15 was estimated by management to be $495,912.  As part of implementing ASC 815-40-14 the Company decreased the accumulated deficit by $162,643 and decreased additional paid in capital by $212,184 and increased the discount on the convertible debenture by $446,371.  The adjustment to the accumulated deficit was a result of the interest expense recorded in connection with the original derivative liability and the reversal of prior amortization expense, and the change in fair value of the derivative liability as of July 1, 2009.  
 
   
As of June 30, 2013
 
   
Fair Value Measuring Using
 
   
Carrying
                   
   
Value
   
Level 1
   
Level 2
   
Total
 
Derivative Liabilities
 
$
787,000
     
-
     
-
   
$
787,000
 
Total Derivative Liabilities
 
$
787,000
     
-
     
-
   
$
787,000
 
 
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the twelve months of fiscal year 2013:
 
         
 
Fair Value
     
 
Measurements
     
 
Using Level 3
     
 
Inputs
     
 
Derivative
     
 
Liabilities
 
Totals
 
Beginning Balance as of July 1, 2012
  $ 346,000     $ 346,000  
Total (Gains) or Losses (realized/unrealized) Included in Net Loss
    441,000       441,000  
Purchases, issuances and Settlements
    -       -  
Transfers in and/or out of Level 3
    -       -  
Ending Balance at June 30, 2013
  $ 787,000     $ 787,000  
                 

The following assumptions were used in the calculation of the derivative liability:

   
June 30,
2013
   
June 30,
2012
 
Weighted Average:
           
    Stock Price
 
$
0.058
   
$
0.07
 
    Strike Price
 
$
0.06
   
$
0.12
 
    Dividend rate
   
0.00
%
   
0.00
%
    Risk-free interest rate
   
1.04
%
   
1.08
%
    Expected lives (years)
   
1.25
     
1.17
 
    Expected price volatility
   
134.3
%
   
131.4
%
    Forfeiture Rate
   
0.00
%
   
0.00
%

Note 8. Equity Transactions:

Common stock

On January 20, 2010 the stockholders of the Company by majority of written consent approved the filing of an amendment to the Company's Article of Incorporation to change the name of the corporation from Hague Corp. to Quantum Materials Corp. and to increase the authorized common stock to 200,000,000 shares, $.001 par value.  The stockholders also ratified the Company's compensation plan covering 10,000,000 options to purchase shares of common stock.  This plan provides for the direct issuance of common stock or the grant of options thereunder.  The Amendment to the Company's Article of Incorporation was filed March 23, 2010 with the secretary of the state of Nevada. In March 2013, the stockholders approved an amendment to its Articles of Incorporation to increase the authorized common shares to 400,000,000 shares. The Amendment to the Company's Article of Incorporation was filed April 4, 2013 with the secretary of the state of Nevada. In January 2013, the Company’s Board approved the 2013 Employee Benefit and Consulting Services Compensation Plan covering 20,000,000 shares, which automatically increased to 60,000,000 shares on March 29, 2013.
 
 
 
45
 
 
During the year ended June 30, 2012 the Company issued 4,895,833 common shares for total cash proceeds of $445,000.  The selling price per share ranged from $0.08 to $0.12 per share or an average price of $0.091 per share.

During the year ended June 30, 2012 the Company issued 7,250,000 shares of common stock in exchange for services, valued at the fair market value of the stock at the date of grant, valued at $870,000.

In September 2011, January 2012, March 2012 and June 2012 the Company issued 1,316,608 of restricted common shares to pay accrued interest on the convertible debentures of $161,544, which included provisional interest in the amount of $40,877, for the 12 months from June 1, 2011 to June 1, 2012.

During the year ended June 30, 2013 the Company issued 22,388,375 common shares for total cash proceeds of $697,598.  The selling price per share ranged from $0.03 to $0.12 per share or an average price of $0.0336 per share.  The April 2013 stock offering included warrants to purchase an additional 1,659,000 shares of common stock at $.12 per share.  The Company allocated $65,361 of the total proceeds of $199,080 from that offering to additional paid in capital.

In September 2012, January 2013, March 2013 and June 2013 the Company issued 2,176,247 of restricted common shares to pay accrued interest on the convertible debentures of $151,707, which included provisional interest in the amount of $30,374, for the 12 months from June 1, 2012 to June 1, 2013.

During the year ended June 30, 2013 the Company issued 14,540,589 shares of common stock in exchange for accrued salaries in the amount of $538,540, for services previously performed.  The Company issued shares at a bonus rate, whereby the fair market value of the share, at the date of grant, was $799,732.  The variance of the fair market value over the accrued salaries, in the amount of $261,192 was charged to compensation expense.   Additionally, 137,400 shares were issued in satisfaction of outstanding accounts payable of $7,810.  The fair market value of these shares was $10,305 at the date of grant, resulting in compensation of $2,495 charged to compensation expense.

In the quarter ended June 30, 2013, the Company issued 15,000,000 shares and 15,000,000 stock options to executives related to their employment agreements under the 2013 stock option plan.  The fair value of the stock was $1,050,000 and has been recognized as compensation expense in the year ended June 30, 2013.

During the year ended June 30, 2013 the Company issued 4,631,849 shares of common stock to employees and consultants.  The fair market value of the shares, at the date of grant, was $269,288, which has been recognized as compensation expense for the year ended June 30, 2013.

 Warrants

As of November 4, 2010, the Company's executive officers, directors and employees converted accrued salaries of $630,500 and bonuses of $157,625 totaling $788,125 into warrants to purchase 10,508,331 shares, exercisable at $0.075 per share over a period of five years.  On the date of board approval of this event the Company’s stock had a closing price of $0.075 cents per share.  The Company has attributed $625,852 to the warrant value using the Black Scholes price model.  

As of May 18, 2011, the Company's executive officers, directors and employees converted accrued salaries of $256,000 and bonuses of $64,000 totaling $320,000 into warrants to purchase 2,909,089 shares, exercisable at $0.11 per share over a period of five years.  On the date of board approval of this event the Company’s stock had a closing price of $0.11 cents per share.  The Company has attributed $252,100 to the warrant value using the Black Scholes price model.  

In December 2011, the Company issued 2,000,000 warrants, for the extension of the debenture maturity date.  The warrants are exercisable at $.08 per share, expiring December 18, 2014.   The Company valued these options using the Black Sholes Model, recognizing warrant expense in the amount of $190,400 for the year ended June 30, 2012 and $0 for the year ended June 30, 2013.

The Company issued 2,000,000 common stock warrants on October 31, 2009 in connection with a loan extension.  The warrants expire on October 31, 2014.The Company has attributed $179,913 to the warrant value using the Black Scholes price model, expensed prior to June 30, 2012.  The aforementioned warrants were not exercised as of June 30, 2013.

During the year ended June 30, 2011 the Company issued 1,777,110 warrants to purchase the Company’s common stock.  These warrants were issued in capital raise transactions through the sale of the company’s common stock.  The warrants are exercisable in a range from $0.08 to $0.25 per share over a period with a range of 24 months to 36 months.  The Company has attributed $122,808 to the warrant value using the Black Scholes price model and has recognized the expense prior to June 30, 2012.   The aforementioned warrants were not exercised as of June 30, 2013.

 
46
 

In October 2012, the Company issued 2,000,000 warrants to the debenture holders.  The warrants are exercisable at $.08 per share, expiring October 12, 2015.  In June 2013 and additional 2,000,000 warrants were issued to the debenture holders for additional time extension, through November 4, 2014.  These warrants are also exercisable at $.08 per share, exercisable through January 28, 2018.  The Company valued these options using the Black Sholes Model, recognizing warrant expense in the amount of $99,252 and $190,400 for the year ended June 30, 2013 and 2012, respectively.
 
Stock Options

In the quarter ended March 31, 2012 the Company issued stock options to employees for the purchase of 3,500,000 shares of common stock.  The options are exercisable at a price per share of $0.03, for a five (5) year term.  The Company will ratably recognize $392,500 of expense over the period.  The Company recognized $373,144 and $19,356 of compensation expense (included in general and administrative expense) for the years ended June 30, 2013 and 2012, respectively.

In the quarter ended June 30, 2012, the Company issued stock options to employees for the purchase of 250,000 shares of common stock.  The options are exercisable at a price per share of $0.04, for a five (5) year term.  The Company will ratably recognize $10,925 of expense over the period.  The Company recognized $10,386 and $539 of compensation expense (included in general and administrative expense) for the year ended June 30, 2013 and 2012, respectively.

In the quarter ended March 31, 2013 the Company issued under the Company’s 2013 stock option plan 5,415,725 stock options to employees in exchange for salaries accrued.  The options are exercisable at a price per share of $0.05, for a five (5) year term.  The Company calculated the fair value of the options to be $440,840 using the Black Scholes price model, which has been recognized as compensation expense in the year ending June 30, 2013.

In the quarter ended June 30, 2013, the Company issued 15,000,000 shares and 15,000,000 stock options to executives related to their employment agreements under the 2013 stock option plan.  The options are exercisable at a price per share of $0.05 through March 29, 2023.  The Company calculated the fair value of the options to be $1,036,500 using the Black Scholes price model.  Of this amount, $52,790 has been recognized as compensation expense in the year ended June 30, 2013.

In the quarter ended March 31, 2013 the Company issued 2,000,000 stock options to two service providers in exchange for services.  The options are exercisable at a price per share of $0.05, for a ten (10) year term.  The Company calculated the fair value of the options to be $136,200 using the Black Scholes price model.  Of this amount, $34,703 has been recognized as compensation expense.


The following assumptions were used in the calculation of warrant and option expense:

   
June 30,
2013
   
June 30,
2012
 
Weighted Average:
           
    Stock Price
  $ 0.078     $ 0.12  
    Strike Price
  $ 0.024     $ 0.048  
    Dividend rate
    0.00 %     0.00 %
    Risk-free interest rate
    1.80 %     1.08 %
    Expected lives (years)
    4.695       3.375  
    Expected price volatility
    132.85 %     130.00 %
    Forfeiture Rate
    0.00 %     0.00 %



 
47
 

The following table summarizes warrants that are issued, outstanding and exercisable.

       
Warrants Issued & Outstanding
       
Exercise
 
Expiration
 
June 30
 
June 30
   
June 30
 
Price
 
Date
  2013   2012     2011  
$ 0.25  
 Dec 1, 2010
              -  
$ 0.10  
 Oct 31, 2014
              2,000,000  
$ 0.08  
 Sep 23, 2015
              625,000  
$ 0.075  
 Nov 4, 2015
              10,508,331  
$ 0.15  
 Apr 5, 2013
              100,000  
$ 0.15  
 Apr 26, 2013
              100,000  
$ 0.13  
 Apr 28, 2013
              250,000  
$ 0.08  
 May 10, 2014
              312,500  
$ 0.11  
 May 18, 2016
              2,909,089  
$ 0.16  
 May 24, 2013
              227,273  
$ 0.20  
 Jun 7, 2013
              90,909  
$ 0.25  
 Jun 10, 2013
              71,428  
$ 0.08  
 Dec 18, 2014
        2,000,000          
$ 0.03  
 March 31, 2017
        3,500,000          
$ 0.04  
 June 1, 2017
        250,000          
$ 0.08  
 Oct 12, 2015
 
          2,000,000
               
                           
         
          2,000,000
    5,750,000       17,194,530  


In October 2009 the Board of Directors authorized the approval of a stock option plan covering 7,500,000 shares of common stock, which was later increased to 10,000,000 shares on December 2, 2009 and approved by stockholders on January 25, 2010.  The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options.  The Company issued 9,200,000 options and valued the options at $955,242 using the Black Scholes pricing model.  The Company recorded the entire $944,317 value of 2010 options as stock based compensation for the year ended June 30, 2010.


 
48
 

Option activity was as follows for the twelve months ended June 30, 2013 and the twelve months ended June 30, 2012.
 
 
2013
 
2012
 
  Weighted-Average
Weighted-Average
 
Shares
 
Exercise Price
 
Shares
 
Exercise Price
 
                     
Shares reserved
    10,000,000
       
     10,000,000
       
Outstanding at beginning of year
      9,200,000
 
$
            0.0628
 
        8,950,000
 
$
           0.0638
 
Granted
                     -
       
           250,000
   
           0.0400
 
Exercised
                     -
       
                      -
       
Forfeited/cancelled
                     -
       
                      -
       
                     
Outstanding at end of period
      9,200,000
 
$
0.0628
 
        9,200,000
 
$
0.0628
 
                     
Remaining options available to be issued
          800,000
       
           800,000
       
                     

In January 2013 the Board of Directors authorized the approval of a stock option plan covering 20,000,000 shares of common stock, which was later increased to 60,000,000 shares on March 29, 2013 and approved by stockholders on March 18, 2013.  The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options.

Note 9.   Commitments and Contingencies

Contingency

Certain default clauses related to the various agreements discussed in Note 6 would result in a change of control of the board of directors.  Certain debt holders would have the option to appoint independent members to the board under such default.

From time to time the Company may become a party to litigation matters involving claims against the Company.  Management believes that there are no current matters that would have a material effect on the Company’s financial position or results of operations.
 
License Agreement - Work-Study Arrangements
 
License Agreement with Rice University

On August 20, 2008, Solterra entered into a License Agreement with Rice University.  In August 2013, Solterra entered into an amended License Agreement and Quantum Materials entered into a new License Agreement with Rice. Rice is the owner of certain inventions and patent applications, know-how and rights pertaining to the synthesis of uniform nanoparticle shapes with high selectivity.  We have obtained the exclusive rights to license and sublicense (subject to Rice’s consent, which shall not be unreasonably withheld), develop, manufacture, market and exploit Rice’s inventions, patent applications and any issued patents in the case of Solterra, for the manufacture and sale of photovoltaic cells and photovoltaic applications and in the case of Quantum Materials for the manufacture and sale of quantum dots for electronic and medical applications (excluding photovoltaic applications). With respect to Rice’s patent applications, Rice made a provisional filing for an invention disclosure titled “synthesis of uniform nanoparticle shapes with high selectivity” with the United States Patent and Trademark Office on April 13, 2007 and a subsequent utility filing on April 11, 2008 under the Patent Cooperation Treaty (“PCT”). PCT enables the U.S. applicant to file one application, "an international application," in a standardized format in English in the U.S. Receiving Office (the U.S. Patent and Trademark Office), and have that application acknowledged as a regular national or regional filing in any State or region that is party to the PCT. Dr. Michael Wong is a director of our company and is the inventor of Rice’s patent application licensed by Solterra.

Our initial agreement with Rice requires the payment of certain patent fees to Rice and for us to acquire additional funding and to meet certain milestones by specific dates.  Rice and the Company recently established new milestones for the Company to achieve in the months and years ahead, the failure of which could lead to the termination of the license agreement.
 
 
 
49
 
 
Rice is entitled to receive during the term of each License Agreement certain royalties under the License Agreement of adjusted gross sales (as defined) ranging from 2% to 4% for photovoltaic cells and 7.5% of adjusted gross sales for quantum dots sold in electronic and medical applications. Minimum royalties payable under the License Agreement include $29,450 due January 1, 2015, $217,000 due January 1, 2016, $648,750 due January 1, 2017, $2,038,500 due January 1, 2018 and $3,738,600 due January 1, 2019 and each January 1 of every year thereafter, subject to adjustments for changes in the consumer pricing index.  The term of the License Agreement is to expire on the expiration date of Rice’s rights in its intellectual property and the Licensee’s rights are worldwide. Our Agreement, as amended, with Rice provides for termination of each Agreement in the event that we are determined to be insolvent as defined in the Agreements.

Agreement with Arizona State University

 
Solterra had an agreement with Arizona State University (“ASU”) pursuant to which ASU at a cost of $835,000 will assist Solterra under the direction of Dr. Ghassan Jabbour in scaling up or optimizing the solar cells so that they can be printed. As of June 30, 2010, $630,000 of these costs in this agreement have been incurred and a further $205,000 were to accrue before the end of the fiscal year ended June 30, 2010.  During February 2010, Dr. Jabbour accepted a Directorship at the King Abdullah University of Science and Technology (KAUST), in Saudi Arabia, as a result of Dr. Jabbour now being located in Saudi Arabia it is no longer logistically feasible for him to conduct the development work at ASU. We have paid ASU $175,000 under our contract with ASU.  Dr. Jabbour is continuing his development work at the KAUST facilities and we have attempted to negotiate a substantially reduced fee payable to ASU.  Dr. Jabbour is also our Chief Science Officer and is an employee of QMC/Solterra.  
 

Agreement with University of Arizona

Solterra has entered into an exclusive Patent License Agreement with the University of Arizona ("UA") to license US Patent # 7,015,052, which was issued on March 21, 2006, entitled “Screen Printing Techniques for the Fabrication of Organic Light - Emitting Diodes”. Pursuant to the License Agreement, Solterra has an exclusive license to market, sell and distribute licensed products within its field of use which is defined as organic light emitting diodes in printed electronic displays and all other printed electronic components. Solterra has the right to grant sublicenses with respect to the licensed product and the license method (as defined in the agreement). Pursuant to said agreement, as amended, we are obligated to pay minimum annual royalties of $5,000 by June 30, 2012, $25,000 by December 31, 2013, $50,000 by December 31, 2014, $125,000 by June 30, 2015 and $200,000 on each June 30th thereafter, subject to adjustments for increases in the Consumer Price Index.  Royalties based on net sales are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products for printed electronic displays. Our Agreement with UA may be terminated by UA in the event that we are in breach of any provision of this Agreement and said breach continues for 60 days after receiving written notice. Our Agreement with UA will also automatically terminate if Solterra becomes insolvent or unable to pay its debts as they become due. We can provide no assurances that we will be able to meet our obligations under our Agreement with UA. Termination of our Agreement with UA could materially adversely affect our operations.
  
Employment agreements

The Company has three employment agreements in effect.  The CEO and Vice President of Research and Development each has a five year agreement which started in January 2013.   The CTO had an employment agreement which was in effect until August 2013 when he resigned his position with the Company.

Summary

 
                               
Fiscal
 
Services
         
Employment
   
License
       
Year
 
agreements
         
agreements
   
agreements
   
Total
 
2014
        $       $ 525,000       -     $ 525,000  
2015
                  525,000       54,450       579,450  
2016
                  525,000       392,000       917,000  
2017
                  525,000       848,750       1,373,750  
2018
                  262,500       2,238,500       2,501,000  
Thereafter
                  -       3,938,600       3,938,600  
                                       
                                       
Total
  $ -             $ 2,362,500     $ 7,472,300     $ 9,834,800  
                                         

 
 
50
 

Note 10.   Income taxes
 
Quantum Materials Corp. follows the guidance of ASC 740, "Income Taxes." Deferred income taxes reflect the net effect of (a) temporary difference between carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax reporting purposes, and (b) net operating loss carryforwards. No net provision for refundable Federal income tax has been made in the accompanying statement of loss because no recoverable taxes were paid previously. Similarly, no deferred tax asset attributable to the net operating loss carry forward has been recognized, as it is not deemed likely to be realized.
 
The provision for refundable Federal income tax consists of the following for the period ending June 30:
 
   
June 30
   
June 30
 
   
2013
   
2012
 
Federal income tax benefit attributed to:
           
Current operations
 
$
1,668,000
   
$
393,000
 
Less, Change in valuation allowance
   
(1,668,000
)
   
(393,000
)
                 
   
$
0
   
$
0
 
                 

The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows:
 
             
             
   
June 30
   
June 30
 
   
2013
   
2012
 
Deferred tax asset attributed to:
           
Net operating loss carryover
   
5,111,450
     
3,443,450
 
Less, Change in valuation allowance
   
(5,111,450
)
   
(3,443,450
)
                 
   
$
0
   
$
0
 

At June 30, 2013, Quantum Materials Corp. had an unused net operating loss carryover approximating $5,111,450 that is available to offset future taxable income; expiring beginning in 2028. United States tax regulations impose limitations on the use of NOL carry forwards following certain changes in ownership.  If such a change were to occur with respect to the Company, the limitation could significantly reduce the amount of benefits that would be available to offset future taxable income each year, starting with the year of ownership change, the subsequent merger result in limitation on the use of NOL carry forwards.

Under regulations, the Company has open tax years, subject to audit, beginning for the year ended June 30, 2010.
 
Note 11.  Subsequent Events

Effective August 30, 2013, Dr. Robert Glass resigned his position as CTO and his board of director designation to pursue other endeavors.
 
 
51
 

 
Item 9.            Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

History of auditor changes:

In December 2012 Peter Messineo, CPA (“PM”) merged into the firm known as DKM Certified Public Accountants (“DKM”).  PM had audited our June 30, 2012financial statements.  In April 2013 the agreement of DKM and PM was terminated.  The Company, with approval of the Board of Directors, changed audit firm from DKM to Messineo & Co, CPAs, LLC (“M&Co”).  M&Co is the successor firm of the registration of PM.  There were no disagreements with DKM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
 Item 9.A.(T)  Controls and Procedures.

Scope of the Evaluation
 
The CEO and CFO’s evaluation of the our Disclosure Controls and Internal Controls included a review of the controls’ (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information generated for use in this annual report. In the course of the Evaluation, the CEO and CFO sought to identify data errors, control problems, acts of fraud, and they sought to confirm that appropriate corrective action, including process improvements, was being undertaken. This type of evaluation is done on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our quarterly reports on Form 10-Q and annual reports on Form 10-K. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and Internal Controls, and to make modifications if and as necessary.  Our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including improvements and corrections) as conditions warrant.
 
Among other matters, the Evaluation was to determine whether there were any significant deficiencies or material weaknesses in our Internal Controls, which are reasonably likely to adversely affect our ability to record, process, summarize and report financial information, or whether the Evaluators identified any acts of fraud, whether or not material, involving management or other employees who have a significant role in our Internal Controls. This information was important for both the Evaluation, generally, and because the Rule 13a-14(a)/15d-14(a) Certifications require that the CEO and CFO disclose that information to our Board (audit committee), and our independent auditors, and to report on related matters in this section of the annual report. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions". These are control issues that could have significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce, to a relatively low level, the risk that misstatement cause by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employee in the normal course of performing their assigned functions. The Evaluators also sought to deal with other controls matters in the Evaluation, and in each case, if a problem was identified, they considered what revisions, improvements and/or corrections to make in accordance with our ongoing procedures.
  
 
52
 
 
Conclusions
 
Based upon the Evaluation, (i) our disclosure controls and procedures are effective in giving us reasonable assurance that they are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms and to ensure that such information is accumulated and communicated to the our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, and (ii) the Company acknowledges it has a significant deficiency explained below in Management’s Report Over Internal Controls and after considering the remedy to overcome this deficiency also explained below in Management’s Report Over Internal Controls - our Internal Controls are effective at that assurance level to provide reasonable assurance that our financial statements are fairly presented in conformity with accounting principles generally accepted in the United States. Additionally, there has been no change in our Internal Controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our Internal Controls.

Report of Management on Internal Controls over Financial Reporting.

Board of Directors and Quantum Materials Corp.:

The Management of Quantum Materials Corp. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U. S. generally accepted accounting principles.  The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U. S. generally accepted accounting principles, and that  receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and, (iii) provide reasonable assurance regarding prevention of timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.

Because of its inherent limitations, internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, the effectiveness of internal control over financial reporting was made as of a specific date. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2013, based on criteria for effective internal control over financial reporting described in “ Internal Control—Integrated Framework ” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Company’s Board of Directors.
 
 
53
 
 
Based on this assessment, management determined that, as of June 30, 2013, Quantum Materials Corp. maintained effective internal control over financial reporting, although we did recognize a significant deficiency.  This deficiency of not having sufficient qualified staff has resulted in the Company being unable to file our 10-K for the year ending June 30, 2013 in a timely manner.  A significant deficiency is a deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.

Although currently we do not identify any material weaknesses in the process of self assessment, we have recognized a significant deficiency in our   internal controls.  Currently we do not have sufficient in-house expertise in US GAAP reporting.  Instead, we rely very much on the expertise and knowledge of external financial advisors in US GAAP conversion.  External financial advisors have helped prepare and review the consolidated financial statements.  Although we have not identified any material errors with our financial reporting or any material weaknesses with our internal controls, no assurances can be given that there are no such material errors or weaknesses existing.  Upon obtaining adequate financing we will seek to recruit experienced professionals to augment and upgrade our financial staff to address issues of timeliness and completeness in US GAAP financial reporting.  In addition, we do not believe we have sufficient documentation with our existing financial processes, risk assessment and internal controls.  We plan to work closely with external financial advisors to document the existing financial processes, risk assessment and internal controls systematically.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting as such attestation is not required by a smaller reporting company such as the Company.


Item 9.B.  Other Information.

Not Applicable.
PART III

Item 10.  Directors, Executive Officers and Corporate Governance

The names, ages and principal occupations of the Company's present officers and directors are listed below, it being understood that there are currently two vacancies on the Board of Directors, including one resulting from the August 2013 resignation of Robert Glass.

Name
 
Age
 
Position with the Company (1)
 
Stephen Squires (2)
 
54
 
President and Chief Executive Officer and Director
 
Christopher Benjamin
 
39
 
Acting Chief Financial Officer
 
Dr.Ghassan E. Jabbour
 
51
 
Chief Science Officer, Director
 
Dr. Michael S. Wong
 
40
 
Director
 
David Doderer
 
42
 
Vice President of Research and Development
 
Robin Squires (2)
 
31
 
Vice President of Administration
 
____________
(1)
 
(2)
Directors are elected at the annual meeting of stockholders and hold office until the following annual meeting.
 
Stephen Squires and Robin Squires are married.

The terms of all officers expire at the annual meeting of directors following the annual stockholders meeting. Officers serve at the pleasure of the Board and may be removed, either with or without cause, by the Board of Directors, and a successor elected by a majority vote of the Board of Directors, at any time.
 
 
54
 

Background

The following is a brief summary of the background of each director, director nominee and executive officer of our company:

Stephen Squires has over 25 years of experience in turnarounds, startups, business development, mergers and acquisitions and strategic planning. Mr. Squires is skilled at identifying emerging technologies and driving commercialization/global market introduction to position companies for growth. From 1977 to 1983, he worked at McDonnell Douglas Corporation, a company engaged in the business of building advanced tactical fighter aircraft and space vehicles, developing and adapting advanced materials for combat aircraft applications. From1983 to 2001, Mr. Squires, as founder, served as President and Chief Executive Officer of Aviation Composite Technologies, Inc., a company whose principal business was the engineering, design, manufacture and refurbishment of advanced composite aero structures. Under Mr. Squire’s leadership the company grew from zero to over 200 employees and operated a 100,000 square foot state of the art facility. Aviation Composite was merged with USDR Aerospace in 2001. Prior to his employment with the Company which commenced upon the closing date of the Agreement and Plan of Reorganization, Mr. Squire’s principal occupation was consulting and advising in the areas of advanced materials, nanotechnology, applications engineering, strategic international marketing with emphasis on middle east and commercialization of emerging technologies for Orasi LLC. Since 1998, Mr. Squires has pursued his interests in advanced materials such as nano fibers and nanotubes where he quickly recognized the potential of the unique quantum features these materials held. Mr. Squires' extensive business, managerial, executive and leadership experience in a variety of industries, particularly qualifies him for service on the Board. Mr. Squires has had experience working for McDonnell Douglas Corporation and Aviation Composite Technologies, each of which brings valuable business experience to the Board.

Christopher Benjamin has served as Chief Financial Officer of the Company since June 2011. Mr. Benjamin's experience includes both public and private company financial reporting expertise, which he brings to the Board of Directors. Based in Phoenix, AZ, Mr. Benjamin has served as President of Rogue CFO Consulting since November 2007. Prior to this, Chris spent 12 years in the corporate world, with his last several years spent as CFO to growth stage ventures. His responsibilities at these companies included monthly financial reporting and analysis, audit and cash management, forecasting, oversight of the General Ledger, as well as ensuring compliance with GAAP, FASB and SEC reporting standards. Earlier in his career when working with larger corporations his responsibilities included serving as Controller and being involved in Sarbanes Oxley process documentation, process flow creation and SEC reporting support. He received his M.B.A. from the University of Washington in Seattle in 2007 and a B.A. in accounting from the University of Fraser Valley in Abbotsford, British Columbia, Canada in 1997.

Dr. Ghassan E. Jabbour is the Director of the Solar and Alternative Energy Science and Engineering Research Center at KAUST (King Abdullah University of Science and Technology) In Saudi Arabia. Prior to this Dr Jabbour was the Director of Flexible and Organic Electronics Development at the Flexible Display Center (FDC) since 2006 and a Professor of Chemical and Materials Engineering at Arizona State University since 2006. He is also the Technical Advisory Board Leader on Optoelectronic Materials, Devices and Encapsulation at FDC. He has been selected to the Asahi Shimbun 100 New Leaders of the USA and has received the Presidential Award for Excellence from the Hariri Foundation in 1997. Dr. Jabbour's research experience encompasses flexible-roll-to-roll-electronics and displays, smart textile, moisture and oxygen barrier technology, transparent conductors, organic light emitting devices, organic and hybrid photovoltaics, organic memory storage, organic thin film transistors, combinatorial discovery of materials, nano and macro printed devices, micro and nanofabrication, biosensors, and quantum simulations of electronic materials. Dr. Jabbour attended Northern Arizona University, the Massachusetts Institute of Technology (MIT), and the University of Arizona. Dr. Jabbour is an SPIE fellow.  Prof. Jabbour has authored and co-authored over 300 publications, invited talks, and conference proceedings. He is the editor of several books and symposia proceedings involving organic photonics and electronics, and nanotechnology. Prof. Jabbour is the guest editor of the MRS Bulletin issue on “Organic Photovoltaics”. He is the Chair and/or Co-Chair of over 50 conferences related to photonic and electronic properties of organic materials and their applications in displays and lighting, hybrid photosensitive materials, and hybrid integration of semiconducting and nanotechnology. Dr. Jabbour has scientific and technical experience with the Company's technology and proposed products. Much of our technology development was accomplished on site by Dr. Jabbour at the Arizona State University labs but such work was relocated to better accommodate the logistic requirements of our Chief Science Officer, Professor Ghassan Jabbour, who is working at Kaust University in Saudi Arabia. The foregoing scientific knowledge is an important asset to a technology driven company and to Dr. Jabbour's presence on the Board of Directors of the Company.
 
 
 
55
 
Dr. Michael S. Wong Principal Investigator, Associate Professor in Chemical and Biomolecular Engineering Associate Professor in Chemistry (Joint Appointment) at William Marsh Rice University. His accomplishments include:
 
·  
Smithsonian Magazine "37 Under 36" Young Innovator Award (2007)
·  
3M Non-tenured Faculty Award (2006, 2007)
·  
GOLD 2006 Conference Best Presentation Award, for "best new idea in gold catalysis" (2006)
·  
AIChE South Texas Section Best Applied Paper Award (2006)
·  
AIChE Nanoscale Science and Engineering Forum Young Investigator Award (2006)
·  
MIT Technology Review's TR35 Young Innovator Award (2006)
·  
Hershel M. Rich Invention Award (2006)
·  
National Academy of Engineering Indo-America Frontiers of Engineering Symposium, Invited Speaker (2006)
·  
Smalley/Curl Innovation Award (2005)
·  
National Academies Keck Futures Initiative (NAKFI) Symposium, Invited Participant (2004)
·  
Oak Ridge Associated Universities Ralph E. Powe Junior Faculty Enhancement Award (2003)
·  
National Academy of Engineering Japan-America Frontiers of Engineering (JAFOE)
·  
Symposium, Invited Participant (2002)
·  
Rice Quantum Institute (RQI), Fellow (2002)
·  
Robert P. Goldberg Grand Prize, MIT $50K Entrepreneurship Competition (2001)
·  
Union Carbide Innovation Recognition Award (2000)
·  
MIT Chemical Engineering Edward W. Merrill Outstanding Teaching Assistant Award (1997)
·  
Faculty advisor for Phi Lambda Upsilon, chemical sciences honorary society (2003 - present)

Dr. Michael S. Wong joined the Department of Chemical Engineering in 2001, and received a joint appointment in the Department of Chemistry in 2002. Before coming to Rice University, he did post-doctoral research with Dr. Galen D. Stucky of the Department of Chemistry and Biochemistry at University of California, Santa Barbara. Mr. Wong’s educational background includes a B.S. in Chemical Engineering from Caltech, an M.S. in Chemical Engineering Practice (“Practice School”) from MIT, and a Ph.D. in Chemical Engineering from MIT (under the supervision of Dr. Jackie Y. Ying, “Supramolecular Templating of Mesoporous Zirconia-Based Nanocomposite Catalysts”). With the underlying theme of designing and engineering novel materials for catalytic and encapsulation applications, his research interests lie in the areas of nanostructured materials (e.g. nanoporous materials, nanoparticle-based hollow spheres, and quantum dots), heterogeneous catalysis, and bioengineering applications. He is particularly interested in developing new chemical approaches to assembling nanoparticles into functional macrostructures. Dr. Wong, as a Professor at William Marsh Rice University, the licensor of our quantum dots technology, is 100% familiar with our licensing rights with Rice and the capabilities of this technology.  His scientific experience is invaluable as a member of the Board of Directors.
 
David Doderer has over 15 years of research & development experience in emerging technologies including biotech, nanotech and quantum effects.  From 2002 to 2005, he served as principal investigator for USGN, a company engaged in the business of defense, safety and security solutions, where he contributed to numerous patents/patents pending & proprietary processes. From 2006 to 2008, he managed Managing Hudler Titan LLC, a technology consulting company, specializing in advanced nanofiber filtration for gaseous streams; crowd sourcing to efficiently share and manage the information resource existing in personal experience; and a clean energy/ clean air/ clean water initiative through aggregation of retail level contributions in alternative energy based carbon offset programs. Mr. Doderer's experience in research and development in emerging technologies and his contributions to the filings of numerous patents and proprietary processes provides invaluable experience to the Board.

Robin Squires, Robin Squires, Vice President of Administration since January 2013, has served as a bookkeeper and controller of the Company since November 2008.  Prior to that time, she founded a small home services company in 2001 and she was with that Company until _2003.  Mrs. Squires organizational skills have served her well in supporting the executive staff. She is currently pursuing an MBA at ASU.

Possible Expansion of the Board in the event of Default under Outstanding Debentures

The Transaction Documents described under Item 7 include a Stock Pledge Agreement pursuant to which Stephen Squires has pledged 20,000,000 shares of our Common Stock to the Debenture holders (the “Holders”) until such time as the Debentures are paid in their entirety. Also, the Securities Purchase Agreement provides until such time as the Holders no longer hold any Debentures, we shall appoint two (2) members to our Board of Directors, with such board members to be appointed by MKM Opportunity Master Fund, Ltd. (“MKM”).  Each member appointed by MKM will be independent of, and not affiliated with, MKM. In addition, so long as MKM has the right to appoint two board members under this Agreement, we shall not expand the size of our Board of Directors to more than seven (7) board members.  Notwithstanding the foregoing, in the event of a default under the Transaction Documents, MKM and Steven Posner Irrevocable Trust u/t/a Dated 06/17/65 (“The Posner Trust”) shall have the right to appoint three (3) and two (2) members, respectively, to our Board of Directors, which directors need not be independent of, and may be affiliated with, MKM or Posner.  In the event that MKM or Posner exercises their right to appoint members of our Board of Directors in the event of a default, the Board of Directors shall set the size of the Board to no more than nine (9) members. Richard Patton served on our Board of Directors as a designee of MKM during fiscal 2009 until he resigned from the Board on August 17, 2009.  Dr. Isaac Horton served on our Board of Directors as a designee of MKM during fiscal 2009 until he resigned from the Board on November 12, 2009.  As of the filing date of this Form 10-K, MKM and The Posner Trust do not have any appointees on the Board of Directors.
 
 
56
 

Corporate Governance
 
Our business, property and affairs are managed by, or under the direction of, our Board, in accordance with the General Corporation Law of the State of Nevada and our By-Laws. Members of the Board are kept informed of our business through discussions with the Chief Executive Officer and other key members of management, by reviewing materials provided to them by management.
 
In the past, there have been no arrangements or understandings pursuant to which a director or executive officer was selected to be a director or executive officer other than employment contracts with two of our executive officers. We have had no nominating committee of the Board. Executive officers serve at the pleasure of the Board, subject to their rights under any employment contracts.
 
We review our corporate governance policies and practices by comparing our policies and practices with those suggested by various groups or authorities active in evaluating or setting best practices for corporate governance of public companies. Based on this review, we have adopted, and will continue to adopt, changes that the Board believes are the appropriate corporate governance policies and practices for our Company. We intend to comply with the Sarbanes-Oxley Act of 2002 and subsequent rule changes made by the SEC and any applicable securities exchange.
 
Director Qualifications and Diversity
 
The board seeks independent directors who represent a diversity of backgrounds and experiences that will enhance the quality of the board’s deliberations and decisions. Candidates shall have substantial experience with one or more publicly traded companies or shall have achieved a high level of distinction in their chosen fields. The board is particularly interested in maintaining a mix that includes individuals who are active or retired executive officers and senior executives, particularly those with experience in the renewable energy, finance and capital market industries.
 
In evaluating nominations to the Board of Directors, our Board also looks for certain personal attributes, such as integrity, ability and willingness to apply sound and independent business judgment, comprehensive understanding of a director’s role in corporate governance, availability for meetings and consultation on Company matters, and the  willingness to assume and carry out fiduciary responsibilities. Qualified candidates for membership on the Board will be considered without regard to race, color, religion, sex, ancestry, national origin or disability. See “Lack of Nominating Committee.”
 
Risk Oversight
 
The full board has oversight of and will prioritize the following risks:
 
Risks and exposures associated with corporate governance, and management and director succession planning, strategic, financial and execution risks and other current matters that may present material risk to our operations, plans, prospects or reputation.
 
Risks and exposures associated with financial matters, particularly financial reporting, tax, accounting, disclosure, internal control over financial reporting, financial policies, investment guidelines and credit and liquidity matters.
 
Risks and exposures associated with leadership assessment, and compensation programs and arrangements, including incentive plans.
 
 
57
 
 
Board Leadership Structure
 
The Chairman of the Board presides at all meetings of the Board according to our bylaws. The Chairman is required to be appointed on an annual basis by at least a majority vote of the remaining directors. Currently, the offices of Chairman of the Board and Chief Executive Officer are separated and the chairman seat is vacant. The company has no fixed policy with respect to the separation of the offices of the Chairman of the Board and Chief Executive Officer. The Board believes that the separation of the offices of the Chairman of the Board and Chief Executive Officer could become part of the succession planning process and that it is in the best interests of the company to make this determination from time to time.
 
Lack of Committees; Independent Directors

We do not have standing audit, nominating or compensation committees, or committees performing similar functions. Our board of directors believes that it is not necessary to have standing audit, nominating or compensation committees at this time because the functions of such committees are adequately performed by our board of directors. The directors who perform the functions of auditing, nominating and compensation committees in the past were not independent because they were also officers of our company.
 
Our Board has determined that Dr. Michael Wong is considered an “Independent Director” but not as a “financial expert” as those terms are defined below. Under the National Association of Securities Dealers Automated Quotations (“NASDAQ”) definition, an independent director means a person other than an officer or employee of the Company or its subsidiaries or any other individuals having a relationship that, in the opinion of the Company’ board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director. The board’s discretion in determining director independence is not completely unfettered. Further, under the NASDAQ definition, an independent director is a person who (1) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years), employed by the company; (2) has not (or whose immediate family members have not) been paid more than $60,000 during the current or past three fiscal years;  (3) has not (or whose immediately family has not) been a partner in or controlling shareholder or executive officer of an organization which the company made, or from which the company received, payments in excess of the greater of $200,000 or 5% of that organizations consolidated gross revenues, in any of the most recent three fiscal years; (4) has not (or whose immediate family members have not), over the past three years been employed as an executive officer of a company in which an executive officer of our Company has served on that company’s compensation committee; or (5) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years) a partner of our company’s outside auditor. The term “Financial Expert” is defined as a person who has the following attributes: an understanding of generally accepted accounting principals and financial statements; has the ability to assess the general application of such principals in connection with the accounting for estimates, accruals and reserves; experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements, or experience actively supervising one or more persons engaged in such activities; an understanding of internal controls and procedures for financial reporting; and an understanding of audit committee functions.
 
In the future, we intend to have an audit committee and such other committees as determined by the Board of Directors to be in the best interest of the Company and to be in compliance with all applicable securities and state laws and listing requirements of any applicable exchanges or NASDAQ that the Company’s securities may become listed on in the future, of which we can provide no assurances that this will occur. In the event we form an audit committee, we will seek to have a “financial expert” as an independent board member serving on the Audit Committee.

Section 16(a) Compliance

Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders (the “Reporting Persons”) are required by the SEC regulations to furnish us with copies of all Section 16(a) reports that they file.

Based solely on our review of the copies of such forms received by us, or written representations from the Reporting Persons, we believe that Stephen Squires, Robin Squires, David Doderer and Robert Glass each had at least one form 3, 4 or 5 filed late for the fiscal year ended June 30, 2013.
 
 
58
 

Lack of Nominating Committee

The Board of Directors has acted as the nominating committee for the Company and no separate nominating committee has been formed to date. This type of committee, if one existed, would be responsible for identifying and recommending the director nominees to be selected by the Board of Directors for each annual meeting of shareholders and reviewing any stockholder nominees; implementing the Board’s criteria for selecting new directors; developing, reviewing and recommending to the Board a set of corporate governance policies applicable to Quantum; providing oversight for the evaluation of the performance of the Board of Directors; and adopting a written charter.  Management believes that the cost of having a nominating committee for Quantum as a Smaller Reporting Company outweighs the benefits that may be derived from implementing such a committee.

The Board of Directors, acting as the nominating committee on December 2, 2009, by unanimous written consent, approved our then five directors for election by the Consenting Stockholders in Lieu of an actual meeting, which occurred in January 2010.  (Note: No other meeting of the Board acting as the nominating committee has been held since December 2009.) Based upon the size of the Company and the Board’s familiarity with the Company since its inception, the Board also has determined that each of the Directors is qualified to suggest nominees for consideration to the nominating committee. The Board of Directors, when acting as the nominating committee, is generally responsible for:

 
•
 
Developing a nomination process for candidates to the Board of Directors;
       
 
•
 
Establishing criteria and qualifications for membership to the Board of Directors;
       
 
•
 
Identifying and evaluating potential Director nominees;
       
 
•
 
Filling vacancies on the Board of Directors; and
       
 
•
 
Recommending nominees for election or re-election.

The Board of Directors, when fulfilling the duties of a nominating committee, does not operate under a charter and it does not have a policy with regard to the consideration of any Director candidates recommended by members.
 
Director Qualifications . While the members of our Board have not established specific minimum qualifications for director candidates, the candidates for Board membership should have the highest professional and personal ethics and values, and conduct themselves consistent with our Code of Ethics. While the members of the Board have not formalized specific minimum qualifications they believe must be met by a candidate to be recommended by the members, the members of the Board believe that candidates and nominees must reflect a Board that is comprised of directors who (i) have broad and relevant experience, (ii) include some independent directors, (iii) are of high integrity, (iv) have qualifications that will increase overall Board effectiveness and enhance long-term stockholder value, and (v) meet other requirements as may be required by applicable rules, such as financial literacy or financial expertise with respect to potential Audit Committee members. These factors, and others as considered useful by our Board acting as its own nomination and governance committee, will be reviewed in the context of an assessment of the perceived needs of our Board of Directors at a particular point in time. As a result, the priorities and emphasis of our Board of Directors may change from time to time to take into account changes in business and other trends, and the portfolio of skills and experience of current and prospective directors. Consideration of new director candidates is expected to involve a series of Board discussions, review of information concerning candidates and interviews with selected candidates. The Board does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. Candidates for nomination to our Board of Directors may be suggested by other members of our Board of Directors. From time to time, our Board acting as its own nomination committee may in the future (although it has not done so in the past) engage the services of a third party search firm to identify director candidates.

 
59
 
 
Limitation of Directors’ Liability and Indemnification

Our company is incorporated under the laws of the State of Nevada, which laws provide for indemnification of officers and directors under certain circumstances. Our Bylaws provide for the indemnification of our directors to the fullest extent permitted under the general corporation law of the State of Nevada from time to time against all expenses, liability and loss (including attorneys’ fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered in connection with acting as directors of our company.

Our articles of incorporation provide that no Director or Officer of the corporation shall be personally liable to the corporation or any of its stockholders for damages for breach of fiduciary duty as a Director or Officer involving any act or omission of any such Director or Officer; provided, however, that: the foregoing provision shall not eliminate or limit the liability of a Director or Officer (i) for acts or omissions which involve intentional misconduct, fraud or a knowing violation of the law, or (ii) the payment of dividends in violation of Section 78.300 of the Nevada Revised Statutes. Any repeal or modification of this Article by the Stockholders of the corporation shall be prospective only, and shall not adversely affect any limitations on the personal liability of a Director or Officer of the corporation for acts or omissions prior to such repeal or modification.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of our company under Nevada law or otherwise, we have been advised the opinion of the Securities and Exchange Commission is that such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event a claim for indemnification against such liabilities (other than payment by us for expenses incurred or paid by a director, officer or controlling person of our company in successful defense of any action, suit, or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction, the question of whether such indemnification by it is against public policy in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

Code of Ethics 

The Securities & Exchange Commission requires registrants like the Company to either adopt a code of ethics that applies to the Company’s Chief Executive Officer and Chief Financial Officer or explain why the Company has not adopted such a code of ethics. For purposes of item 406 of Regulation S-K, the term “code of ethics” means written standards that are reasonably designed to deter wrongdoing and to promote:

·  
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
·  
Full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities & Exchange Commission and in other public communications made by the Company;
·  
Compliance with applicable governmental law, rules and regulations;
·  
The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and
·  
Accountability for adherence to the code.

The Code of Ethics was previously filed as an exhibit to our report on Form 10-K for the fiscal year ended June 30, 2008. Management intends in the future to review the Code of Ethics and will consider appropriate amendments and revisions thereto.

 

 
60
 

Item 11.                            Compensation of Directors and Executive Officers .

The following table sets forth the overall compensation earned over the fiscal years ended June 30, 2012 and 2013 by (1) each person who served as the chief executive officer or chief financial officer of the Company or its subsidiary during fiscal year 2013; and (2) our most highly compensated executive officers as of June 30, 2013 with compensation during fiscal year ended 2013 of $100,000 or more. 

 
Fiscal
Year 
 
Salary 
($)
   
Bonus
($)
   
Stock
Awards
($)
   
Warrants
Or
Options
Awards
($)(1)
   
Non-Equity
Incentive
Plan Compen-
sation ($)
   
Nonqualified
Deferred
Compensation
Earnings ($)
   
All Other 
Compen-
sation
($) (2) (3)
   
Total ($)
(3)
 
                                                   
Stephen Squires
Chief Executive
2012
  $ 180,000     $ -0-     $ -0-     $ 105,000     $ -0-     $ -0-     $ 11,520     $ 296,520  
Officer (4)(5)   2013   $ 202,500     $ -0-     $ 350,000     $ 295,000     $ -0-     $ -0-     $ 11,520     $ 859,020  
                                                                   
Chris Benjamin
2012
  $ 60,000     $ -0-     $ -0-     $  -0-     $ -0-     $ -0-     $ -0-     $ 60,000  
Chief Financial Officer (5) 2013   $ 120,000     $ -0-     $ -0-     $ -0-     $ -0-     $ -0-     $ -0-     $ 120,000  
                                                                   
David Doderer
2012
  $ 120,000     $ -0-     $ 160,000     $ -0-     $ -0-     $ -0-     $ -0-     $ 280,000  
Vice President (5) 2013   $ 150,000     $ -0-     $ 350,000     $ 295,000     $ -0-     $ -0-     $ -0-     $ 795,000  
                                                                   
Dr. Ghassan Jabbour
2012
  $ 120,000     $ -0-     $ 20,000     $ -0-     $ -0-     $ -0-     $ -0-     $ 140,000  
Chief Science Officer (5) 2013   $ 120,000     $ -0-     $ -0-     $ -0-     $ -0-     $ -0-     $ -0-     $ 120,000  
                                                                   
Dr. Robert Glass
2012
  $ 85,000     $ -0-     $ 60,000     $ -0-     $ -0-     $ -0-     $ -0-     $ 145,000  
Former Chief Technology
Officer (5)(6)
2013   $ 117,500     $ -0-     $ 350,000     $ 295,000     $ -0-     $ -0-     $ -0-     $ 762,500  


 (1)
The options and restricted stock awards presented in this table for 2013 and 2012 reflect the entire fair value of such awards in the year of grant. However, the accompanying financial statements reflect the dollar amount expensed by the company during applicable fiscal year for financial statement reporting purposes pursuant to guidance issued by the FASB. Such guidance requires the company to determine the overall value of the stock awards and options as of the date of grant. The stock awards are valued based on the fair market value of such shares on the date of grant and are charged to compensation expense over the related vesting period. The options are valued at the date of grant based upon the Black-Scholes method of valuation, which is expensed over the service period over which the options become vested. As a general rule, for time-in-service-based options, the company will immediately expense any option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. For a description of the guidance issued by the FASB and the assumptions used in determining the value of the options under the Black-Scholes model of valuation, see the notes to the consolidated financial statements included with this Form 10-K. 
   
(2)
 Includes all other compensation not reported in the preceding columns, including (i) perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is less than $10,000; (ii) any “gross-ups” or other amounts reimbursed during the fiscal year for the payment of taxes; (iii) discounts from market price with respect to securities purchased from the company except to the extent available generally to all security holders or to all salaried employees; (iv) any amounts paid or accrued in connection with any termination (including without limitation through retirement, resignation, severance or constructive termination, including change of responsibilities) or change in control; (v) contributions to vested and unvested defined contribution plans; (vi) any insurance premiums paid by, or on behalf of, the company relating to life insurance for the benefit of the named executive officer; and (vii) any dividends or other earnings paid on stock or option awards that are not factored into the grant date fair value required to be reported in a preceding column.
 
(3)
Since inception of Solterra, Solterra utilizes the home of Stephen Squires as an executive office.   Total compensation includes the amount accrued or reimbursed to Mr. Squires as it pertains to his home office.

(4)
Mr. Squire's compensation includes compensation paid to his wife, Robin Squires.

(5)
See “Salary Accruals” below for a description of accrued salaries of certain officers and directors, some of which were converted into warrants to purchase Common Stock of the Company.

(6)
Dr. Glass resigned his position as CTO and Board of Director member effective August 30, 2013.  The stock and warrants issued were fully vested when awarded.
 
 
 
61
 

 
For a description of the material terms of each named executive officers’ employment agreement or arrangement, including the terms of any contract, agreement, plan or other arrangement that provides for any payment to a named executive officer in connection with his or her resignation, retirement or other termination, or a change in control of the company see section below entitled “Employment Agreements.”

No outstanding common share purchase option or other equity-based award granted to or held by any named executive officer in 2013 or 2012 were re-priced or otherwise materially modified, including extension of exercise periods, the change of vesting or forfeiture conditions, the change or elimination of applicable performance criteria, or the change of the bases upon which returns are determined, nor was there any waiver or modification of any specified performance target, goal or condition to payout.


Outstanding Equity Awards At Fiscal Year-End
 
The following table provides certain information concerning any common share purchase options, stock awards or equity incentive plan awards held by each of our named executive officers and directors that were outstanding, exercisable and/or vested as of June 30, 2013.
 
     
Option Awards (1) (4)
   
Stock Awards (2)
   
Name(1)(2)
   
Number of
Securities
Underlying
Unexercised
Options(#)
Exercisable 
   
Number of
Securities
Underlying
Unexercised
Options(#)
Unexercisable 
   
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#) 
   
Option
Exercise
Price ($)
   
Option
Expiration
Date 
   
Number of
Shares or
Units of
Stock That
Have Not
Vested (#) 
   
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested 
   
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested 
   
Equity
Incentive Plan
Awards:
Market or
Payout Value of
Unearned
Shares, Units or
Other Rights
That Have Not
Vested 
   
      Stephen Squires (3)
   
1,000,000
5,000,000
1,666,666
3,500,000
   
0
0
0
0
   
0
0
0
0
   
$.05
$.05
$.075
$.05
   
10/19/19
01/20/20
11/04/15
03/02/17
   
0
0
0
0
   
0
0
0
0
   
N/A
N/A
N/A
N/A
   
N/A
N/A
N/A
N/A
   
     
5,000,000
   
0
   
0
   
$.05
   
03/29/23
   
0
   
0
   
N/A
   
N/A
   
                                                           
      David Doderer
   
500,000
833,333
738,636
   
0
0
0
   
0
0
0
   
$.05
$.075
$.11
   
10/19/19
11/04/15
05/18/16
   
0
0
0
   
0
0
0
   
N/A
N/A
N/A
   
N/A
N/A
N/A
   
     
5,000,000
3,000,000
   
0
0
   
0
0
   
$.05
$.05
   
03/29/23
01/11/2018
   
0
0
   
0
0
   
N/A
N/A
   
N/A
N/A
 
   
                                                           
      Ghassan Jabbour
   
300,000
3,250,000
568,181
   
0
0
0
   
0
0
0
   
$.05
$.075
$.11
   
10/19/19
11/04/15
05/18/16
   
0
0
0
   
0
0
0
   
N/A
N/A
N/A
   
N/A
N/A
N/A
   
                                                           
      Robert Glass
   
250,000
500,000
556,818
   
0
0
0
   
0
0
0
   
$.11
$.075
$.11
   
05/24/20
11/04/15
05/18/16
   
0
0
0
   
0
0
0
   
N/A
N/A
N/A
   
N/A
N/A
N/A
   
     
5,000,000
   
0
   
0
   
$.05
   
03/29/23
   
0
   
0
   
N/A
   
N/A
   
     
2,415,000
 
   
0
   
0
   
$.05
   
01/11/18
   
0
   
0
   
N/A
   
N/A
   
                                                           
      Dr. Michael S. Wong
   
    300,000
250,0000
   
0
0
   
0
0
   
$.05
$.04
   
10/19/19
06/13/18
   
0
0
   
0
0
   
N/A
N/A
   
N/A
N/A
   
                                                           
      Chris Benjamin
   
    500,000
   
0
   
0
   
$.05
   
03/29/23
   
0
   
0
   
N/A
   
N/A
   
                                                           
     Robin Squires
   
600,000
   
0
   
0
   
$.05
   
10/19/19
   
0
   
0
   
N/A
   
N/A
   
                                                           
 
 
__________
(1)
On October 20, 2009, the Board of Directors granted Stephen Squires, Robin Squires (Mr. Squire's wife), Brian Lukian, David Doderer, Ghassan Jabbour and Dr. Michael S. Wong immediately vested ten-year non-statutory stock options to purchase 1,000,000 shares, 600,000 shares, 500,000 shares, 500,000 shares, 300,000 and 300,000 shares, respectively, exercisable at a price of $.05 per share.

(2)
On January 20, 2010, the Board of Directors approved employment contracts of Stephen Squires and Robert Glass, each of which contained the grant of 2,000,000 and 250,000 restricted shares of Common Stock, respectively.  Mr. Squire's contract also contained the grant of ten-year non-statutory stock options to purchase 5,000,000 shares of common stock at an exercise price of $.05 per share.  Mr. Glass' contract called for the grant of options to purchase 250,000 shares which were granted on May 24, 2010. These ten-year non-statutory stock options entitle Mr. Glass to purchase 250,000 shares at an exercise price of $.11 per share.

(3)
See “Salary Accruals” below for a description of accrued salaries of certain officers and directors which were converted into warrants to purchase Common Stock of the Company.

 
62
 

Employment Agreements and Arrangements

Stephen Squires, David Doderer and Robert Glass are each a party to an employment agreement with the Company, although Dr. Glass voluntarily terminated his employment agreement on August 30, 2013. The Company's other executive officers, Ghassan Jabbour and Christopher Benjamin,  each has employment arrangements with the Company to be compensated at the rate of $10,000 per month.

Name
 
Position
 
Annual Salary
 
Bonus
Stephen Squires
 
Chief Executive Officer
 
 
$ 225,000 (1)(3)
 
 (2)
               
David Doderer
 
VP Research & Development
 
 
$ 180,000 (3)
 
 (2)
               
Robert Glass
 
Chief Technology Officer
 
 
$ 180,000 (3)(4)
 
 (2)
               

(1) 
Excludes $5,000 per month paid to his wife, Robin Squires.

(2)
Discretionary bonus as determined by the Compensation Committee based upon company and individual performance or $120,000 per annum.

(3)
Excludes fiscal 2013 accrued salary of $285,000 for Mr. Squires, $97,500 for Mr. Doderer and $102,500 for Dr. Glass.

(4)
Dr. Glass resigned effective August 30, 2013.  Refer to the Subsequent Events in the Notes to the Consolidated Financial Statements for further information.

Salary Accruals

As of November 4, 2010, the Company's executive officers, directors and employees converted accrued salaries of $630,500 and bonuses of $157,625 totaling $788,125 into warrants to purchase 10,508,331 shares, exercisable at $.075 per share over a period of five years. The following table lists the names of such persons, the dollar amount converted and the total number of warrants received.

Name
 
Dollar Amount Converted
   
Number of Warrants Issued
 
             
Stephen Squires
  $ 125,000       1,666,666  
Brian Lukian
    234,375       3,125,000  
David Doderer
    62,500       833,333  
Robert Glass
    37,500       500,000  
Ghassan Jabbour
    243,750       3,250,000  
Andrew Robinson
    50,000       666,666  
Toshinori Ando
    35,000       466,666  
Total
  $ 788,125       10,508,331  
 

 
 
63
 

As of May 18, 2011, the Company's executive officers, directors and employees converted accrued salaries of $256,000 and bonuses of $64,000 totaling $320,000 into warrants to purchase 2,909,089 shares, exercisable at $.11 per share over a period of five years. The following table lists the names of such persons, the dollar amount converted and the total number of warrants received.

Name
 
Dollar Amount Converted
   
Number of Warrants Issued
 
             
David Doderer
  $ 81,250       738,636  
Robert Glass
    61,250       556,818  
Ghassan Jabbour
    62,500       568,181  
Andrew Robinson
    50,000       454,545  
Toshinori Ando
    65,000       590,909  
Total
  $ 320,000       2,909,089  

As of June 30, 2011 the Company has accrued salaries and expense reimbursements to our executive officers in the amounts set forth below .

Name
 
Salary Accrued
   
Expense Reimbursements Accrued
 
             
Stephen Squires
 
$
120,000
   
$
-0-
 
Brian Lukian
 
$
-0-
   
$
-0-
 
David Doderer
 
$
80,000
   
$
-0-
 
Robert Glass
 
$
80,000
   
$
-0-
 
Ghassan Jabbour
 
$
80,000
   
$
-0-
 
Andrew Robinson
 
$
10,000
   
$
-0-
 
Toshinori Ando
 
$
15,000
   
$
-0-
 
   
$
385,000
   
$
-0-
 

As of June 30, 2012, the Company has accrued salaries and expense reimbursements to our executive officers in the amounts set forth below .
Name
 
Salary Accrued
   
Expense Reimbursements Accrued
 
             
Stephen Squires
 
$
182,577
   
$
13,933
 
Christopher Benjamin
 
$
39,825
   
$
-0-
 
David Doderer
 
$
120,000
   
$
-0-
 
Robert Glass
 
$
196,629
   
$
-0-
 
Ghassan Jabbour
 
$
150,000
   
$
-0-
 
Andrew Robinson
 
$
133,713
   
$
-0-
 
Toshinori Ando
 
$
125,000
   
$
3,870
 
   
$
947,744
   
$
17,803
 

In January 2013, officers, directors and employees of the Company listed below converted accrued salary into shares of Common Stock and options under the 2013 Plan.

 Name
 
Accrued Salary
   
Bonus
   
# of Shares
   
# of Options
 
Dr. Ghassan E. Jabbour
  $ 150,000     $ 52,500       4,050,000       0  
David Doderer
  $ 120,000     $ 30,000       0       3,000,000  
Christopher Benjamin
  $ 39,825     $ 13,939       1,075,275       0  
Stephen Squires
  $ 0     $ 0       0       0  
Robin Squires
  $ 122,577     $ 42,902       3,309,570       0  
Dr. Robert Glass
  $ 96,929     $ 24,157       0       2,415,725  
Other employees
  $ 226,139     $ 79,149       6,105,244       0  
                Total                
                    14,540,089       5,415,725  
 
 
64
 
 
As of June 30, 2013, the Company has accrued salaries and expense reimbursements to our executive officers in the amounts set forth below .


Name
 
Salary Accrued
   
Expense Reimbursements Accrued
 
             
Stephen Squires
 
$
197,125
   
$
-0-
 
Christopher Benjamin
 
$
90,000
   
$
-0-
 
David Doderer
 
$
225,000
   
$
-0-
 
Robert Glass
 
$
339,129
   
$
-0-
 
Ghassan Jabbour
 
$
120,000
   
$
-0-
 
Andrew Robinson
 
$
264,457
   
$
-0-
 
Toshinori Ando
 
$
99,870
   
$
-0-
 
   
$
  1,335,581
   
$
-0-
 


 
Employment Agreement - Stephen Squires

Pursuant to an employment agreement dated October 26, 2012, the Company entered into a five-year employment contract to retain the services of Stephen Squires as Chief Executive Officer of the Company for the period of January 1, 2013 through January 1, 2018. The agreement is subject to automatic successive renewal terms of one year, unless either party provides written notice to the other party terminating the initial term of any extension thereof at least 60 days prior to the scheduled termination date of the contract. Mr. Squires is to receive an annual salary of $225,000, paid in monthly installments at the rate of $18,750 per month. Mr. Squires also received a signing bonus of 5,000,000 restricted shares of Common Stock and 5,000,000 stock options with an amended exercise price of $0.05 per share, fully vested, expiring on March 29, 2023.  In the event Mr. Squires' services as a director are terminated for any reason, including, termination by his own choice, within six months of a change in control event as defined in said agreement, he shall receive one year's fees of $225,000 payable in one lump sum no later than 30 days after the termination of his services as a director and, in such event, any options that are not fully vested shall become immediately vested and the options shall be extended for an additional one year following the final exercise date of said option agreement. Mr. Squires' employment agreement may be terminated for cause as defined in the agreement. In such event, he shall receive his unpaid portion of his base salary computed up to the date of termination, plus certain other benefits. In the event of death, his estate shall receive compensation of the unpaid portion of his base salary up to the date of his death, plus certain benefits. The agreement contains certain prohibitions against soliciting employees and clients of the Company for his own personal benefit during the term of the agreement and for a period of one year thereafter. Mr. Squires’ employment agreement does not reflect the following approved by the Company’s Board:

·  
Compensation of $5,000 per month paid to Mr. Squires’ spouse for administrative services;
·  
Prior to entering into his employment agreement, Mr. Squires and his spouse received in October 2009 options to purchase a total of 1,600,000 shares of the Company in 2009 at $.05 per share through October 2019;
·  
The November 2010 issuance of five year warrants to purchase 1,666,666 shares exercisable at $.005 per share in exchange for the cancellation of $125,000 of accrued salary;
·  
The issuance of 10,000,000 shares of Common Stock in January 2011 in exchange for the cancellation of indebtedness to Mr. Squires of $270,145 or $.027 per share.

 
Employment Agreement – David Doderer

Pursuant to an employment agreement dated October 26, 2012, the Company entered into a five-year employment contract to retain the services of David Doderer as Vice President of Research and Development of the Company for the period of January 1, 2013 through January 1, 2018. The agreement is subject to automatic successive renewal terms of one year, unless either party provides written notice to the other party terminating the initial term of any extension thereof at least 60 days prior to the scheduled termination date of the contract. Mr. Doderer is to receive an annual salary of $150,000, paid in monthly installments at the rate of $12,500 per month. Mr. Doderer also received a signing bonus of 5,000,000 restricted shares of Common Stock and 5,000,000 stock options with an amended exercise price of $0.05 per share, fully vested, expiring on March 29, 2023. In the event Mr. Squires' services as a director are terminated for any reason, including, termination by his own choice, within six months of a change in control event as defined in said agreement, he shall receive one year's fees of $120,000 payable in one lump sum no later than 30 days after the termination of his services as a director and, in such event, any options that are not fully vested shall become immediately vested and the options shall be extended for an additional one year following the final exercise date of said option agreement. Mr. Squires' employment agreement may be terminated for cause as defined in the agreement. In such event, he shall receive his unpaid portion of his base salary computed up to the date of termination, plus certain other benefits. In the event of death, his estate shall receive compensation of the unpaid portion of his base salary up to the date of his death, plus certain benefits. The agreement contains certain prohibitions against soliciting employees and clients of the Company for his own personal benefit during the term of the agreement and for a period of one year thereafter.
 
 
 
65
 

 
 
Other Employment Arrangements

Dr. Ghassan E. Jabbour and Chris Benjamin are each receiving monthly salaries of $10,000. Robin Squires, the wife of Stephen Squires, is receiving a monthly salary of $5,000 in recognition of her administrative services. The Company has the right to terminate the services of Dr. Jabbour, Mr. Benjamin and Mrs. Squires at any time. The Board of Directors granted Mr. Jabbour 250,000 shares of restricted Common Stock in exchange for services rendered during fiscal 2012. In fiscal 2011, Dr. Jabbour received Warrants to purchase 3,818,181 shares of Common Stock at exercise prices ranging from $.075 per share to $.11 per share over a period of five years. These Warrants were granted in exchange for the forgiveness of accrued salaries described elsewhere under “Salary Accruals.” In fiscal 2010, Dr. Jabbour also received Warrants to purchase 300,000 shares exercisable over a term of ten years at $.05 per share. In fiscal 2012, Mr. Doderer received 2,000,000 shares of restricted Common Stock in exchange for services rendered.

Loans from Stephen Squires

In November 2008, Mr. Squires received 35,500,000 shares of the Company's Common Stock as part of a plan of reorganization, 20,000,000 of which he pledged to secure certain company indebtedness. Between December 2008 and December 2010, Mr. Squires privately sold an aggregate of approximately 13,431,000 shares of the Company's Common Stock for an aggregate of $595,000. Mr. Squires advanced to the Company cash loans and made payment of Company expenses utilizing $270,145 of the net proceeds of these private sales. On December 30, 2010, the Board of Directors authorized Mr. Squires to receive 10,000,000 restricted shares in cancellation of all outstanding cash loans and advanced expenses totaling $270,145. Not reflected in the foregoing, were additional cash loans that have been made by Mr. Squires to the Company and repaid to him.

In January 2010, the board of directors granted Mr. Squires the option to convert his cash loans to the Company into common stock of the Company's subsidiary. In this respect, Mr. Squires has a two-year option to convert up to $200,000 into a maximum of 5% of the outstanding common stock of Solterra.  As of the filing date of this Form 10-K, Mr. Squires has declined to exercise this option.


DIRECTOR COMPENSATION
 
Cash Fees
 
As of the filing date of this Form 10-K, no cash fees have been paid to any directors of the Company, although the board reserves the right to pay such cash fees in the future.
 
Restricted Stock and Options

Dr. Michael Wong received in October 2009 and in June 2012, options to purchase 300,000 shares and 250,000 shares, respectively, under the Company’s 2009 Plan as defined herein under “2009 Stock Option Plan.” These options were granted over a term of ten years and five years, respectively, at exercise prices ranging from $.04 per share to $.05 per share.
 
 
66
 

 
The Company’s other directors, namely, Stephen Squires, David Doderer, Ghassan Jabbour, Chris Benjamin and Robert Glass are each directors and executive officers of the Company. Their employment contracts and employment arrangements have included the receipt of restricted shares of Common Stock and options/warrants granted in connection with services rendered as employees of the Company. See the contents of this “Item 11” for a description of their compensation.

Travel Expenses
 
All directors shall be reimbursed for their reasonable out of pocket expenses associated with attending the meeting.
 
2013 Compensation
 
The following table shows the overall compensation earned for the 2013 fiscal year with respect to each non-employee -director of the Company as of June 30, 2013.
 
     
DIRECTOR COMPENSATION 
 
Name and
Principal
Position
   
Fees
Earned
or Paid
in Cash
($) 
   
Stock
Awards 
($) (1) 
   
Warrant/
Option
Awards ($)
(1) 
   
Non-Equity
Incentive Plan
Compensation
($) (2) 
   
Nonqualified
Deferred
Compensation
Earnings ($) 
   
All Other
Compensation
 ($) (3)
   
Total ($) 
 
                                             
Dr. Michael S. Wong,
Director
   
-0-
   
-0-
   
-0-
   
-0-
   
-0-
   
-0-
   
$
 
 
 
(1)
ASC 718 requires the company to determine the overall value of the restricted stock awards and the options as of the date of grant based upon the Black-Scholes method of valuation, which value is set forth in the table above, and to then expense that value over the service period over which the restricted stock awards and the options become exercisable vested.  As a general rule, for time-in-service-based restricted stock awards and options, the company will immediately expense any restricted stock award or option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the restricted stock award and option.  For a description of ASC 718 and the assumptions used in determining the value of the restricted stock awards and options under the Black-Scholes model of valuation, see the notes to the consolidated financial statements included with this Form 10-K.

(2) 
Excludes awards or earnings reported in preceding columns.
 
(3)
 
 
 
 
Includes all other compensation not reported in the preceding columns, including (i) perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is less than $10,000; (ii) any “gross-ups” or other amounts reimbursed during the fiscal year for the payment of taxes; (iii) discounts from market price with respect to securities purchased from the company except to the extent available generally to all security holders or to all salaried employees; (iv) any amounts paid or accrued in connection with any termination (including without limitation through retirement, resignation, severance or constructive termination, including change of responsibilities) or change in control; (v) contributions to vested and unvested defined contribution plans; (vi) any insurance premiums paid by, or on behalf of, the company relating to life insurance for the benefit of the director; (vii) any consulting fees earned, or paid or payable; (viii) any annual costs of payments and promises of payments pursuant to a director legacy program and similar charitable awards program; and (ix) any dividends or other earnings paid on stock or option awards that are not factored into the grant date fair value required to be reported in a preceding column.
 


 
67
 

2009 Stock Option Plan

On December 2, 2009, the Company established a 2009 Employee Benefit and Consulting Services Compensation Plan   (the “2009 Plan”) covering 10,000,000 shares. The material features of the Plan are described below.

Administration

Our Board of Directors, Compensation Committee or both, in the sole discretion of our Board, administers the 2009 Plan, which was approved by the Company’s Board of Directors on December 2, 2009 and by stockholders as of January 25, 2010. The Board, subject to the provisions of the 2009 Plan, has the authority to determine and designate officers, employees, directors and consultants to whom awards shall be made and the terms, conditions and restrictions applicable to each award (including, but not limited to, the option price, any restriction or limitation, any vesting schedule or acceleration thereof, and any forfeiture restrictions). The Board may, in its sole discretion, accelerate the vesting of awards. The Board of Directors must approve all grants of Options and Stock Awards issued to our officers or directors.

Types of Awards

The 2009 Plan is designed to enable us to offer certain officers, employees, directors and consultants of us and our subsidiaries equity interests in us and other incentive awards in order to attract, retain and reward such individuals and to strengthen the mutuality of interests between such individuals and our stockholders.  In furtherance of this purpose, the Plan contained provisions for granting incentive and non-statutory stock options and Common Stock Awards.

Stock Options . A "stock option" is a contractual right to purchase a number of shares of Common Stock at a price determined on the date the option is granted. The option price per share of Common Stock purchasable upon exercise of a stock option and the time or times at which such options shall be exercisable shall be determined by the Board at the time of grant. Such option price shall not be less than 100% of the fair market value of the Common Stock on the date of grant. The option price must be paid in cash, money order, check or Common Stock of the Company.  The Options may also contain at the time of grant, at the discretion of the Board, certain other cashless exercise provisions.

Options shall be exercisable at the times and subject to the conditions determined by the Board at the date of grant, but no option may be exercisable more than ten years after the date it is granted. If the Optionee ceases to be an employee of our company for any reason other than death, any option granted as an Incentive Stock Option exercisable on the date of the termination of employment may be exercised for a period of thirty days or until the expiration of the stated term of the option, whichever period is shorter. In the event of the Optionee’s death, any granted Incentive Stock Option exercisable at the date of death may be exercised by the legal heirs of the Optionee from the date of death until the expiration of the stated term of the option or six months from the date of death, whichever event first occurs.  In the event of disability of the Optionee, any granted Incentive Stock Options shall expire on the stated date that the Option would otherwise have expired or 12 months from the date of disability, whichever event first occurs.  The termination and other provisions of a non-statutory stock option shall be fixed by the Board of Directors at the date of grant of each respective option.

Common Stock Award . “Common Stock Award” is shares of Common Stock that will be issued to a recipient at the end of a restriction period, if any, specified by the Board if he or she continues to be an employee, director or consultant of us. If the recipient remains an employee, director or consultant at the end of the restriction period, the applicable restrictions will lapse and we will issue a stock certificate representing such shares of Common Stock to the participant. If the recipient ceases to be an employee, director or consultant of us for any reason (including death, disability or retirement) before the end of the restriction period unless otherwise determined by the Board, the restricted stock award will be terminated.

Eligibility

The Company’s officers, employees, directors and consultants of the Company and its subsidiaries are eligible to be granted stock options, and Common Stock Awards.  Eligibility shall be determined by the Board; however, all Options and Stock Awards granted to officers and directors must be approved by the Board.

Termination or Amendment of the Plan

The Board may at any time amend, discontinue, or terminate all or any part of the Plan, provided, however, that unless otherwise required by law, the rights of a participant may not be impaired without his or her consent, and provided that we will seek the approval of our stockholders for any amendment if such approval is necessary to comply with any applicable federal or state securities laws or rules or regulations.
 
 
68
 

 
Awards

As of June 30, 2013, options to purchase 9,200,000 shares at an exercise have been granted under the Plan.  These include the following persons:

   
Amount of Shares
   
Exercise Price
   
Net Realizable
Value (1)
 
                   
Stephen Squires
    6,000,000     $ .05     $ 60,000  
Robin Squires
    600,000       .05       6,000  
Brian Lukian
    500,000       .05       5,000  
David Doderer
    500,000       .05       5,000  
Dr. Michael S. Wong
    550,000       .04 - .05       8,250  
Ghassan Jabbour
    300,000       .05       3,000  
Robert Glass
    250,000       .11       -0-  
Steven Morse
    500,000       .12       -0-  

__________________

(1)  
Based upon the closing last sale of $0.06 per share as of June 28, 2013, after deducting the applicable exercise price.

It is not possible to predict the individuals who will receive future awards under the 2009 Plan or the number of shares of Common Stock covered by any future award because such awards are wholly within the discretion of the Board.  The foregoing table does not reflect options/warrants or shares granted to officers and directors outside of the 2009 Plan.

Shares Subject to the Plan

The maximum number of shares of Common Stock that may be issued pursuant to awards granted under the Plan is 10,000,000 shares.  Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The Plan does not limit the number of shares of Common Stock with respect to which options or Stock Awards may be granted to any individual during any calendar year.  The aggregate number of shares issuable under the Plan and the number of shares subject to options and awards to be granted under the Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the Common Stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the Plan.

2013 Stock Option Plan

In January 2013, the Company approved the 2013 Employee Benefit and Consulting Services Compensation Plan covering 20,000,000 shares, which automatically increased to 60,000,000 shares on March 29, 2013. The Plan is identical to the terms of the 2009 Plan except that unless stockholders approve the Plan within 12 months of the Board’s adoption of said Plan, no incentive stock options may be granted under the Plan.

The Company’s executive officers, directors and employees agreed to convert, effective January 11, 2013, an aggregate of $755,169 into 14,450,589 shares of restricted Common Stock and five year options to purchase 5,415,725 shares exercisable at $.05 per share over a period of five years. Each employee, officer and/or director who converted their salaries into Common Stock also received a 35% bonus on the amount converted which was also converted into Common Stock. Such persons who decided to convert their salaries into five year options exercisable at $.05 per share received a 25% bonus on the amount converted, which bonus was also converted into additional options. See “Employment Agreements and Arrangements – Salary Accruals” for additional information.

 
69
 

Item 12.                        Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth, as of June 30, 2013, shares of Common Stock beneficially owned by (1) each person (including any group) of more than five percent of our Common Stock, based solely on Schedule 13D and 13G filings with the Securities and Exchange Commission, and (2) the Company’s directors and officers .

Name of Beneficial Owner
 
Common Stock
Beneficially Owned (1)(2)
   
Percent of Class (3)
 
Stephen Squires (4) (5)
    42,558,322       21.4  
Christopher Benjamin (12)
    1,575,275       *  
Ghassan E. Jabbour (6)
    8,418,181       4.5  
Michael S. Wong (7)
    550,000       *  
David Doderer (8)
    16,871,969       8.7  
Robert Glass (9)
    13,722,543       7.0  
Robin Squires (13)
    600,000       *  
Directors and executive officers as a group (6) persons (10)
    69,973,747       32.5  
                 
MKM Opportunity Master Fund, Ltd(11)
    11,232,341       6.1  
____________
* Less than 1%
(1)
Unless otherwise indicated, ownership represents sole voting and investment power.
 
(2)
The address for each beneficial owner named above is c/o the Company at 12326 Scott Drive, Kingston, OK 73439.
 
(3)
Based upon 183,099,837 common shares outstanding.
 
(4)
Includes 20,000,000 shares pledged to our Debenture Holders. See “Item 10.”
 
(5)
Includes options/warrants to purchase 16, 166,666 shares owned by Mr. Squires.
 
(6)
Includes options/warrants to purchase 4,118,181 shares.
 
(7)
Includes options to purchase 550,000 shares.
 
(8)
Includes options/warrants to purchase 10,071,969 shares.
 
(9)
Includes options/warrants to purchase 8,722,543 shares.
 
(10) 
Includes options/warrants to purchase 31,982,091 shares.
 
(11) 
Includes options to purchase 2,000,000 shares. Excludes shares issuable upon conversion of outstanding notes, which is convertible into 16,666,666 shares of a Company’s Common Stock. In the event that the note is converted beyond its maximum permitted percentage, which percentage is stated in the contract, MKM would own 27,899,007 shares or 13.7% of the outstanding shares of the Company’s Common Stock.
 
(12) 
Includes options to purchase 500,000 shares.
 
(13) 
Includes options to purchase 600,000 shares.

 
 
70
 
 
Securities Authorized for Issuance under Equity Compensation Plans.

The following summary information is as of the Record Date and relates to our 2009 Plan (which Plan was approved by the board and ratified by stockholders) described elsewhere herein pursuant to which we have granted options to purchase our Common Stock:

   
(a)
   
(b)
   
(c)
 
 
 
 
 
Plan category
 
 
Number of shares of common stock to be issued upon exercise
Of outstanding options
   
 
Weighted average
exercise price of
outstanding
options
   
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding shares
 reflected in column (a)
 
Equity Compensation
Plans
    9,200,000       (1 )     800,000  

 (1) Options exercisable at prices ranging from $.04 per share to $.12 per share.

The following summary information is as of the Record Date and relates to our 2013 Plan (which Plan was approved by the board but not ratified by stockholders as of the date of this Form 10-K) described elsewhere herein pursuant to which we have granted options to purchase our Common Stock:

   
(a)
   
(b)
   
(c)
 
 
 
 
 
Plan category
 
 
Number of shares of common stock to be issued upon exercise
Of outstanding options
   
 
Weighted average
exercise price of
outstanding
options
   
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding shares
 reflected in column (a)
 
Equity Compensation
Plans
    36,956,614       (1 )     23,043,386  

 (1) Options exercisable at a price of $.05 per share.


Item 13.                        Certain Relationships and Related Transactions and Director Independence.

For a description of certain transactions between the Company and its affiliated parties, reference is made to Item 13 of the Company’s Form 10-K for the Company’s fiscal year ended June 30, 2013, which information is incorporated herein by reference.

For a description of transactions during fiscal 2013 between the Company and its executive officers and directors, reference is made to Item 11 of this Form 10-K.

For a description of transactions between the Company and its debenture holders, reference is made to Item 7 of this Form 10-K which describes an extension of the due date of the debentures through November 4, 2014.  For additional information, also see the “Notes to Financial Statements.”

Director Independence

Our Board has determined that Dr. Michael Wong is considered an “Independent Director” but not as a “financial expert” as those terms are defined below. Under the National Association of Securities Dealers Automated Quotations (“NASDAQ”) definition, an independent director means a person other than an officer or employee of the Company or its subsidiaries or any other individuals having a relationship that, in the opinion of the Company’ board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director. The board’s discretion in determining director independence is not completely unfettered. Further, under the NASDAQ definition, an independent director is a person who (1) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years), employed by the company; (2) has not (or whose immediate family members have not) been paid more than $60,000 during the current or past three fiscal years;  (3) has not (or whose immediately family has not) been a partner in or controlling shareholder or executive officer of an organization which the company made, or from which the company received, payments in excess of the greater of $200,000 or 5% of that organizations consolidated gross revenues, in any of the most recent three fiscal years; (4) has not (or whose immediate family members have not), over the past three years been employed as an executive officer of a company in which an executive officer of our Company has served on that company’s compensation committee; or (5) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years) a partner of our company’s outside auditor. The term “Financial Expert” is defined as a person who has the following attributes: an understanding of generally accepted accounting principals and financial statements; has the ability to assess the general application of such principals in connection with the accounting for estimates, accruals and reserves; experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements, or experience actively supervising one or more persons engaged in such activities; an understanding of internal controls and procedures for financial reporting; and an understanding of audit committee functions.
 
 
71
 

Item 14.                          Principal Accountant Fees and Services.

Services of Messineo & Co., CPAs, LLC (previously Peter Messineo, CPA).

Audit Fees
 
During fiscal 2013 and 2012, the aggregate fees billed for professional services rendered by Peter Messineo, CPA (and the successor’s firms in which Mr. Messineo is the engagement partner) (the “Independent Auditors”) for the annual audits of the Company's consolidated financial statements totaled $12,000 and $10,000, respectively.

Financial Information Systems Design and Implementation Fees

During 2013 and 2012, there were $0 and $0 in fees billed for professional services by rendered by Peter Messineo, CPA rendered in connection with, directly or indirectly, operating or supervising the operation of its information system or managing its local area network.

All Other Fees

During 2013 and 2012, there were $7,500 and $7,500 in fees billed for professional services rendered by the independent auditors for review of the Company’s quarterly filings and 8-K filings with the Securities and Exchange Commission. The foregoing fees exclude expense reimbursements.

Item 15.                         Exhibits and Financial Statement Schedules

(a)  
Financial Statements

The following documents are filed under “ Item 8. Financial Statements and Supplementary Data” and are included as part of this Form 10-K as the consolidated financial statements of the Company for the years ended June 30, 2013 and 2012:

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Deficit
Notes to Consolidated Financial Statements
 


 
72
 


(b)  
Exhibits

The following exhibits are all previously filed in connection with our Form 8-K filed November 10, 2008, unless otherwise noted.
 
2.1
Agreement and Plan of Merger and Reorganization, dated as of October 15, 2008, by and among Quantum Materials Corp., Solterra Renewable Technologies, Inc., the shareholders of Solterra and Greg Chapman, as Indemnitor.
   
4.1
Form of Securities Purchase Agreement dated as of November 4, 2008.
   
4.2
Form of Security Agreement dated November 4, 2008.
   
4.3
Form of Subsidiary Guarantee dated November 4, 2008.
   
4.4
Form of Stock Pledge Agreement dated November 4, 2008.
   
4.5
Form of Debenture-- MKM Opportunity Master Fund, Ltd.
   
4.6
Form of Debenture.-- MKM SP1, LLC
   
4.7
Form of Debenture-- Steven Posner Irrevocable Trust u/t/a Dated 06/17/65.
   
4.8
Form of Escrow Agreement
   
4.9
Form of Amended Waiver and Consent.
   
4.10
Form of Registration Rights Agreement.
   
4.11
Standstill Agreement dated June 1, 2009.  (Incorporated by reference to Form 8-K filed June 9, 2009)
   
4.12
Amended Standstill Agreement dated June 1, 2009. (Incorporated by reference to Form 10-K filed for the year ended June 30, 2009.)
   
4.13
Extension of Standstill Agreement dated October 29, 2009. (Incorporated by reference to Form 10-K filed for the year ended June 30, 2009.)
 
10.1
License Agreement by and between William Marsh Rice University and Solterra Renewable Technologies, Inc. dated August 20, 2008.
   
10.2
Letter dated October 2, 2008 from Rice University amending the License Agreement contained in Exhibit 10.1
   
10.3
Agreement with Arizona State University executed by ASU on October 8, 2008 and executed by Solterra on September 18, 2008.
   
10.4
Letters dated November 5, 2009 and November 5, 2009 amending Rice University Agreement. (Incorporated by reference to Form 10-K filed for the year ended June 30, 2009.)
   
10.5
Consulting Agreement between Steven Posner, Oceanus Capital and The issuer. (Incorporated by reference to Form 10-K filed for the year ended June 30, 2009.)
   
10.6
Consulting Agreement between Sound Capital Inc. and the issuer dated November 12, 2009 (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 2009)
   
10.7
License Agreement between The University of Arizona and the issuer dated July 2009.  (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 2009).
   
10.8
Letter dated December 16, 2010 from Rice University amending the License Agreement contained in Exhibit 10.1 (Incorporated by reference to the Registrant’s Form 10-K for its fiscal year ended June 30, 2010.)
   
10.9 Amendment to Exclusive Patent License Agreement between University of Arizona and Solterra Renewable Technologies (i.e. amendment to exhibit 10.7). (Incorporated by reference to the Registrant’s Form 10-K for its fiscal year ended June 30, 2010 filed on February 14, 2011.)
   
10.10 Amended License Agreement by and between William Marsh Rice University and Solterra Renewable Technologies, Inc. (Incorporated by reference to Form 8-K dated September 19, 2013)
   
10.11 License Agreement by and between William Marsh Rice University and Quantum Materials Corp. (Incorporated by reference to Form 8-K dated September 19, 2013)
   
10.12 Second Amendment to Issuer’s Agreement with University of Arizona. (Incorporated by reference to Form 10-K for the fiscal year ended June 30, 2012)
   
10.13 Employment Agreement – Stephen Squires. (Incorporated by reference to Form 8-K filed January 23, 2013)
   
10.14 Employment Agreement – David Doderer (Incorporated by reference to Form 8-K filed January 23, 2013)
   
21.1
Subsidiaries of Registrant listing state of incorporation (Incorporated by reference to Form 10-K for fiscal year ended June 30, 2011)
   
31(a)
Rule 13a-14(a) Certification – Principal Executive Officer *
   
31(b)
Rule 13a-14(a) Certification – Principal Financial Officer *
   
32(a)
Section 1350 Certification – Principal Executive Officer *
   
32(b)
Section 1350 Certification – Principal Financial Officer *
 
101.SCH
Document, XBRL Taxonomy Extension *
   
101.CAL
Calculation Linkbase, XBRL Taxonomy Extension Definition *
   
101.DEF
Linkbase, XBRL Taxonomy Extension Labels *
   
101.LAB
Linkbase, XBRL Taxonomy Extension *
   
101.PRE
Presentation Linkbase *
____________
*  Filed herewith.
 
(c)  
Financial Statement Schedules

We are not filing any financial statement schedules as part of this Form 10-K because such schedules are either not applicable or the required information is included in the financial statements or notes thereto.

 
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SIGNATURES

Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
QUANTUM MATERIALS CORP.
 
       
Date: October 15, 2013
By:
/s/ Stephen Squires
 
   
Name: Stephen Squires 
 
   
Title: President and Principal Financial Officer  
 
       
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 
Signature
 
Title
 
Date
         
/s/ Stephen Squires 
 
Title: President and Principal Financial Officer
 
Date: October 15, 2013
Stephen Squires 
       
         
/s/ Christopher Benjamin
 
Title: Principal Financial Officer
 
Date: October 15, 2013
Christopher Benjamin
       
         
/s/ Michael S. Wong
 
Title: Director 
 
Date: October 15, 2013
Michael S. Wong
       
         
/s/ Dr. Ghassan E. Jabbour
 
Title: Director
 
Date: October 15, 2013
Dr. Ghassan E. Jabbour
       
         
/s/ David Doderer
 
Title: Director
 
Date: October 15, 2013
David Doderer
       
         
 
Stephen Squires, Michael S. Wong, Dr. Ghassan E. Jabbour, David Doderer, Chris Benjamin and Robert Glass represent all the current members of the Board of Directors.
 

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