UNITED STATES

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, 2016

 

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   20-81955783

(State of jurisdiction of

incorporation or organization)

  (I.R.S. Employer
Identification Number)

 

3055 Hunter Road, San Marcos, Texas   78666
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (713) 817-2675

 

(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, 2015, of the 321,793,887 outstanding shares of common stock, the number of shares held by non-affiliates was approximately 280,971,350 shares with an aggregate market value of approximately $42,146,000 based upon the closing price of $0.15 of our common stock as of the close of business on December 31, 2015.

 

As of September 19, 2016, the issuer had 325,013,789 shares of common stock, $0.001 par value per share outstanding.

 

 

 

 
   

 

QUANTUM MATERIALS CORP.

 

FORM 10-K

 

FOR THE FISCAL YEAR ENDED JUNE 30, 2016

 

TABLE OF CONTENTS

 

PART I  
Item 1. Business 3
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 20
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Mine Safety Disclosures 20
     
PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 21
Item 6. Selected Financial Data 26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risks 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35
Item 9A. Controls and Procedures 35
Item 9B. Other Information 36
     
PART III  
Item 10. Directors, Executive Officers and Corporate Governance 37
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 55
Item 13. Certain Relationships and Related Transactions and Director Independence 57
Item 14. Principal Accountant Fees and Services 58
     
PART IV  
Item 15. Exhibits and Financial Statement Schedules 58

 

  1  

 

 

FORWARD-LOOKING STATEMENTS

 

Some of the statements set forth this Form 10-K contain forward-looking statements within the meaning of the Securities Exchange Act of 1934. 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,” “possible”, “target”, “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:

 

  we are a development stage company with no history of profitable operations;
     
  we may need additional capital to finance our business;
     
  our products may not gain market acceptance;
     
  we may not be able to establish distribution relationships and channels and strategic alliances for market penetration and revenue growth;
     
  competition within our industry; 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.

 

Throughout this Form 10-K, unless otherwise designated, the terms “we”, “us”, “our”, the “Company”, our “Company” refer to Quantum Materials Corp., a Nevada corporation and its subsidiaries.

 

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PART I

 

Item 1. Business

 

Overview

 

We are a nanotechnology company specializing in the design, development, production and supply of nanomaterials, including quantum dots (“QDs”), tetrapod quantum dots (“TQDs”), and other nanoparticles for a range of applications in televisions, displays and other optoelectronics, photovoltaics, solid state lighting, life sciences, security ink, battery, and sensor sectors of the market. We are currently traded in the over-the-counter marketplace on the OTCQB under the ticker symbol “QTMM.” Our wholly-owned operating subsidiary, Solterra Renewable Technologies, Inc. (“Solterra”), is focused on the photovoltaic (solar cell) market.

 

QDs are nanoscale semiconductor crystals typically between 10 and 100 atoms in diameter. Approximately 10,000 would fit across the diameter of a human hair. Their small size makes it possible for them to exhibit certain quantum mechanical properties. QDs emit either photons or electrons when excited. In the case of photons, the wavelength (color) of light emitted varies depending on the composition and size of the quantum dot. As such, the photonic emissions can be tuned by the creation of QDs of different types and/or sizes. Their unique properties as highly efficient, next generation semiconductors have led to the use of QDs in a range of electronic and other applications, in the display and lighting industries. QDs also have applications in solar cells, where their characteristics enable conversion of light energy into electricity with the potential for significantly higher efficiencies and lower costs than existing technologies, thereby creating the opportunity for a step change in the solar energy industry through the use of QDs in printed photovoltaic cells.

 

QDs were first discovered in the early 1980s and the industry has developed to the point where QDs are now being used in an increasing range of applications, including televisions and displays, light emitting diode (“LED”) lighting (also known as solid-state lighting), and in the biomedical industry. LG, Samsung, and other companies, have recently launched new televisions using QDs to enhance the picture color quality and power efficiency. A number of major lighting companies are developing product applications using QDs to create a more natural light for LEDs. The biomedical industry is using QDs in diagnostic and therapeutic applications; and applications are being developed to print highly efficient photovoltaic solar cells in mass quantities at a low cost.

 

A key challenge for the quantum dot industry has been and may continue to be its ability to scale up production volumes sufficiently to meet growing demand for QDs while maintaining product quality and consistency and reducing the overall costs of supply to stimulate new applications. QDs remain an expensive product, however a number of recent market research reports have forecasted rapid growth of the QD market, including an April 2016 report by Credence Research which states “The quantum dots market is expected to cross US$ 8.0 Bn by 2022, expanding at a CAGR of 51.3% during the forecast period 2015 to 2022.”

 

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, was formed in May 2008 by Mr. Stephen Squires, our former Chief Executive Officer, and other shareholders 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 QDs, 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, which was later amended, to develop, manufacture and exploit TQDs by William Marsh Rice University (“Rice”) located in Houston, Texas (the “Solterra Rice License”). In September 2011, a new license, which was later amended, was entered into between Rice and QMC (the “QMC Rice License,” and together with the Solterra Rice License, the “Rice Licenses”). The Rice Licenses grant to QMC and Solterra 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, a current member of the Company’s Scientific Advisory Board. 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 with the University of Arizona, which was later amended, (the “UA License”) pursuant to which Solterra has been granted exclusive rights to use the University of Arizona’s patented screen printing techniques in the production and sale of organic light emitting diodes (“OLEDs”) incorporating QDs in printed electronic displays and other printed electronic components. This technology was developed at University of Arizona by Dr. Ghassan Jabbour, a member of the Company’s Scientific Advisory Board.

 

In 2010, Solterra entered into an agreement with a third party provider of industrial process equipment to develop a proprietary process for continuous flow production of QDs and TQDs under which Solterra retained all ownership and rights to the design and any related intellectual property. The development work has since been completed and the first two units have been delivered and placed into operation.

 

In 2013, the Company opened the Wet Lab in San Marcos, Texas at Star Park, an extension of Texas State University. In 2014, the first piece of manufacturing equipment was delivered to the Wet Lab. The capacity of the initial unit is approximately 250kg of QDs or TQDs per year and is intended to be used for internal research and development purposes although it also can be used for commercial production.

 

In 2014, the Company acquired a patent portfolio from Bayer AG that included patents and patent applications covering the high volume manufacture of QDs, including heavy metal free compositions, various methods for enhancing quantum dot performance, and a quantum dot based solar cell technology (the “Bayer Patents”).

 

In 2015, the Company expanded its San Marcos facility and took delivery of a second, larger unit capable of producing approximately 2,000kg of QDs and other nanoparticles per year. This second unit is intended to be used for the Company’s initial commercial production. The Company believes this equipment has positioned the Company to quickly and efficiently scale up mass production of QDs and TQDs for commercial sale, solar panel production, and other applications allowing the Company to readily meet increases in volume demand by simply adding additional equipment units.

 

The acquired Bayer Patents, the Rice Licenses, the UA License, and our proprietary continuous flow manufacturing process comprise the fundamental asset platform of the Company. The Company believes that the intellectual property and proprietary technologies position the Company to become a leader in the overall nanomaterials and quantum dot industry, and a preferred supplier of high performance QDs and TQDs to an expanding range of applications.

 

Business Accomplishments

 

The following outlines the business accomplishments of the Company over the last few years:

 

  entered into Technology Development Agreement for design and manufacture of fluid tracking nanoparticles;
     
  implemented Quality Management System (QMS) for QD production to establish ISO readiness;
     
  hired pioneering scientific and engineering personnel to create world-class technical team;
   
 

entered into a minority-owned joint venture, Quantum Materials Asia Co., Ltd. with Chinese partner Guanghui Technology Group (“GTG”);

   
  entered into a funded product development agreement with leading global optical film manufacturer Nitto Denko Corporation;
   
  entered a joint development agreement with an industry-leading display manufacturer;
   
  developed and introduced QDX™ Quantum Dots;
   
 

took delivery and placed into service our second manufacturing unit bringing the Company’s total capacity up to approximately 2,250kg of QDs and other nanoparticles per year;

   
  developed and began producing both red and green cadmium-free QDs;
   
  implemented high volume production of QDs using patented chemistry and process and proprietary equipment;

 

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  established and subsequently twice expanded a laboratory facility for research, development and production in Texas and negotiated a collaboration with Texas State University;
   
  acquired a foundational patent portfolio from Bayer AG covering high volume production of QDs, including heavy metal free quantum dots, quantum dot enhancement technologies and quantum dot solar cell technologies; and
   
  licensed key patents from Rice and UA.

 

We 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” section.

 

Previously, our principal business emphasis was on the development of TQDs for solar cell applications through Solterra. The solar cell market became increasingly volatile, with prices eroding due to the influx of subsidized products from abroad. Although we intend to complete the development of our QD solar cell technology and attempt to bring a competitive product to market, we have decided not do so in the current environment. Our intent is to wait until we 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 competitive cost per watt compared to existing solar cell technology and at a scale that will meet growing market demand for distributed, sustainable energy.

 

In the meantime, we have experienced a significant increase in interest from potential customers in our materials and technologies for other applications such as televisions, displays, and lighting. Management believes that these markets present the best near term opportunities for our exploitation of QDs on a commercial scale. We will continue to pursue the solar cell market along with other uses for QDs and TQDs, but as indicated above, we have implemented a more balanced approach that addresses the potential demand for high performance TQDs in the other emerging markets. See “Major Market Segments” section below.

 

Industry Overview

 

The Product: Quantum Dots and Other Nanomaterials

 

QDs were first discovered in the early 1980s, by Alexei Ekimov and independently by Louis E. Brus. QDs are semiconductor nanoparticles, typically between 2 and 10 nanometers (a billionth of a meter) in diameter or mean dimension, small enough for the particle to exhibit quantum mechanical properties because its excitons (electrons in a bound state) are confined in all three spatial dimensions.

 

QDs emit light (fluorescence) or electrons when excited with energy such as light or electricity. Emission or absorption wavelength is directly related to the size of the QD; the smaller the QD, the closer it is to the blue end of the spectrum, and the larger the QD, the closer it is to the red end of the spectrum. This allows the excitation and emission of QDs to be highly tunable. These qualities are driving demand for QDs as a performance and energy efficiency enhancing next generation engineered material and have led to the use of QDs in a range of electronic and other applications including in LED/LCD televisions and displays (“LCDs”), and solid state lighting (“SSL”) where the ability to produce a very narrow frequency of light is highly desirable.

 

In LCD televisions and displays, for example, before QDs, the “white” LED backlight light color quality was very poor, containing a lot of blue light but far less red and green and many frequencies of light in-between that are not needed at all. Typical LCDs only use red, green, and blue light to create an image. This means displays had to waste a lot of energy on light that gets filtered out in order to generate enough red and green light for a sufficiently bright display. With QDs, LCDs not only save energy by producing only the red and green light needed, they also produce better picture quality by providing a broader array of more vibrant colors because the red and green light is much more pure.

 

QDs also have applications in solar cells, where their characteristics enable conversion of light energy into electricity, with the potential for significantly higher efficiency than existing technologies. In traditional solar cells, a photon can only be converted into a fixed amount of energy per photon, regardless of the photon’s total energy. Excess energy is converted to heat which further lowers the efficiency of the panel. QD-based solar cells have the potential to significantly exceed this efficiency because QDs are capable of generating multiple electrons per photon strike rather than converting the extra energy of high energy photons to heat as in the case of traditional solar cells. QD solar cells can also convert the infrared portion of the spectrum that is not absorbed by traditional solar cells. These attributes make the theoretical maximum efficiency of QD solar cells 66% which is twice that of traditional silicon solar cells. We believe the use of QDs in solar cells will create the opportunity for a step change in efficiency and performance in printed photovoltaic cells.

 

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A uniquely performing variant of QDs are tetrapod quantum dots (“TQDs”). 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 have material advantages over standard spherical QDs particularly in solar panel applications where both absorption of photons and charge transport are enhanced by the legs of the tetrapod which effectively serve as trillions of antenna for light. Their unique architecture and shape also promotes more uniform distances between the dots, which helps to eliminate the problem of aggregation. TQDs are more costly and difficult to produce in quantity using known methods, with the exception of our proprietary chemical process technology licensed exclusively to us under the Rice Licenses.

 

How Quantum Dots are Produced

 

High volume production of QDs is typically accomplished through one of several methods including:

 

Colloidal synthesis : Growth of QDs from precursor compounds dissolved in solutions, much like traditional chemical processes. This manual batch process requires careful control of temperature, mixing and concentration levels of precursor materials. Precise control must be maintained uniformly throughout the solution otherwise non-uniform, irregular QDs are produced. Due to their very small size it is extremely difficult if not impossible to segregate the QDs by size once they have been produced and a conglomeration of varied size QDs are not capable of producing the unique features that are required in most applications.

 

Prefabricated seed growth : QDs are created from chemical precursors in the presence of a molecular cluster compound under conditions whereby the integrity of the molecular cluster is maintained and acts as a prefabricated seed template. This manual batch method can produce reasonable quantities of QDs, but can take significant capital resources to achieve significant volume and still results in low yields.

 

QMC’s automated continuous process : Unlike the more labor-intensive batch processes described above, we use a continuous manufacturing process to produce QDs and TQDs. This patented process and chemistry provides advantages to other methods such as more precise control of process variables which leads to improved quality control. We believe that by using this method yields are higher and manufacturing costs are lower as compared to other methods. We also believe that we are the only company to successfully deploy continuous flow technology in the large-scale manufacturing of highly uniform QDs of both cadmium-based and cadmium-free chemistry.

 

Raw materials for the commercial production of QD are purchased in bulk from chemical supply companies. Indium, a component of our cadmium-free QD is considered a “rare metal.” Indium is primarily found in South America, Canada, Australia, China and the Commonwealth of Independent States. There is also a mature and efficient indium recycling process. While our management does not believe that a supply disruption of the indium-containing compounds used in the manufacturing of QDs represents a significant risk, no assurances can be given in this regard.

 

Market for Quantum Dots

 

A number of recent market research reports have forecasted rapid growth of the QD market including the following:

 

· A report by Touch Display research published in January 2015, which states “the quantum dot display and lighting component market will surpass $2 billion by 2016 and reach $10.6 billion by 2025.” IHS writes in their Q2-2015 Quarterly/Technology report “Total shipments of LCDs incorporating quantum dot technology will surge to a staggering 135.2 million units in 2020, up from less than 1 million in 2013.”
     
· “Quantum Dots : Market Shares, Strategy, and Forecasts, Worldwide, 2015 to 2021”, published by Wintergreen Research in August 2015 forecasts that “Quantum dot markets at $306 million in 2014 are anticipated to reach $4.6 billion by 2021 as next generation devices, systems, and displays are triggered by quantum dots.” They also note “quantum dots represent the next wave of semiconductor revolution.”
     
· An April 2016 report by Credence Research states “The quantum dots market is expected to cross US$ 8.0 Bn by 2022, expanding at a CAGR of 51.3% during the forecast period 2015 to 2022,” and a report published by Transparency Market Research also in April 2014 forecasts that “the market will develop at an exceptional 53.8% CAGR between 2013 and 2023. If the projections hold true, the market could rise from a valuation of US$88.5 mn in 2011 to US$8.2 bn by 2023.”

 

The biggest growth sectors are forecast to be in TVs, displays, sold-state lighting, and solar cells. Other current and potential applications for QD include batteries, security inks, sensors, lasers, and paints. QDs remain an expensive product, and the high cost has slowed market growth to this point although we believe the recent growth of mass manufacturing is quickly easing the cost constraints.

 

Notwithstanding the foregoing quantum dot market industry forecasts and any other quantum dot research industry reports referenced in this Form 10-K, no assurance can be given that these market industry forecasts for the utilization and sale of quantum dots will be realized or will result in profitable operations for the Company. See “Risk Factors” section.

 

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Major Market Segments

 

TVs, Displays, and Other Optoelectronics . This market is comprised principally of quantum dot LCD displays (“QDLCDs”) for televisions, computers, cell phones, tablets and various other applications. In QDLCDs, QDs are used to downconvert some of the blue light from the LED backlight directly to green and red light allowing for the creation of more vibrant colors and energy savings as compared to a traditional LCD TV/display. Unlike OLEDs which are extremely expensive to produce and require massive manufacturing capital expenditures, QD films are a drop-in solution for LCD manufacturers using existing infrastructure allowing for OLED-like color performance at significantly lower cost and investment.

 

LCD TVs make up the vast majority of new TV shipments, and QDLCDs are forecasted to grow to 135 million units by 2020 according to the IHS Quarterly/Technology Q2-2015 research report. LG, Samsung, AUO, and other OEMs have recently introduced televisions using QDs to enhance the color quality and power efficiency.

 

Lighting . In the lighting market, companies began to commercialize quantum dot LEDs in 2013 with significant R&D occurring among manufacturers of solid-state lighting. While companies have launched quantum dot LED lamps, the market for quantum dot LED lamps and the other lighting products is still relatively small. We believe QD-based LED lighting will be the best replacement for currently available compact florescent and LED lighting, as QD technology provides greater power efficiency and the ability to tune the light spectrum to emit light that is the most pleasing and/or appropriate for the application. LED lighting is expected to dominate the $100 billion lighting industry over the next five years.

 

Solar Energy . QDs are capable of producing energy from a broad spectrum of solar and radiant energy, including the ultraviolet and infrared frequencies conventional silicon solar cells generally do not convert to electricity. QD solar cells have conversion potentials of approximately twice that of conventional solar cells, and applications are being developed to “print” highly efficient photovoltaic solar cells in mass quantities at low cost. Management believes that QD solar cells and panels will be the next evolutionary development in the field of solar energy and that commercialization will begin in 2017.

 

Management also believes that the increased conversion efficiencies will be realized with the use of TQDs resulting from their unique shape and that our low cost proprietary continuous production process and printing technology will permit Solterra to offer solar electricity solutions that can compete on a non-subsidized basis with the price of retail electricity in key markets around the world. We believe that global energy consumption trends that include the need for distributed energy generation (non-grid and especially in developing markets) and the desire for non-fossil fuel generated energy even at increased costs will drive market demand for solar. Management believes this will be especially true if existing generation by nuclear and coal is decommissioned due to age-related, safety, or environmental concerns or global governmental policy.

 

Anti-counterfeiting . Piracy and counterfeiting cost businesses more than $200 billion annually and account for the loss of more than 750,000 jobs in the US alone. Counterfeit drugs cost the global pharmaceutical industry approximately $18 billion in lost profits annually and according to Interpol, result in as many as one million deaths annually. QDs and other custom nanoparticles added to ink can be used to create unclonable unique “fingerprints” for every package using current printing technology, and these “fingerprints” can be quickly verified with a handheld device or optical in-line screening in manufacturing or handling lines.

 

Life Sciences . The life sciences industry was one of the early areas of adoption of QD technology, especially for QDs used in fluorescent markers in diagnostic applications. This includes both the in vitro use of QDs for marking (illuminating) particular cell types or metabolic processes for understanding diseases, and in vivo imaging made possible by QD fluorescence in near infrared that can be detected in deep tissues.

 

The fluorescent qualities of QDs provide an attractive alternative to traditional organic dyes in bio-imaging. It is estimated that QDs are 20 times brighter and 100 times more stable than standard fluorescent indicators.

 

Other applications . Current and future applications of QDs may impact a broad range of other industrial markets. These potentially include computing and memory, improved thermoelectric components, biohazard detection sensors, diode lasers, bio and chemical hazard detection sensors, and medical imaging. We intend to monitor these uses as they mature from basic research and plan for specific quantum dot compositions as market opportunities develop.

 

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Current Position

 

In September 2016, we completed a second expansion of its laboratory space at STAR Park, in San Marcos, Texas in preparation for qualification of production runs of quantum dots for display applications. As part of a broader Quality Management System, the Company has delineated production and research work flows to meet client demands as well as to prepare for optimization or customization of QD compositions. The expansion also allows for additional production capacity to meet expected QD demand.

 

Widespread, rapid adoption of quantum dots by the display or other markets may cause supply pressure that can only be met with significant increases in available production capability. While we believe our current manufacturing capacity of approximately 2 metric tons per year is about the same as our largest competitors, we also have established plans to be able to increase our manufacturing capacity with very short lead times and minimized facilities requirements. This is anticipated to be a key advantage to the Company to meet market demand and drive increased revenue.

 

The advantages and benefits of our automated production are:

 

  large scale production with a compact footprint;
     
  less manpower and time needed for cost savings;
     
  economies of scale leading to lower costs;
     
  high production yield with little post-processing;
     
  improved quality control for higher uniformity; and
     
  assurance of backup systems for continuous supply.

 

Sales and Marketing Overview

 

During the past year, we have made progress in the development of QDs for use in electronic display applications, in particular for LCD TV applications. With a focus on cadmium free QDs, we have been developing technologies aimed at meeting key customer requirements, and we have been shipping samples of products to customers for evaluation and testing.

 

Our discussions with current and potential new customers in the display industry confirm that the market opportunity is substantial and our business plan is aligned with the customers’ product specification needs. Beyond electronic displays, we see opportunities for applications in oil & natural gas production, solar, life sciences, and anti-counterfeiting sectors. In addition to customers in the electronic components industry, we have recently shipped sample products to a customer in the oil & natural gas industry.

 

We believe that our advantages in delivery of high quality, high performance QDs and other nanomaterials, its patented continuous production techniques, and its licensed screen printing techniques, make it an attractive supplier to these markets.

 

Operational Overview

 

Our operations are located in San Marcos, Texas at the Star Park Technology Center, an extension of Texas State University (“TSU”). This location provides us with space for future expansion and with convenient access to TSU faculty and specialized laboratory facilities and equipment that can support joint research and development efforts with Texas State University. Located 30 miles south of Austin, Texas, the San Marcos facility is also in close proximity to a number of leading companies in the electronics, lighting, solar, and life sciences markets.

 

We have acquired commercial-scale continuous manufacturing equipment at the San Marcos facility and now have the capacity to produce more than two metric tons (2,000kg) per year of nanomaterials for supply to its customers. Management believes that the production capacity of the San Marcos facility is similar to, or greater than its largest competitors’ factories which are much larger and require significantly larger capital expenditures. This efficiency is the direct result of our patented continuous flow process and proprietary manufacturing knowhow and equipment. While we plan to work extensively with its current provider of equipment, we own 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 or build the manufacturing equipment in-house, if necessary.

 

We expect to commence generating revenues from the production of materials at the San Marcos facility in early 2017. Such revenues are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners.

 

Our ongoing research and development functions are considered key to maintaining and enhancing our competitive position in the growing nanomaterials and QD market. Nanomaterials and QD technology continue to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development, and will focus a significant part of our efforts on this, as it has done historically. Continuing R&D activities at the San Marcos facility and our collaboration with Texas State University, Rice, University of Arizona, and the numerous other research centers and departments with which we have relationships will be important aspects of the Company’s strategy.

 

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Our key assets include patents, proprietary high volume process equipment technology, licenses and other intellectual property rights, its knowhow and the expertise, capabilities, and relationships brought to the Company by its management team. We will continue to build out our intellectual property portfolio and licensing rights.

 

The Licenses with Rice and University of Arizona include provisions for milestones and milestone payments. To date, such payments have been paid as agreed, waived and/or extended by both Rice and University of Arizona, respectively, illustrating the support each university has given us as we have attempted to advance our business with measured resources. As we move forward, we expect to be able to meet all payment and other obligations under the Licenses, and the Company’s funding strategy takes account of these requirements. Solterra plans to utilize the Company’s patented low-cost, high-volume quantum dot production combined with TQD technology licensed from Rice to commercialize QD solar cells at a fraction of the cost of current silicon based solar cells.

 

Our business is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, and regulation of hazardous materials used in or produced by the manufacture or use of QDs. Management believes that the patented (owned and licensed) processes and proprietary manufacturing equipment employed allow us to comply with current regulations. However, new regulations or requirements may develop that could adversely affect us and our products in the future. See “Risk Factors” section.

 

Management and Personnel

 

We have traditionally operated with limited resources and infrastructure. As we near commercial manufacturing, we have expanded our scientific and operations staff. As of the date of this Form 10-K, we have 16 employees, including the management team.

 

Our Board of Directors, Scientific Advisory Board, and management team are comprised of individuals from a range of backgrounds with a strong representation from the business and scientific communities. Our Scientific Advisory Board includes Dr. Michael Wong, the inventor of our licensed TQD dot chemistry and Dr. Ghassan Jabbour, the inventor of our printed electronics technology, Tomio Gotoh, the inventor that led the technology efforts at NEC Japan, and Dr Muniswamy Anandan, inventor, author and former president of the Society for Information Display (SID). Each of these individuals brings significant value to the Company through their connections and relationships with various universities, research institutions, and industry contacts.

 

As we move into the next stage of our business, the Board of Directors and management team will continue to be strengthened by the recruitment of additional members. With Mr. Peruvemba assuming the role of President and CEO in June 2016, our Board of Directors does not have a majority of independent directors as of the date of this Form 10-K; however we intend to return to a majority of independent directors and are currently in the process of determining the best way to achieve this. Our board includes a member who meets the requirements of the SEC’s “financial expert” definition, and in September 2015, our Board of Directors formed Audit, Compensation, and Nominating and Corporate Governance Committees. Additionally our Board of Directors established a separate Scientific Advisory Board comprised of individuals with strong scientific backgrounds.

 

Once we commence commercial manufacturing operations, we expect to add additional employees in operating management, sales/marketing, R&D, production, finance and accounting, and business administration from time to time, as necessary, as our business expands and the scale up of production accelerates.

 

Competition

 

The commercial nanomaterials industry and more specifically, the quantum dot industry, is relatively young and undeveloped, with a number of small competitors attempting to establish themselves in different segments by 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 QDs in specific applications will carefully consider the quality, characteristics and physical properties of the QDs for efficacy in their targeted applications. This includes but is not necessarily limited to the following factors: the consistency of dots from batch to batch; resistance to degradation of performance characteristics by heat, oxygen, moisture, and luminous flux; brightness of emissions; purity of emissions; effective life spans; volume of dots necessary to produce the intended result; special characteristics such as dual emission capabilities; whether or not the QDs contain cadmium or other heavy metals or other hazardous compounds; the time needed to expand capacity; and the location of capacity relative to the manufacturer or ability to locate capacity nearby.

 

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  Volume : Before a manufacturer makes the commitment and dedicates capital and marketing resources to incorporate QDs in its end product, it must be confident that the volume of QDs it can obtain from a supplier will be sufficient to meet production needs in the 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 QDs.
     
  Price : The price at which QDs can be delivered for incorporation in a new product will dictate the rate at which new applications can be developed and supported. High prices have historically restricted the market for QDs to only the highest value uses such as in the life sciences, while the potential for lower prices of supply appears to be opening many 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. The Company spent $305,703 and $64,460 on research and development in 2016 and 2015 respectively. None of these costs were borne by customers.

 

We believe we are well positioned in all four areas described above. We believe our QDs, including cadmium/heavy metal-free QDs, meet or exceed our competitors’ current brightness and purity specifications, and our patented continuous manufacturing process allows us to produce large volumes at competitive price points while also giving us the ability to quickly scale up capacity and locate it anywhere in the world it is needed. Lastly, our continuing relationships with universities such as Rice, University of Arizona, and Texas State University, private and public labs and our approach to joint development ventures should enable us 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 than the Company. See “Risk Factors” section.

 

Licenses and Intellectual Property

 

In 2010, we entered into an agreement with a third party provider of industrial process equipment to develop proprietary equipment for continuous production of QDs under which we retained all ownership and rights to the design and any related intellectual property. We have, to date, received two production machines, a 250kg per year capacity unit primarily for internal research and development purposes and sample production, and a larger 2,000kg per year unit for commercial production. We believe the design of this manufacturing equipment will position us to quickly and efficiently scale up mass production of QDs for commercial sale.

 

While we plan to work extensively with its current provider of equipment, we own 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 or build the equipment in-house, if necessary.

 

Bayer Patents

 

In 2014, we acquired several patents and patent applications in five diverse sets of patent families from Bayer Technology Services GmbH, the global technological backbone and major innovation driver for Bayer AG of Leverkusen, Germany (the “Bayer Patents”). The Bayer Patents provide broad intellectual property protection for advances we have achieved in economical high-volume QD manufacturing. In addition, the Bayer Patents cover volume production technology for heavy metal-free QDs and nanoparticles; increasing quantum yields; heavy metal-free QDs; and hybrid organic quantum dot solar cell (“QDSC”) production as well as a surface modification process for increased efficiency of high performance solar cells and printed electronics.

 

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Agreement with Rice University

 

On August 20, 2008, Solterra entered into a License Agreement with Rice University (the “Solterra Rice License”) for a certain patent application. In November 2012, Rice was granted US Patent # 8,313,714 titled “Synthesis of uniform nanoparticle shapes with high selectivity” by the United States Patent and Trademark Office (the “Rice Patent”). In August 2013, Solterra entered into an amended License Agreement and QMC entered into a new License Agreement with Rice (“QMC Rice License”, and together with the Solterra Rice License Agreement, the “Rice Licenses”). Pursuant to the Rice License Agreements, QMC and Solterra have obtained the exclusive rights to sublicense (subject to Rice’s consent which shall not be unreasonably withheld), develop, manufacture, market, and exploit the Rice Patent, in the case of Solterra, for the manufacture and sale of photovoltaic cells and photovoltaic applications, and in the case of QMC, for the manufacture and sale of quantum dots for electronic and medical applications (excluding photovoltaic applications).

 

The Rice License Agreements, as amended, require the payment of certain patent fees to Rice and for QMC and Solterra to meet certain milestones by specific dates. Pursuant to the Solterra Rice License Agreement, as amended, Rice is entitled to receive, during the term, certain royalties of adjusted gross sales (as defined therein) ranging from 2% to 4% for photovoltaic cells and 7.5% of adjusted gross sales for QDs sold in electronic and medical applications. Additionally, minimum royalties payable under the Solterra Rice License Agreement include $100,000 due January 1, 2017, $356,250 due January 1, 2018, $1,453,500 due January 1, 2019, $3,153,600 due January 1, 2020 and each January 1 of every year thereafter, subject to adjustments for changes in the consumer pricing index. Pursuant to the QMC Rice License Agreement, as amended, Rice is entitled to receive, during the term, a royalty of 7.5% of adjusted gross sales for QDs sold in electronic and medical applications. Additionally, minimum royalties payable under the QMC Rice License Agreement include $117,000 due January 1, 2017, $292,500 due January 1, 2018, $585,000 due January 1, 2019 and each January 1 of every year thereafter, subject to adjustments for changes in the consumer pricing index. The Rice License Agreements and subsequent amendments have been previously filed on Form 8-K and are incorporated by reference herein.

 

Agreement with University of Arizona

 

Solterra entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. Pursuant to UA License Agreement, as amended, Solterra is obligated to pay minimum annual royalties of $50,000 by December 31, 2016, $125,000 by June 30, 2017 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. The UA License Agreement and subsequent amendments have been previously filed on Form 8-K and are incorporated by reference herein.

 

Other Intellectual Property

 

The Company also owns additional intellectual property in the form of proprietary equipment designs, 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” section.

 

Governmental Approvals

 

Chemical substances manufactured in quantities of 10,000 kilograms or less per year are exempt from full premanufacture notice (“PMN”) review under section 5 of the Toxic Substances Control Act (“TSCA”). Low volume exemption (“LVE”) substances undergo a 30-day review. To date, we have only made small quantities of QDs for research and development. We will file a LVE notice at least 30 days prior to initial commercial manufacture and do not expect any difficulties in receiving an exemption from full PMN review; however no assurances can be given in this regard.

 

Item 1A. 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

 

Risks Related to Our Business

 

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.

 

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We need to continue as a going concern if our business is to succeed, if we do not we will go out of business.

 

There are a number of factors contained in our audited financial statements that raise substantial doubt about our ability to continue as a going concern. Such factors are 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 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.

 

Our business plans for the sale of quantum dots (“QDs”) may not materialize.

 

Our business plans contemplate the sale of QDs for sale in multiple industries. We can provide no assurances that our business opportunities will have the desired end result which is most favorable or beneficial to our business, if at all, or that we will achieve profitable operations.

 

Our intended business is partially based on rights granted to QMC and Solterra pursuant to the license agreements with William Marsh Rice University (“Rice”).

 

We have entered into exclusive license agreements, as amended with Rice (collectively, the “Rice Licenses”), 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 QDs for electronic and medical applications. The Rice Licenses require us to be financially solvent, to meet certain milestones, obligations and conditions and to make certain royalty and other payments during the term of the Rice Licenses. Any default under the terms of the Rice Licenses, which if not cured or waived by Rice, could result in the loss of the Rice Licenses and the right to manufacture and sell certain products. While Rice has in the past waived certain milestone dates and extended certain payment dates, there is no assurance that we will meet the new milestones or payment requirements or that Rice will agree to waive any future requirements. While we own patents acquired from Bayer AG pertaining to the high volume production of QDs, our management believes that the loss of the Rice Licenses could have a material adverse effect on our future opportunities.

 

One of our intended businesses, to print electronic components is dependent on our patent license agreement with University of Arizona (“UA”).

 

Solterra entered into an exclusive patent license agreement, as amended, with UA (the “UA License”). 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 other printed electronic components. Solterra has the right to grant sublicenses with respect to the licensed product and the license method (as defined therein). Pursuant to the UA License, we are obligated to pay minimum annual royalties. While UA has in the past waived certain milestone dates and extended certain payment dates, there is no assurance that we will meet the new milestones or payment requirements or that UA will agree to waive any future requirements. Termination of the UA License with UA could materially adversely affect our future opportunities.

 

The market for QDs is expected to grow significantly over the next several years.

 

The market for the sale of QDs is expected to grow significantly over the next several years. No assurances can be given that the quantum dots industry will grow as forecasted, that the potential applications described under “Item 1” will develop as discussed or that we will be able to capitalize on the growth and developments that do occur.

 

Our production method is expected to enable us to scale production more readily thereby reducing the production costs of QDs.

 

QDs remain an extremely expensive commodity, and the price of QDs is directly affected by the high cost of producing QDs in relatively small batch quantities. As with other nanomaterials, these relatively high prices have been supported by favorable performance of the QDs at very low concentrations. Prices for QDs 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 QDs 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 QDs, while maintaining strict control over quality and uniformity. We have developed a proprietary manufacturing technique to produce QDs 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 us to become competitive or to remain competitive against other manufacturing techniques that may be developed and applied.

 

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We have entered into a number of non-disclosures agreements (“NDAs”) and material transfer 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 several years, we have entered into a number of NDAs and material transfer 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. No assurances can be given that the non-disclosure agreements and sample supply agreements entered into by us as described above will result in sales of our products.

 

Our ongoing research and development functions are considered key to maintaining and enhancing our 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. We intend 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 San Marcos facility will be an important aspect of our strategy, as will our collaboration with Rice, UA, Texas State University and the numerous research centers and departments with which we have relationships. No assurances can be given that we will be able to successfully maintain and enhance our competitive position in the growing quantum dot market.

 

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

 

Our key assets include our patents, licenses and intellectual property rights, know-how and the expertise, capabilities and relationships brought to us by our management team. We will continue to develop our intellectual property portfolio and licensing rights, and we currently have two patents pending related to the continuous flow production of QDs. No assurances can be given that we will be successful in building out our portfolio of owned and licenses intellectual property and in protecting these rights.

 

Our business is subject to environmental and other regulations.

 

Our business is subject to various types of government regulations, including regulation of hazardous materials used in or produced by the manufacture or use of nanomaterials and restrictions on the chemical composition of QDs used in the various applications. Our management believes that our patented and licensed chemistry and continuous manufacturing process allows us to comply with current regulations by producing nanomaterials with the 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 us or our products in the future.

 

As we grow, we will need to obtain and retain additional qualified management and personnel.

 

We have traditionally operated with limited resources and infrastructure. We have a total of 16 employees, including our management team. Our Board of Directors, Scientific Advisory Board and management team are comprised of individuals from a range of backgrounds, with a strong representation from the business and scientific community. Our Scientific Advisory Board includes Dr. Michael Wong, the inventor of our TQD dot chemistry, Tomio Gatoh inventor of the NEC TK-80 microcomputer, Dr Munisamy Anandan, former president of SID, 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, UA and various other university, research and industry contacts.

 

As we move into the next stage of our business, our Board of Directors and management team will seek to continue to be strengthened by the recruitment of additional members. As our finances permit, we will seek to add additional employees in operating management, sales/marketing, R&D, production and administration. Additional staffing will be added from time-to-time, as necessary, when our business expands and the scale up of production accelerates. No assurances can be given that we will be successful in hiring and retaining additional qualified board members, 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. We believe that we are well positioned to compete in each of the aforementioned four areas. Nevertheless, we are 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 than us.

 

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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 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 QDs 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 to 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 to 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.

 

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 .

 

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Technological changes in the QDs 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 and 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.

 

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.

 

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 and 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 pursuant to the arrangement, which may subject us to losses over which we have no control or expensive termination arrangements. As a result, our business may be adversely affected by a number of factors that are outside of our control.

 

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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. The risks we face in protecting our intellectual property and in developing, manufacturing, marketing and selling our products include:

 

  possible loss of our exclusive licenses with Rice and UA;
     
  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;
     
  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 owned or licensed patents, which can result in a narrowing of or invalidating our patents or licensed patents, or rendering such rights unenforceable;
     
 

we may have to participate in interference, cancellation, or opposition proceedings before the United States Patent and Trademark Office, or before foreign patent and trademark offices, with respect to our patents, 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 agreements and NDAs 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 or the public, and others may independently develop technology equivalent to our trade secrets and proprietary information.

 

Our technology and products could unknowingly 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. While we have received a freedom to operate opinion from our intellectual property counsel, 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 the intellectual 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.

 

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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 such third party’s intellectual property rights or from using, making or selling products deemed to be infringing such third party’s intellectual property rights. If we have supplied infringing products or technology to third parties, we may be obligated to indemnify those 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 patents, 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 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 QDs. Our Rice License, which currently permits 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 tetrapod quantum dot license may terminate if we materially breach the Rice License 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.

 

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, or suspend, limit 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 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/or adversely affect sales of our products.

 

  17  

 

 

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 involves a risk of potential injury to our employees. These operations are subject to regulation under the Occupational Safety and Health Act (“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/or 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 may be 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 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, such claims 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/or 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 manufacturers, 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 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.

 

Our ability to use NOL carryforwards to offset future taxable income for U.S. federal income tax purposes may be subject to limitation

 

Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules) increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years).

 

Risks Related to Our Common Stock

 

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 therefore, we are 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.

 

  18  

 

 

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 convertible securities exchangeable into a large number of shares of our common stock 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 convertible securities 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 and earnings 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;
     
  industry adoption of quantum dot technology or other new competing technologies;
     
  the timing of adding the personnel necessary to execute our growth plan; and
     
  the cost of raw materials

 

We anticipate that our operating expenses will continue to increase significantly, particularly as we begin production and 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.

 

  19  

 

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

In June 2013, we opened a Wet Lab facility and principal executive office in San Marcos, Texas for research and development and the production of QDs and other nanomaterials. The facility where the Company is located is owned by Texas State University. In June 2015, the Company moved into a larger lab space in the same facility. As of June 30, 2016, our monthly rent for the San Marcos facility and office was $4,066.

 

We recently increased our laboratory and office space at the San Marcos facility and as of the date of this Form 10-K, our monthly rent is $9,075.

 

Item 3. Legal Proceedings

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

  20  

 

 

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 on the OTCQB under the symbol “QTMM.” The OTCQB marketplace offers trading for securities of smaller reporting companies like us that are reporting to the Securities and Exchange Commission. 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.

 

As of June 30, 2016, there were 324,563,789 shares of common stock outstanding and 198 stockholders of record according to our transfer agent. The foregoing number of stockholders does not include approximately 660 additional beneficial stockholders held in street name as of January 13, 2016.

 

The following table sets forth the high and low closing prices for our common stock during the most recent two fiscal years. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

Quarter Ended   High     Low  
September 30, 2014   $ 0.42     $ 0.19  
December 31, 2014   $ 0.24     $ 0.12  
March 31, 2015   $ 0.24     $ 0.14  
June 30, 2015   $ 0.19     $ 0.14  
September 30, 2015   $ 0.20     $ 0.15  
December 31, 2015   $ 0.16     $ 0.13  
March 31, 2016   $ 0.15     $ 0.10  
June 30, 2016   $ 0.17     $ 0.09  

 

Historically we have not paid cash dividends on our common stock, and the Board of Directors intends to retain all of our earnings, if any, to finance the development and expansion of our business. There can be no assurance that our operations will prove profitable to the extent necessary to pay cash dividends. Moreover, even if such profits are achieved, the future dividend policy will depend upon our earnings, capital requirements, financial condition, and other factors considered relevant by our Board of Directors.

 

Issuer Sales of Unregistered Securities

 

From July 1, 2015 to June 30, 2016, we had the following sales of unregistered common stock.

 

  21  

 

 

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 Purchases   Exemption from Registration Claimed   If Option, Warrant or Convertible Security, Terms of Exercise or Conversion
                       
September 2015   Common Stock Warrants     694,444     Issuance of stock warrants   Section 4(2); and/or Rule 506   Warrants exercisable at $0.04 to $0.10 per share through January 9, 2018
August 2015   Common Stock     1,050,000     Shares issued for warrants exercised; $63,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
August 2015   Common Stock     183,010     Shares issued for warrants in cashless exercise; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
September 2015   Common Stock     250,001     Shares issued for warrants exercised; $15,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
September 2015   Common Stock     2,400,000     Shares issued for services; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
September 2015   Common Stock     2,146,629     Shares issued for options in cashless exercise; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
September 2015   Common Stock Options     1,000,000     Issuance of stock options   Section 4(2); and/or Rule 506   Options exercisable at $0.17 per share through September 22, 2025
October 2015   Common Stock     2,458,333     Shares issued for warrants exercised; $165,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
October 2015   Common Stock     1,999,503     Shares issued for warrants in cashless exercise; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
October 2015   Common Stock     1,000,000     $100,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
October 2015   Common Stock Options     500,000     Issuance of stock options   Section 4(2); and/or Rule 506   Options exercisable at $0.17 per share through October 14, 2025
October 2015   Common Stock Warrants     7,770,731     Issuance of stock warrants   Section 4(2); and/or Rule 506   Warrants exercisable at $0.04 to $0.06 per share through October 30, 2017
November 2015   Common Stock     1,721,005     Shares issued for warrants in cashless exercise; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
November 2015   Common Stock     100,000     Shares issued for warrants exercised; $5,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
November 2015   Common Stock     100,000     Shares issued for services; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
November 2015   Common Stock     250,000     Shares issued as stock-based compensation; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
November 2015   Common Stock Options     2,000,000     Issuance of stock options   Section 4(2); and/or Rule 506   Options exercisable at $0.17 per share through November 13, 2025
December 2015   Common Stock     1,676,286     Shares issued for warrants exercised; $82,500 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
January 2016   Common Stock     500,000     Shares issued as stock-based compensation; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
January 2016   Common Stock     250,000     Shares issued for warrants exercised; $10,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
February 2016   Common Stock     111,111     Shares issued for warrants exercised; $5,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
February 2016   Common Stock     400,000     Shares issued for services; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
February 2016   Common Stock Options     2,000,000     Issuance of stock options   Section 4(2); and/or Rule 506   Options exercisable at $0.14 to $0.15 per share through January 25, 2022
March 2016   Common Stock     333,333     Shares issued for warrants exercised; $15,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
March 2016   Common Stock Warrants     583,333     Issuance of stock warrants   Section 4(2); and/or Rule 506   Warrants exercisable at $0.04 per share through March 11, 2016
April 2016   Common Stock Options     4,250,000     Issuance of stock options   Section 4(2); and/or Rule 506   Options exercisable at $0.12 per share through April 13, 2026
April 2016   Common Stock Options     500,000     Issuance of stock options   Section 4(2); and/or Rule 506   Options exercisable at $0.12 per share through April 26, 2026
April 2016   Common Stock Warrants     5,665,860     Issuance of stock warrants   Section 4(2); and/or Rule 506   Warrants exercisable at $0.12 to $0.15 per share through April 26, 2021
May 2016   Common Stock     675,458     Shares issued for warrants in cashless exercise; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
May 2016   Common Stock     500,000     Shares issued for warrants exercised; $25,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
May 2016   Common Stock Warrants     2,525,195     Issuance of stock warrants   Section 4(2); and/or Rule 506   Warrants exercisable at $0.11 to $0.15 per share through May 19, 2021
June 2016   Common Stock Options     6,000,000     Issuance of stock options   Section 4(2); and/or Rule 506   Options exercisable at $0.13 per share through June 30, 2026
June 2016   Common Stock Warrants     333,280     Issuance of stock warrants   Section 4(2); and/or Rule 506   Warrants exercisable at $0.15 per share through June 1, 2021

 

  22  

 

 

From July 1, 2014 to June 30, 2015, we had the following sales of unregistered common stock.

 

              Consideration Received        
              and Description of Underwriting or Other      
              Discounts to Market       If Option, Warrant or
              Price or Convertible     Convertible Security,
        Number     Security Afforded to   Exemption from   Terms of Exercise or
Date of Sale   Title of Security   Sold     Purchases   Registration Claimed   Conversion
                       
July 2014   Common Stock     766,667     Shares issued for warrants exercised; $46,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
August 2014   Common Stock     582,034     $119,070 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
August 2014   Common Stock     100,000     Shares issued for warrants exercised; $8,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
September 2014   Common Stock     2,511,811     $355,375 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
September 2014   Common Stock     1,387,500     Shares issued for warrants exercised; $82,625 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
September 2014   Common Stock     52,154     Shares issued in exchange for $12,778 of interest; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
October 2014   Common Stock     1,999,333     Shares issued upon conversion of $299,900 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
October 2014   Common Stock Warrant     1,999,333     Warrants issued upon conversion of $299,900 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Warrants exercisable at $0.30 per share through October 31, 2019
October 2014   Common Stock     3,830,077     Shares issued for services; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
October 2014   Common Stock     208,333     Shares issued for warrants exercised; $10,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
October 2014   Common Stock Warrant     500,000     Warrants issued in connection with subscription agreement   Section 4(2); and/or Rule 506   Warrants exercisable at $0.05 per share through May 15, 2016
October 2014   Common Stock Warrant     1,300,000     Warrants issued in connection with subscription agreement   Section 4(2); and/or Rule 506   Warrants exercisable at $0.05 per share through May 15, 2016
October 2014   Common Stock Warrant     115,000     Warrants issued in connection with subscription agreement   Section 4(2); and/or Rule 506   Warrants exercisable at $0.07 per share through May 31, 2016
November 2014   Common Stock     334,000     Shares issued upon conversion of $50,100 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
November 2014   Common Stock Warrant     334,000     Warrants issued upon conversion of $50,100 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Warrants exercisable at $0.30 per share through November 4, 2019
November 2014   Common Stock     366,667     Shares issued for warrants exercised; $23,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable

 

  23  

 

 

              Consideration Received and Description of        
              Underwriting or Other Discounts to       If Option, Warrant or
              Market Price or       Convertible Security,
        Number     Convertible Security   Exemption from   Terms of Exercise
Date of Sale   Title of Security   Sold     Afforded to Purchases   Registration Claimed   or Conversion
November 2014   Common Stock     40,483     Shares issued in exchange for $9,028 of interest; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
November 2014   Common Stock     8,333,333     Shares issued upon conversion of $500,000 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
December 2014   Common Stock     833,334     Shares issued upon conversion of $125,000 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
December 2014   Common Stock Warrant     833,334     Warrants issued upon conversion of $125,000 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Warrants exercisable at $0.30 per share through November 5, 2019
December 2014   Common Stock     283,334     Shares issued for warrants exercised; $21,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
December 2014   Common Stock     591,667     Shares issued for warrants in cashless exercise; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
December 2014   Common Stock Warrant     400,000     Warrants issued in connection with subscription agreement   Section 4(2); and/or Rule 506   Warrants exercisable at $0.10 per share through December 15, 2016
January 2015   Common Stock     666,667     Shares issued upon conversion of $100,000 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
January 2015   Common Stock Warrant     666,667     Warrants issued upon conversion of $100,000 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Warrants exercisable at $0.30 per share through January 21, 2017
January 2015   Common Stock     550,000     Shares issued for services; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
January 2015   Common Stock     425,000     Shares issued for warrants exercised; $34,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
January 2015   Common Stock     401,096     Shares issued in exchange for $16,044 of interest; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
January 2015   Common Stock Warrant     6,250,000     Warrants issued upon closing of $500,000 debenture; no commissions paid   Section 4(2); and/or Rule 506   Warrants exercisable at $0.06 per share through January 15, 2017

 

  24  

 

 

              Consideration Received and Description of        
              Underwriting or Other Discounts       If Option, Warrant or
              to Market Price or       Convertible Security,
        Number       Convertible Security   Exemption from   Terms of Exercise
Date of Sale   Title of Security   Sold     Afforded to Purchases   Registration Claimed   or Conversion
February 2015   Common Stock     2,416,668     Shares issued for services; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
February 2015   Common Stock     766,667     Shares issued for warrants exercised; $46,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
February 2015   Common Stock     67,946     Shares issued in exchange for $2,718 of interest; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
February 2015   Common Stock     10,000,000     Shares issued upon conversion of $400,000 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
February 2015   Common Stock Warrant     187,970     Warrants issued in connection with subscription agreement   Section 4(2); and/or Rule 506   Warrants exercisable at $0.13 per share through February 6, 2017
March 2015   Common Stock     2,687,970     $125,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
March 2015   Common Stock Warrant     1,250,000     Warrants issued in connection with subscription agreement   Section 4(2); and/or Rule 506   Warrants exercisable at $0.04 per share through March 6, 2017
March 2015   Common Stock Warrant     1,250,000     Warrants issued in connection with subscription agreement   Section 4(2); and/or Rule 506   Warrants exercisable at $0.04 per share through March 13, 2017
March 2015   Common Stock     633,334     Shares issued for warrants exercised; $38,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
April 2015   Common Stock     2,250,000     Shares issued upon conversion of $250,000 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
April 2015   Common Stock Warrant     333,333     Warrants issued upon conversion of $50,000 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Warrants exercisable at $0.30 per share through April 25, 2017
April 2015   Common Stock Warrant     416,667     Warrants issued upon conversion of $50,000 of debentures; no commissions paid   Section 4(2); and/or Rule 506   Warrants exercisable at $0.24 per share through April 25, 2017
April 2015   Common Stock     5,300,000     $530,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
April 2015   Common Stock     3,206,721     Shares issued for warrants exercised; $174,080 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
May 2015   Common Stock     4,000,000     $400,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
May 2015   Common Stock     362,500     Shares issued for warrants exercised; $23,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
June 2015   Common Stock     131,579     Shares issued for services; no commissions paid   Section 4(2); and/or Rule 506   Not applicable

 

  25  

 

 

              Consideration Received and Description of        
              Underwriting or Other Discounts       If Option, Warrant or
              to Market Price or       Convertible Security,
        Number       Convertible Security   Exemption from   Terms of Exercise
Date of Sale   Title of Security   Sold     Afforded to Purchases   Registration Claimed   or Conversion
June 2015   Common Stock     200,000     Shares issued for warrants exercised; $12,000 cash received; no commissions paid   Section 4(2); and/or Rule 506   Not applicable
June 2015   Common Stock Option     14,300,000     Issuance of stock options   Section 4(2); and/or Rule 506   Options exercisable at $0.10 per share through April 2, 2020
June 2015   Common Stock Option     2,000,000     Issuance of stock options   Section 4(2); and/or Rule 506   Options exercisable at $0.10 per share through May 4, 2020
June 2015   Common Stock Warrant     5,000,000     Warrants issued for services; no commissions paid   Section 4(2); and/or Rule 506   Warrants exercisable at $0.07 per share through June 15, 2018
June 2015   Common Stock Warrant     555,555     Warrants issued in connection with subscription agreement   Section 4(2); and/or Rule 506   Warrants exercisable at $0.18 per share through September 11, 2016

 

Repurchase of Securities

 

In the year ended June 30, 2016, there were no purchases by the Company of its common stock. The Company cancelled 638,300 shares that were surrendered by a former employee. See Note 17.

 

Item 6. Selected Financial Data

 

Not applicable.

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the “Risk Factors” section and elsewhere in this Form 10-K, which are incorporated herein by reference.

 

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Business Overview

 

We are a nanotechnology company specializing in the design, development, production and supply of nanomaterials, including quantum dots (“QDs”), tetrapod quantum dots (“TQDs”), and other nanoparticles for a range of applications in televisions, displays and other optoelectronics, photovoltaics, solid state lighting, life sciences, security ink, battery, and sensor sectors of the market. We are currently trading in the over-the-counter marketplace on the OTCQB under the ticker symbol “QTMM.” Our wholly-owned subsidiary, Solterra Renewable Technologies, Inc. (“Solterra”) is a wholly-owned operating subsidiary of QMC that is focused on the photovoltaic (solar cell) market.

 

QDs are nanoscale semiconductor crystals typically between 10 and 100 atoms in diameter. Approximately 10,000 would fit across the diameter of a human hair. Their small size makes it possible for them to exhibit certain quantum mechanical properties. QDs emit either photons or electrons when excited. In the case of photons, the wavelength (color) of light emitted varies depending on the size of the quantum dot. As such, the photonic emissions can be tuned by the creation of QDs of different sizes. Their unique properties as highly efficient, next generation semiconductors have led to the use of QDs in a range of electronic and other applications in the biomedical, display, and lighting industries. QDs also have applications in solar cells, where their characteristics enable conversion of light energy into electricity with the potential for significantly higher efficiencies and lower costs than existing technologies, thereby creating the opportunity for a step change in the solar energy industry through the use of QDs in printed photovoltaic cells.

 

QDs were first discovered in the early 1980s and the industry has developed to the point where QDs are now being used in an increasing range of applications, including the television and display industries, the light emitting diode (“LED”) lighting (also known as solid-state lighting) industry, and the biomedical industry. LG, Samsung, and other manufacturers have recently launched new televisions using QDs to enhance the picture color quality and power efficiency. A number of major lighting companies are developing product applications using QDs to create a more natural light for LEDs. The biomedical industry is using QDs in diagnostic and therapeutic applications; and applications are being developed to print highly efficient photovoltaic solar cells in mass quantities at a low cost.

 

A key challenge for the quantum dot industry has been and may continue to be its ability to scale up production volumes sufficiently to meet growing demand for QDs while maintaining product quality and consistency and reducing the overall costs of supply to stimulate new applications. QDs remain an expensive product, however a number of recent market research reports have forecasted rapid growth of the QD market, including an April 2016 report by Credence Research which states “The quantum dots market is expected to cross US$ 8.0 Bn by 2022, expanding at a CAGR of 51.3% during the forecast period 2015 to 2022,” and a report published by Transparency Market Research, also in April 2014, which forecasts that “the market will develop at an exceptional 53.8% CAGR between 2013 and 2023. If the projections hold true, the market could rise from a valuation of US$88.5 mn in 2011 to US$8.2 bn by 2023.”

 

In 2014, we acquired several patents and patent applications in five diverse sets of patent families from Bayer Technology Services GmbH, the global technological backbone and major innovation driver for Bayer AG of Leverkusen, Germany (the “Bayer Patents”). The Bayer Patents acquired provide broad intellectual property protection for advances we have achieved in economical high-volume QD manufacturing. In addition, the Bayer Patents cover volume production technology for cadmium-free QDs and nanoparticles; increasing quantum yields; and hybrid organic quantum dot solar cell (“QDSC”) production as well as a surface modification process for increased efficiency of high performance solar cells and printed electronics.

 

In addition to the Bayer Patents, we have a worldwide exclusive license from William Marsh Rice University (“Rice”) to a patented chemical process that permits it to produce high performance TQDs using a lower cost and environmentally friendly solvent for greater manufacturing flexibility.

 

We have developed proprietary equipment that allows it to mass produce consistent quantities of QDs and TQDs in a continuous process at lower capital costs than other existing processes. We also have the exclusive license from the University of Arizona (“UA”) to a patented technique for printing LEDs. We believe that these intellectual properties and proprietary technologies position us to become a leader in the overall nanomaterials and quantum dot industry and a preferred supplier of high performance QDs and TQDs to an expanding range of applications.

 

Plan of Operation

 

We currently operate from a leased facility in San Marcos, Texas at the STAR Park Technology Center, an extension of Texas State University (the “San Marcos Facility”). This location provides us with convenient access to university faculty and specialized laboratory facilities that can support joint research and development efforts with Texas State University. Located approximately 30 miles south of Austin, Texas, this location is also in close proximity to a number of leading companies in the electronics, lighting, solar, and life sciences markets.

 

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The Company has established commercial-scale manufacturing equipment at the San Marcos facility and now has the capacity to produce more than two metric tons (2,000kg) per year of quantum dots and other nanomaterials for supply to its customers. Management believes that the production capacity of the San Marcos facility is similar to, or greater than its largest competitors’ operating factories which are much larger and required significantly higher capital expenditures. This efficiency is the direct result of our patented continuous flow process and proprietary manufacturing knowhow and equipment. While we plan to work extensively with its current provider of equipment, we own 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 necessary.

 

We expect to commence generating revenues from the production of materials at the San Marcos facility in early 2017. Such revenues are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners.

 

Our marketing strategy is to engage in strategic arrangements with manufacturers, distributors, and others to jointly develop applications using its patented continuous production process. Such joint collaborations will involve us working closely with its industry counterparts to optimize the performance of our materials in each application or device and to use the results from product development and testing to further enhance product specifications. On July 15, 2015 we entered into a joint development agreement with an unnamed major display panel manufacturer and on September 11, 2015 we entered into a funded product development agreement with a leading global optical film manufacturer, Nitto Denko Corporation. In June 2016 we entered into a development agreement with an unnamed company in the oil and natural gas sector to produce novel technology for use in that industry. To date, we have not entered into any formal commercial supply agreements, joint ventures, or licensing agreements.

 

These collaborations will support our internal research and development activities which will continue to be a primary part our business. Our principal revenue streams are expected to come from (i) sales of quantum dots and other nanomaterials, (ii) royalties from sales of products and components by third parties incorporating the Company’s products, (iii) milestone payments under joint development arrangements with product developers and manufacturers, and (iv) sublicensing fees where we engage in sublicensing arrangements for its owned and/or licensed technology.

 

Our ongoing research and development functions are considered key to maintaining and enhancing its competitive position in the growing nanomaterials and quantum dot market. Nanomaterial and quantum dot technology continues to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development, and intend to focus a significant part of our efforts on this, as we have done historically. Continuing R&D activities at the San Marcos facility and our collaboration with Texas State University, Rice, UA, and the numerous other research centers and departments with which we have relationships will be important aspects of our strategy.

 

Solterra plans to utilize QMC’s patented low-cost, high-volume quantum dot production combined with TQD technology licensed from Rice to commercialize quantum dot solar cells at a cost that is competitive with conventional fossil fuel generation on an unsubsidized basis.

 

Our business is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, and regulation of hazardous materials used in or produced by the manufacture or use of QDs. Management believes the patented (owned and licensed) processes and proprietary manufacturing equipment employed allow us to comply with current regulations. However, new regulations or requirements may develop which could adversely affect the Company or its products in the future. See “Risk Factors” section.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our judgments and estimates in determining our financial condition and operating results. Estimates are based upon information available as of the date of the consolidated financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and require management’s most subjective judgments often as a result of the need to make estimates about the effect of matters inherently uncertain. The most critical accounting policies and estimates are described below.

 

Revenue Recognition: The Company recognizes revenue from the sale of products and services in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements.”

 

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The Company recognizes revenue when product has been delivered and risk of loss has passed to the customer, collection of the resulting receivable is reasonably assured, persuasive evidence of an arrangement exists, and the fee is fixed or determinable. The assessment of whether the fee is fixed or determinable considers whether a significant portion of the fee is due after normal payment terms. If it is determined that the fee is not fixed or determinable, the Company recognizes revenue at the time the fee becomes due, provided that all other revenue recognition criteria have been met. Sales arrangements may contain customer-specific acceptance requirements for both products and services. In such cases, revenue is deferred at the time of delivery of the product or service and is recognized upon receipt of customer acceptance.

 

Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

Restricted Cash: Restricted cash represents cash held in escrow for the purpose of purchasing the Company’s microreactors. Restricted cash is not generally available to the Company until the purchase has been paid in full, at such time any excess funds will be transferred to the Company.

 

Accounts Receivable: Trade accounts receivables are recorded in accordance with terms and amounts specified in the related contracts on an ongoing basis. Management of the Company continually monitors accounts receivable for collectability issues. The Company evaluates the collectability of accounts receivable on a specific account basis using a combination of factors, including the age of the outstanding balances, evaluation of the customer’s financial condition, and discussions with relevant Company personnel and with the customers directly.

 

Financial Instruments: Financial instruments consist of cash and cash equivalents, restricted cash, payables, and convertible debentures. The carrying value of these financial instruments approximates fair value due to either their short-term nature or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.

 

Property and Equipment: Property and equipment are stated at cost. Depreciation is computed on the straight-line basis over the estimated useful lives of the various classes of assets as follows:

 

Furniture and fixtures   7 years
Computers and software   3 years
Machinery and equipment   3 - 10 years

 

Licenses and Patents: Licenses and patents are stated at cost. Amortization is computed on the straight-line basis over the estimated useful life of five years.

 

Asset Impairment: In accordance with Accounting Standards Codification (ASC) 360-10-35 “Impairment or Disposal of Long-Lived Assets” , the Company evaluates the recoverability of property and equipment if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if an impairment of such property is necessary. The effect of any impairment would be to expense the difference between the fair value of such property and its carrying value. There were no impairment charges in the consolidated statements of operations during the years ended June 30, 2016 and 2015.

 

Debt Issuance Costs: The costs related to the issuance of debt are presented on the consolidated balance sheets as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt.

 

Income Taxes: The Company follows ASC 740 “Income Taxes” regarding the accounting for deferred tax assets and liabilities. Under the asset and liability method required by this guidance, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A deferred tax asset will be reduced by a valuation allowance when, based on the Company’s estimates, it is more likely than not that a portion of those assets will not be realized in a future period.

 

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The Company follows ASC 740 “Income Taxes” regarding the accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold that an income tax position is required to meet before recognizing in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. Additionally, the Company recognizes income tax related penalties and interest in the provision for income taxes.

 

Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Beneficial Conversion: Debt and equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible notes. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as beneficial conversion expense and an increase to additional paid-in-capital.

 

Derivative Instruments: The Company enters into financing arrangements which may consist of freestanding derivative instruments or hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities, as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the consolidated balance sheets and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.

 

The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as freestanding warrants, the Company generally uses the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, income (expense) going forward will reflect the volatility in these estimates and assumption changes. Increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.

 

Fair Value Measurements: The Company estimates fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. The valuation techniques require inputs that are categorized using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: (1) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) significant unobservable inputs, including those that require considerable judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, the Company categorizes the entire fair value measurement according to the lowest level of input that is significant to the measurement even though other significant inputs that are more readily observable may have also utilized.

 

Research and Development Costs: Research and development (R&D) costs are expensed as incurred. These expenses include the costs of our proprietary R&D efforts, as well as costs incurred in connection with certain licensing arrangements.

 

Liquidity and Capital Resources

 

As of June 30, 2016 we had a working capital deficit of $895,349, with total current assets and liabilities of $377,920 and $1,273,269, respectively. Included in the liabilities are $238,182 that is owed to our officers, directors and employees for services rendered and accrued through June 30, 2016 and $407,702 of convertible debentures, net of unamortized discount and $10,093 of notes payable that are due within one year. As a result, we have relied on financing through the issuance of common stock and convertible debentures.

 

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As of June 30, 2016, we have cash and cash equivalent assets of $266,985 and continue to incur losses in operations. Over the past five years we have primarily relied on sales of common stock and debt instruments to support operations as well as employees and consultants agreeing to defer payment of wages and fees owed to them and/or converting such wages and fees into securities of the Company. Management believes it may be necessary for the Company to rely on external financing to supplement working capital in order to meet the Company’s liquidity needs in fiscal year 2017 and 2018; the success of securing such financing on terms acceptable to the Company cannot be assured. If we are unable to achieve the financing necessary to continue our plan of operations, our stockholders may lose their entire investment in the Company.

 

The following table summarizes the net cash provided by (used in) operating, investing and financing activities for the periods indicated:

 

    Year Ended June 30,  
    2016     2015  
             
Operating activities   $ (2,380,022 )   $ (2,277,697 )
Investing activities   $ (19,832 )   $ (660,831 )
Financing activities   $ 1,993,000     $ 3,491,866  

 

Operating Activities. Net cash used in operating activities was $2,380,022 for the year ended June 30, 2016 compared to $2,277,697 for the same period of 2015, an increase of $102,325. The increase was primarily driven by increases in research and development expenses.

 

Investing Activities. Net cash used in investing activities was $19,832 for the year ended June 30, 2016 compared to $660,831 for the same period of 2015, a decrease of $640,999. During the year ended June 30, 2015, we purchased a second microreactor and certain patents from Bayer AG. There were no such major purchases during the year ended June 30, 2016.

 

Financing Activities. Net cash provided by financing activities was $1,993,000 for the year ended June 30, 2016 compared to $3,491,866 for the same period of 2015, a decrease of $1,498,866. The decrease is due to fewer sales of common stock and fewer issuances of convertible debentures during the year ended June 30, 2016.

 

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes we will be able to meet our obligations and continue our operations for the next fiscal year. Realization values may be substantially different from carrying values as shown and these consolidated financial statements do not give effect to adjustments that would be necessary to reflect the carrying value and classification of assets and liabilities should we be unable to continue as a going concern. As of June 30, 2016, we had not yet achieved profitable operations, had a working capital deficit of $895,349 and expect to incur further losses in the development of the business, all of which casts substantial doubt about our ability to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. We continue to explore available financing options, including, without limitation, the sale of equity, debt borrowing and/or the receipt of product licensing fees and royalties. We can provide no assurances that future financing, if needed, will be obtained on terms satisfactory to us, if at all. In this respect, see Note 1 in our notes to the consolidated financial statements for additional information as to the possibility that we may not be able to continue as a going concern.

 

Results of Operations - Year Ended June 30, 2016 Compared to Year Ended June 30, 2015

 

Balance Sheets

 

Cash and Cash Equivalents

 

As of June 30, 2016, the Company’s consolidated balance sheet included cash and cash equivalents of $266,985 compared to $673,839 at June 30, 2015, representing a decrease of $406,854. In the fourth quarter of the year ended June 30, 2016, $1,565,000 was raised through the issuance of convertible debentures.

 

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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 convertible debentures.

 

Property and Equipment

 

Property and equipment decreased $1,365 during the year ended June 30, 2016. During the year ended June 30, 2016 there were additions to property and equipment, but these were offset by periodic depreciation and resulted in the decrease.

 

Licenses and Patents

 

Licenses and patents decreased $38,549 during the year ended June 30, 2016. The decrease is a result of periodic amortization booked during the year ended June 30, 2016.

 

Accounts Payable, Accrued Expenses and Accrued Salaries

 

The balance at June 30, 2016 was $855,474 compared to $941,824 at June 30, 2015. The balance at June 30, 2016 is comprised of accrued liabilities to employees for unpaid wages of $238,182, legal fees of $475,384 and other miscellaneous accruals of $141,908. The balance at June 30, 2015 is comprised of accrued liabilities to employees for unpaid wages of $577,027, legal fees of $311,601 and other miscellaneous accruals of $53,196.

 

Notes Payable

 

During the year ended June 30, 2016, to finance an insurance premium, we issued a negotiable promissory note at an interest rate of 4.87% per annum. The note is due on November 11, 2016.

 

Convertible Debentures

 

During the year ended June 30, 2016, we entered into the following convertible debenture agreement (see Note 6):

 

April - June 2016 Convertible Debentures

 

During the fourth quarter of the year ended June 30, 2016, the Company sold 1,565 Units for total proceeds of $1,565,000 from three affiliated and fourteen non-affiliated parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the common stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of common stock, warrants, or rights to purchase common stock or securities convertible into common stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding common stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. In evaluating the accounting treatment of this anti-dilution feature, the Company believes that is has control over whether or not the anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus the Company can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise price is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges, mergers, and reorganizations.

 

Debenture Conversions

 

There were no convertible debenture conversions during the year ended June 30, 2016. The following convertible debenture conversions occurred during the year ended June 30, 2015:

 

In November 2014, holders of $500,000 principal associated with the convertible debenture issued in November 2008 converted the principal into 8,333,333 shares of the Company’s common stock at the conversion price of $0.06 per share.

 

In February 2015, holders of $400,000 principal associated with the convertible debenture issued in February 2014 converted the principal into 10,000,000 shares of the Company’s common stock at the conversion price of $0.04 per share.

 

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In the period October — December 2014, holders of $475,000 principal associated with the convertible debenture issued in September 2014 converted the principal into 3,166,667 shares of the Company’s common stock at the conversion price of $0.15 per share.

 

In January 2015, holders of $100,000 principal associated with the convertible debenture issued in November 2014 converted the principal into 666,667 shares of the Company’s common stock at the conversion price of $0.15 per share.

 

In April 2015, holders of $50,000 principal associated with the convertible debenture issued in November 2014 converted the principal into 333,333 shares of the Company’s common stock at the conversion price of $0.15 per share.

 

In April 2015, holders of $50,000 principal associated with the convertible debenture issued in November 2014 converted the principal into 416,667 shares of the Company’s common stock at the conversion price of $0.12 per share.

 

In May 2015, holders of $150,000 principal associated with the convertible debenture issued in November 2014 converted the principal into 1,500,000 shares of the Company’s common stock at the conversion price of $0.10 per share.

 

Statements of Operations

 

Revenues

 

During the year ended June 30, 2016, we recognized revenue of $240,835 compared to $0 for the year ended June 30, 2015. Of this amount, $225,000 is a result of the Company entering into a funded product development agreement with a leading global film manufacturer, Nitto Denko Corporation.

 

General and Administrative Expenses

 

During the year ended June 30, 2016 the Company incurred $5,392,596 of general and administrative expenses, an increase of $1,952,915 from the $3,439,681 recorded for the year ended June 30, 2015. The increase in general and administrative expenses was primarily due to an increase in stock-based compensation of $2,095,751, offset by a decrease in legal and audit fees of $208,432. The increase in stock-based compensation is primarily due to i) the immediate vesting of 10,000,000 stock options held by Mr. Lindberg, the Chief Financial Officer due to a revised employment agreement executed during the year ended June 30, 2016 and ii) the fair value of stock warrants granted upon conversion of salaries during the year ended June 30, 2016.

 

General and administrative expenses for the year ended June 30, 2016 included compensation of $1,128,188, legal and audit of $634,778, other professional fees of $571,907, travel expense of $124,119, corporate expense of $482,504 and stock based compensation of $2,326,024. General and administrative expenses for the year ended June 30, 2015 included compensation of $1,071,199, legal and audit of $843,210, other professional fees of $689,466, travel expense of $213,355, corporate expense of $315,266 and stock based compensation of $230,273.

 

Research and Development Expenses

 

During the year ended June 30, 2016 the Company incurred $305,703 of research and development expenses, an increase of $241,243 from the $64,460 recorded for the year ended June 30, 2015. The primary reasons for the increase are i) costs associated with a sponsored research agreement the Company has in place with Texas State University and ii) expenditures for lab equipment and consumables in the San Marcos facility.

 

Change in Fair Value of Derivative Liabilities

 

This amount relates to the change in value of the derivative liabilities. The change recorded in the year ended June 30, 2015 was a decrease of $1,871,337, decreasing the fair value of embedded conversion feature liability from $1,871,337 as of June 30, 2014 to $0 as of June 30, 2015. There was no change recorded during the year ended June 30, 2016 due to the conversion of the debenture during the year ended June 30, 2015, resulting in the derivative liability being written down to $0.

 

Gain on Settlement

 

During the year ended June 30, 2016, the Company’s former Chief Financial Officer, Chris Benjamin surrendered 638,300 shares of common stock as well as options to purchase an additional 987,500 shares in exchange for the cancellation of indebtedness to the Company aggregating $79,000. As a result of this surrender, the Company recorded a gain on settlement of $174,568.

 

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The gain on settlement of $546,129 recorded during the year ended June 30, 2015 relates to the settlement reached with a former employee in December 2014. See Note 16.

 

Beneficial Conversion Feature on Convertible Debenture

 

The beneficial conversion expense for the year ended June 30, 2016 was $513,941 compared to $488,037 during the year ended June 30, 2015, an increase of $25,904. During the years ended June 30, 2016 and 2015, the Company entered into convertible debenture agreements that contained beneficial conversion features. See Note 6.

 

Interest Expense

 

Interest expense for the year ended June 30, 2016 was $83,764 compared to $66,647 during the year ended June 30, 2015.

 

Interest expense recorded during the year ended June 30, 2016 is related to the 8% interest associated with the $500,000 convertible debentures issued in January 2015, the 6% interest associated with the $25,050 convertible debenture issued in September 2014 and the 8% interest and amortization of debt issuance costs associated with the $1,565,000 convertible debentures issued during the fourth quarter of 2016.

 

Interest expense recorded during the year ended June 30, 2015 relates to the 8% interest associated with the $500,000 convertible debenture issued in November 2008 which was converted to shares in November 2014, the 8% interest associated with the $400,000 convertible debenture issued in February 2014 which was converted to shares in February 2015 and the 8% interest associated with the $500,000 convertible debentures issued in January 2015.

 

According to the provisions of the Convertible Debenture agreements, the Company may elect to issue shares of the Company’s common stock to pay accrued interest on the debentures. In the years ended June 30, 2016 and 2015, the Company issued zero and 561,679 shares of common stock, respectively, to pay $0 and $40,568 of accrued interest payable, respectively.

 

Accretion of Debt Discount

 

During the year ended June 30, 2016 the Company recorded $225,349 of accretion of debt discount expense, a decrease of $135,301 from the $360,650 recorded for the year ended June 30, 2015. The decrease is related to the write-off of debt discounts upon conversion of the February 2014 and September 2014 convertible debentures during the year ended June 30, 2015.

 

Results of Operations

 

The following table sets forth our consolidated results of operations for the periods indicated:

 

    Year Ended June 30,  
    2016     2015  
Statement of Operations Information:            
             
Revenues   $ 240,835     $ -  
General and administrative     5,392,596       3,439,681  
Research and development     305,703       64,460  
Change in fair value of derivative liabilities     -       (1,871,337 )
Gain on settlement     (174,568 )     (546,129 )
Beneficial conversion expense     513,941       488,037  
Interest expense, net     83,764       66,647  
Accretion of debt discount     225,349       360,650  

 

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.

 

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Recent Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risks

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data

 

Our Annual Consolidated Financial Statements, Notes to Consolidated Financial Statements and the report of Weaver and Tidwell, L.L.P. (“Weaver”), our independent registered public accounting firm, with respect thereto, referred to in the Table of Contents to Consolidated Financial Statements, appear beginning on page F-1 of this document and are incorporated herein by reference.

 

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

 

None.

 

Item 9A. Controls and Procedures

 

Scope of the Evaluation

 

The Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) conducted an evaluation of the Company’s disclosure controls and internal controls which 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.

 

Conclusions

 

Based upon the evaluation as of June 30, 2016, the CEO and CFO concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) were effective in giving us reasonable assurance that the 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 SEC’s rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

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Report of Management on Internal Controls over Financial Reporting

  

The Management of Quantum Materials Corp. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Exchange Act Rule 13a-15(f). Our 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. Our 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.

 

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2016 based on criteria for effective internal control over financial reporting described in “Internal Control—Integrated Framework (2013)” 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 our Board of Directors. Based on this assessment, management determined that, as of June 30, 2016, the Company maintained effective internal control over financial reporting.

 

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.

 

Changes in Internal Controls over Financial Reporting

 

In the fiscal year ended June 30, 2015, we recognized a significant deficiency primarily related to insufficient documentation of financial processes, risk assessment, and internal controls. To remedy the significant deficiency, during the fiscal quarter ended June 30, 2015, the Company hired a full-time Chief Financial Officer and Corporate Controller who is a licensed CPA, substantially reducing the need to rely on the expertise and knowledge of external financial advisors.

 

During the fiscal year ended June 30, 2016, the Company hired a full-time Director of Compliance and engaged in a process of risk assessment, internal control enhancements, and documenting financial processes. In addition, the Company formed a majority-independent board including a board member who meets the requirements of the SEC’s “financial expert” definition. With Mr. Peruvemba assuming the role of President and CEO in June 2016, our Board of Directors does not have a majority of independent directors as of the date of this Form 10-K; however, the Company intends to return the Board of Directors to a majority of independent directors and, we are currently in the process of determining the best way to achieve this. Our Board of Directors also formed an Audit Committee, consisting solely of independent directors, which holds regular meetings that include our independent auditors.

 

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 smaller reporting companies.

 

Item 9B. Other Information

 

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The names, ages and principal occupations of the Company’s present executive officers and directors are listed below.

 

Name   Age   Position with the Company (1)
Sriram Peruvemba   51   Chief Executive Officer, Director
Craig Lindberg   46   Chief Financial Officer
David Doderer   47   Vice President-Research and Development, Director
Daniel Carlson (2)   49   Chairman of the Board
Ray Martin (2)   58   Director

 

 

(1) Our by-laws provide for directors to be elected at the annual meeting of stockholders and hold office until the following annual meeting. Our last annual meeting of stockholders was held on February 17, 2016 at which time five persons were re-elected as directors. There is currently a vacancy on the Board of Directors as a result of the resignation of Stephen Squires effective June 30, 2016.
   
(2) Independent directors.

 

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 of Directors 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.

 

Officer and Director Backgrounds

 

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

 

Sriram Peruvemba, President and Chief Executive Officer, Director. Effective October 14, 2015, Sriram Peruvemba joined the Board of Directors of the Company and effective June 30, 2016, Mr. Peruvemba became Chief Executive Officer of the Company. Mr. Peruvemba is the CEO of Marketer International, a marketing services firm, a position he has held since July 2014. Since August 2014, he has also served as head of marketing for the Society for Information Display (SID). Prior to that, Mr. Peruvemba held the positions of Chief Marketing Officer at Cambrios Technologies from April 2013 through July 2014 and Chief Marketing Officer at E Ink Corporation from December 2009 through April 2013. With over 25 years of experience in the technology industry, Mr. Peruvemba has been an influential advocate in the advancement of electronic display technology. He is an acknowledged expert on electronic displays, touch screens, and related technologies and consults, writes and presents on those subjects, globally. Mr. Peruvemba has also held senior level positions at Sharp Corp, TFS Inc., Planar Systems and Suntronic Technology. He has BSEE and MBA degrees and a post-graduate diploma in management.

 

Craig Lindberg, Chief Financial Officer . Mr. Lindberg joined the Company in April 2015 as Chief Financial Officer. From June 2012 through April 2015, he worked as an entrepreneur where he co-founded several businesses and as a self-employed FP&A consultant. From September 2009 through June 2012, Mr. Lindberg served as Senior Vice President, Strategic Initiatives of Global Geophysical Services, Inc. (“Global”). From July 2008 through September 2009, he served as President and CEO of AutoSeis, Inc., a subsidiary of Global. Previously, Mr. Lindberg was a co-founder of Global where he served as Chief Financial Officer from April 2005 to July 2008. Prior to Global, Mr. Lindberg served as a Regional Manager for Tyson Foods, Inc. Prior to that, Mr. Lindberg worked for Hormel Foods. Mr. Lindberg received a Bachelor of Science from the University of Houston and a Masters of Business Administration from Rice University where he established the Global Geophysical Scholarship for Entrepreneurial Studies. He currently serves as a director of Fast Felt Corporation and of My Body and Soul, a 501(c)(3) charitable organization.

 

David Doderer, Vice President - Research and Development. Mr. Doderer has over 20 years of research and development experience in emerging technologies including aerospace, biotech, and nano and quantum materials. He joined the Company in 2008. From 2006 to 2008, he managed Hudler Titan LLC, a technology consulting company, specializing in advanced nanofiber filtration for gaseous streams; experimental design and predictive modeling; and a clean energy/ clean air/ clean water initiative through aggregation of retail level contributions in alternative energy based carbon offset programs. 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 and proprietary processes. Mr. Doderer’s experience in engineering, research and development in emerging technologies, his contributions to the filings of numerous patents and proprietary processes, and commercial planning provides invaluable experience to our Board.

 

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Daniel Carlson, Chairman of the Board. Daniel Carlson joined the Board on September 14, 2015 and he became Chairman of the Board on April 26, 2016, as a non-executive officer. Management believes that Mr. Carlson is a suitable person to serve as an independent director as he is a finance executive with a track record in financing and managing companies from inception through public listing, with a particular strength in relationship and business development. More specifically, since 2008, Mr. Carlson is a founding partner and Chief Financial Officer of LIFE Power & Fuels LLC and its affiliated entities. At LIFE Power & Fuels LLC, he co-developed strategy of holding companies, managed initial and secondary financings, and he was responsible for all investor communications and maintained all books and records. From February 2012 through July 2015, Mr. Carlson was Chief Financial Officer and Corporate Secretary of American Sands Energy Corp., a LIFE portfolio company. At American Sands Energy Corp., he structured and assisted in closing financings and built financial models, designed corporate website, created all marketing documents and participated in investor roadshows. Mr. Carlson was also Co-founder, Director (head of compensation committee), Treasurer, Corporate Secretary and Chief Financial Officer of Colombia Energy Resources, a LIFE portfolio company. He also served as Managing Director of Terranova Capital Partners, a LIFE Affiliated Company.

 

Ray Martin, Director. Mr. Martin joined the Board in December 2013. Mr. Martin has served as President and Chief Executive Officer of Alternative Lighting Technologies (ALT) since October 2012. ALT is an intellectual property company developing drivers and innovative solutions for LED lighting. Prior to ALT, Mr. Martin worked as Vice President of Technology at Daewon Semiconductor Corporation from December 2010 to September 2012. He has 30 years of product development experience in the semiconductor, energy and lighting industries at companies including Intel Corporation, Asyst Technologies, and Daewon Semiconductor Corporation. In his 14 years at Intel, Mr. Martin worked primarily in Intel’s Technology Development group, in process engineering, industrial engineering, and production management positions. Mr. Martin has a B.S. in Industrial Engineering from Georgia Tech and a M.S. Engineering Management from Santa Clara University. He was an adjunct professor at Santa Clara University, and he served on the Board of Directors of Sustainable Silicon Valley, a non-profit dedicated to promoting sustainability solutions. Management believes that Mr. Martin’s background described above makes him a suitable person to serve as an independent director.

 

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 bylaws. Members of the Board of Directors 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 the of our executive officers. Up until September 22, 2015, 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

 

Our 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, 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 “Nominating and Corporate Governance Committee” section.

 

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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.

 

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 office of Chairman of the Board and Chief Executive Officer, are held separately by different persons. The Company has no fixed policy with respect to the separation of the offices of the Chairman of the Board and Chief Executive Officer.

 

Key Employee

 

Stephen Squires, Managing Director of Solterra. Mr. 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. He has served as the Company’s President, CEO and Chairman from 2008 to June 30, 2016 and he is currently serving as a General Manager of Solterra. Prior to QMC, from 2001 to 2008, Mr. Squires’ 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. From 1983 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 (“Aviation Composite”). Under Mr. Squires’ leadership, Aviation Composite 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. 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.

 

Scientific Advisory Board

 

In July 2014, the Company announced the formation of the Scientific Advisory Board chaired by Dr. Ghassan Jabbour, the Company’s Chief Science Officer and member of the Company’s Board of Directors. Also appointed to the Scientific Advisory Board were Dr. Michael Wong of Rice University and former member of our Board of Directors, and Mr. Tomio Gotoh, a pioneer of the personal computer in Japan, and Dr. Munisamy Anandan.

 

Dr. Ghassan Jabbour. Mr. Jabbour is a Fellow SPIE and Fellow EOS and chairs our Advisory Board. Mr. Jabbour was formerly our Chief Science Officer and former director of our Company/ Dr. Jabbour is also the Center Director and Lead Professor of Advanced Manufacturing, Renewable Energy Center, University of Nevada Reno, a position he has held since February 2013. Prior to that, he served as Founding Director of the Solar and Alternative Energy Science and Engineering Research Center and also AlRawabi Endowed Research Chair at KAUST (King Abdullah University of Science and Technology) in Saudi Arabia from December 2009 to January 2013. 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 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 700 publications, invited talks, and conference proceedings. He is the editor of several books and symposia proceedings involving organic photonics and electronics, and nanotechnology. Professor 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 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 while the Company was residing at Arizona State University Research Park, 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.

 

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Dr. Michael S. Wong is a Principal Investigator, Associate Professor in Chemical and Biomolecular Engineering Associate Professor in Chemistry (Joint Appointment) at Rice University. Dr. Wong heads the Catalysis and Nanomaterials Laboratory and is the inventor of the patented synthesis for tetrapod quantum dots licensed exclusively worldwide by the Company. His research interests lie in the areas of nanostructured materials, heterogeneous catalysis, bioengineering applications, and developing new approaches to assembling nanoparticles into functional macrostructures.

 

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 was invaluable as a member of the Board of Directors from 2008 through 2014 at which time he elected to resign from the Board and to join the Company’s Scientific Advisory Board.

 

Tomio Gotoh is a consultant for Diverse Technologies in Japan. Mr. Gotoh is a principal inventor of the NEC TK-80, the first Japanese microcomputer in 1976. He led numerous product launches that made Nippon Electric Company (“NEC”) the Japanese personal computer industry leader. As NEC’s visionary pioneer, Mr. Gotoh contributed significantly during the dawn of the personal computer era.

 

Dr. Munisamy Anandan is a Managing Member of Organic Lighting Technologies LLC, Austin, Texas. He has 40 years of experience in various flat panel display technologies namely, LCD, plasma, OLED, FED and LCD backlight. He held senior level positions in various companies including Bell Communications Research, Matsushita Electric works and eMagin Corporation. Dr. Anandan is the past president of the Society for Information Display. For the past 12 years he has specialized in LED backlight, for LCDs for various applications including TV, and LED/OLED lighting. He has delivered several keynote addresses, seminars and invited talks at various international conferences around the world, on LED backlight, LED lighting and OLED lighting. He has issued patents on quantum dot and quantum rod based novel pixelated backlight for LCDs, employed in multiplicity of applications and has received several awards that include R&D 100 Award, in recognition of his work. He is Senior Member of IEEE and SID. Dr. Anandan has recently completed writing one part of a book on ‘Quantum dots and rods and their application to LED backlight for LCD’.

 

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Committees; Independent Directors

 

During the fiscal year ended June 30, 2015, we did not have any standing audit, nominating or compensation committees, or committees performing similar functions. On September 22, 2015, the Board of Directors formed an Audit Committee, a Nominating and Corporate Governance Committee, and an Executive Compensation Committee. Charters for each of these three committees were adopted as of that date and are available on our website at www.qmcdots.com. Currently, the members of each committee consist of our two independent directors, namely, Ray Martin and Daniel F. Carlson. Mr. Sriram Peruvemba was a member of the Audit Committee until he became the Company’s Chief Executive Officer on June 30, 2016. 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’s 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 $120,000 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 such 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 the company’s outside auditor.

 

Management believes that Daniel Carlson is a financial expert. The term “financial expert” is defined as a person who has the following attributes: an understanding of generally accepted accounting principles 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.

 

Audit Committee

 

Daniel Carlson and Ray Martin serve on the Audit Committee, which is chaired by Daniel Carlson. The Audit Committee’s responsibilities include:

 

  appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;
     
  approving auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm;
     
  reviewing the internal audit plan with the independent registered public accounting firm and members of management responsible for preparing our consolidated financial statements;
     
  reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly consolidated financial statements and related disclosures as well as critical accounting policies and practices used by us;
     
  reviewing the adequacy of our internal control over financial reporting;
     
  reviewing the code of business conduct and ethics and granting waivers for executive officers and directors thereunder;
     
  establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns;

 

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  recommending, based upon the Audit Committee’s review and discussions with management and the independent registered public accounting firm, whether our audited consolidated financial statements shall be included in our Annual Report on Form 10-K;
     
  recommending, based upon the Audit Committee’s review and discussions with management and the independent registered public accounting firm, whether our audited consolidated financial statements shall be included in our Annual Report on Form 10-K;
     
  preparing the Audit Committee report required by SEC rules to be included in our annual proxy statement;
     
  reviewing all related party transactions for potential conflict of interest situations and approving all such transactions; and
     
  reviewing earnings releases.

 

Compensation Committee

 

Daniel Carlson and Ray Martin serve on the Compensation Committee, which is chaired by Mr. Martin. The Compensation Committee’s responsibilities include:

 

  annually reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer;
     
  evaluating the performance of our Chief Executive Officer in light of such corporate goals and objectives and determining the compensation of our Chief Executive Officer;
     
  reviewing and approving the compensation of our other executive officers;
     
  reviewing and establishing our overall management compensation, philosophy and policy;
     
  overseeing and administering our compensation and similar plans;
     
  evaluating and assessing potential current compensation advisors in accordance with the independence standards;
     
  retaining and approving the compensation of any compensation advisors;
     
  reviewing and approving our policies for the grant of non-cash compensation and perquisites;
     
  reviewing and making recommendations to the Board of Directors with respect to director compensation; and
     
  reviewing the compensation discussion and analysis to be included in our annual proxy statement.

 

Nominating and Corporate Governance Committee

 

Sriram Peruvemba, Daniel Carlson, and Ray Martin serve on the Nominating and Corporate Governance committee, which is chaired by Mr. Peruvemba. The Nominating and Corporate Governance committee’s responsibilities include:

 

  developing and recommending to the Board of Directors criteria for board and committee membership;
     
  establishing procedures for identifying and evaluating board of director candidates, including nominees recommended by stockholders;
     
  identifying individuals qualified to become members of the Board of Directors;
     
  recommending to the Board of Directors the persons to be nominated for election as directors and to each of the Board’s committees;
     
   ● recommending to the Board of Directors the persons to be nominated for election as directors and to each of the board’s committees;
     
  overseeing the evaluation of the Board and the Chief Executive Officer.

 

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Our Board of Directors may establish other committees from time to time.

 

Limitation of Directors’ Liability and Indemnification

 

We 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

 

Our Board has adopted a Code of Business Conduct and Ethics that applies to that applies not only to our employees, but also to the directors and the executive officers, including our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, Corporate Controller, and any other senior financial officers performing similar functions, as defined in the Code of Ethics. Our Board intends to renew the Code of Business Conduct and Ethics in the future and will consider appropriate amendments and revisions thereto 

 

Our Board of Directors also approved Insider Trading, Whistleblower, and Foreign Corrupt Practices Act (FCPA) Policies. These policies along with the Code of Business Conduct and Ethics can be found at our website: www.qmcdots.com.

 

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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 (the “Reporting Persons”) 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. 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, the Company believes that during the fiscal year ended June 30, 2016, Mr. Peruvemba and Mr. Lindberg each had one late Form 4 filing relating to a grant of 500,000 options by the Company and a return of 4,300,000 options to the Company respectively; Mr. Doderer had two late Form 4 filings relating to 833,000 options that expired unexercised and the expiration and reissue of 738,636 warrants; and, and Mr. Squires had 4 late Form 4 filings relating to transfers of 1,562,500, 1,192,307, and 772,189 shares to third parties and sales of 375,000 shares at $0.04/share and 200,000 shares at $0.05/share, all in private transactions.

 

During the fiscal year ended June 30, 2016, Mr. Jabbour filed a Form 5 for two transactions pertaining to the fiscal year ended June 30, 2015 in which 3,250,000 and 568,189 warrants expired unexercised. In September 2016, Mr. and Mrs. Squires filed a Form 5 pertaining to nine transactions which were not reported in the fiscal years ended June 30, 2016 and 2015 representing 4,136,346 shares sold in private transactions and 1,653,741 shares acquired in private transactions.

 

In the fiscal year ended June 30, 2014, Mrs. Squires failed to timely file forms 4 or 5 for seven transactions pertaining to the sale of 4,511,110 shares and the acquisition of 2,000,000 shares, all in private transactions. These transactions have been reported recently on a Form 5.

 

In the fiscal year ended June 30, 2012, Mrs. Squires failed to timely file forms 4 or 5 for one transaction pertaining to the acquisition of 3,000,000 shares in a private transaction. This transaction has been reported recently on a Form 5.

 

In the fiscal year ended June 30, 2011, Mr. Squires failed to timely file forms 4 or 5 for four transactions pertaining to the sale of 647,500 shares and the acquisition of 2,000,000 shares, all in private transactions. These transactions have been reported recently on a Form 5.

 

In the fiscal year ended June 30, 2010, Mr. Squires failed to timely file forms 4 or 5 for one transaction for the sale of 250,000 shares in a private transaction. This transaction has been reported recently on a Form 5.

 

Item 11. Compensation of Directors and Executive Officers.

 

The following table sets forth the overall compensation earned over the fiscal years ended June 30, 2016 and 2015 by (1) each person who served as the chief executive officer or chief financial officer of the Company or its subsidiary during fiscal year 2016; and (2) up to three of our most highly compensated executive officers as of June 30, 2016 with compensation during fiscal year ended 2016 of $100,000 or more.

 

    Fiscal
Year
    Salary
($)
    Bonus
($)
    Stock
Awards
($)
    Warrants
Or
Options
Awards
($)(1)(8)
    Non-
Equity
Incentive
Plan
Compensation
($)
    Nonqualified
Deferred
Compensation
Earnings ($)
    All Other
Compensation
($) (2)(3)
    Total ($)
(3)
 
                                                       
Stephen Squires     2016     $ 285,000     $ 0     $ 0     $ 92,449     $ 0     $ 0     $ 36,000     $ 413,449  
Former Chief Executive Officer (4) (6)     2015     $ 285,000     $ 0     $ 0     $ 0     $ 0     $ 0     $ 36,000     $ 321,000  
                                                                         
Craig Lindberg     2016     $ 120,000     $ 0     $ 0     $ 99,531     $ 0     $ 0     $ 13,419     $ 232,950  
Chief Financial Officer (7)     2015     $ 30,000     $ 0     $ 0     $ 1,974,591     $ 0     $ 0     $ 0     $ 2,004,591  
                                                                         
David Doderer     2016     $ 150,000     $ 0     $ 0     $ 293,105     $ 0     $ 0     $ 0     $ 443,105  
Vice President (4)(7)     2015     $ 150,000     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 150,000  
                                                                         
Sriram Peruvemba     2016     $ 492     $ 0     $ 0     $ 673,464     $ 0     $ 0     $ 0     $ 673,956  
Chief Executive Officer (5)     2015     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  

 

 

(1) The options and restricted stock awards presented in this table for 2016 and 2015 reflect the entire fair value of such awards in the year of grant. However, the accompanying consolidated 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) Total compensation includes the amount reimbursed to Mr. Squires as it pertains to a monthly housing allowance which expired July 31, 2016 and amounts accrued but not reimbursed to Mr. Lindberg for certain benefits-related expenses.
   
(4)

See “Salary or Consulting Accruals” below for a description of accrued salaries of certain officers and directors, some of which were converted into warrants to purchase shares of common stock of the Company.

   
(5) Mr. Peruvemba became CEO effective June 30, 2016. Includes compensation of $70,505 for options granted during his tenure as director that occurred prior to the effective date of Mr. Peruvemba becoming CEO.
   
(6)

Mr. Squires’ compensation includes $60,000 compensation paid to his wife, Robin Squires, in each of the years ended June 30, 2016 and 2015. Mr. Squires resigned as CEO and director of the Company, effective June 30, 2016.

   
(7) During the year ended June 30, 2016, Mr. Lindberg and Mr. Doderer converted accrued salary of $30,000 and $186,250, respectively, into 500,000 and 3,104,167 stock warrants, respectively. The options were valued using the Black-Scholes method of valuation and the valuation in excess of the amount of salary converted is included in the Warrant or Options Awards amounts. The amounts included are $30,194 for Mr. Lindberg and $187,453 for Mr. Doderer.
   
(8) Mr. Peruvemba, Mr. Martin and Mr. Lindberg each participated along with third party investors in the Units offering during the fiscal year ended June 30, 2016 and received stock warrants on the same terms available to the other investors. The value of these warrants is not included in the compensation table.

 

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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 2016 or 2015 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, 2016.

 

    Option Awards (1)           Stock Awards (1)  
                                            Equity   Equity
                                            Incentive   Incentive
                                            Plan   Plan
                                            Awards:   Awards:
                Equity                     Market       Number   Market or
                Incentive                     Value of       of   Payout
    Number           Plan                Number       Shares       Unearned   Value
    of      Number of       Awards:                of       or       Shares,   of Unearned
    Securities      Securities       Number of                Shares or       Units of       Units or   Shares,
    Underlying      Underlying       Securities                Units of       Stock       Other   Units or
    Unexercised      Unexercised       Underlying                Stock       That       Rights   Other
    Options      Options (#)       Unexercised      Option       Option    That       Have       That   Rights That
    (#)      Unexercisable       Unearned      Exercise       Expiration    Have Not       Not       Have Not   Have Not
Name     Exercisable      (3) (4)       Options (#)      Price ($)       Date    Vested (#)       Vested       Vested   Vested
Stephen Squires (1)(2) (6)       0       1,000,000       0     $ 0.05     10/19/2019     0       0     N/A    N/A  
      0       5,000,000       0     $ 0.05     1/20/2020     0       0     N/A    N/A  
      0       1,000,000       0     $ 0.12     04/13/2026     0       0     N/A    N/A  
      3,500,000       0       0     $ 0.05     3/02/2017     0       0     N/A    N/A  
      0       5,000,000       0     $ 0.05     3/29/2023     0       0     N/A    N/A  
      0       2,968,750       0     $ 0.06     2/10/2019     0       0     N/A    N/A  
      0       1,562,500       0     $ 0.08     6/6/2019     0       0     N/A    N/A  
      0       600,000       0     $ 0.05     10/19/2019     0       0     N/A    N/A  
      0       937,500       0     $ 0.08     6/6/2019     0       0     N/A    N/A  
      0       0       2,000,000     $ 0.30 (7)    4/13/2026     0       0     N/A    N/A  
                                                             
Craig Lindberg (2)       0       10,000,000       0     $ 0.10     4/2/2025     0       0     N/A    N/A  
      500,000       0       0     $ 0.06     10/30/2017     0       0     N/A    N/A  
      0       750,000       0     $ 0.12     04/13/26     0       0     N/A    N/A  
      0       0       1,250,000     $ 0.30 (7)    4/13/2026     0       0     N/A    N/A  
                                                             
David Doderer (1)(2)(4)       0       500,000       0     $ 0.05     10/19/2019     0       0     N/A    N/A  
      0       750,000       0     $ 0.12     04/13/26     0       0     N/A    N/A  
      738,636       0       0     $ 0.11     5/18/2017     0       0     N/A    N/A  
      0       5,000,000       0     $ 0.05     3/29/2023     0       0     N/A    N/A  
      0       3,000,000       0     $ 0.05     1/11/2018     0       0     N/A    N/A  
      0       781,250       0     $ 0.06     2/10/2019     0       0     N/A    N/A  
      3,104,167       0       0     $ 0.06     10/30/2017     0       0     N/A    N/A  
      0       0       1,250,000     $ 0.30 (7)    4/13/2026     0       0     N/A    N/A  
                                                             
Sriram Peruvemba       0       500,000       0     $ 0.17     10/14/2025     0       0     N/A    N/A  
      0       150,000       0     $ 0.12     04/13/2026     0       0     N/A    N/A  
      0       6,000,000       0     $ 0.13     06/30/2026     0       0     N/A    N/A  
      0       0       350,000     $ 0.30 (7)    4/13/2026     0       0     N/A    N/A  

 

 

(1)

On January 20, 2010, the Board of Directors approved employment contracts of Stephen Squires and David Doderer which each contained grants of 5,000,000 restricted shares of common stock. The contracts 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 $0.05 per share.

   
(2) See “Salary or Consulting Accruals” below for a description of accrued salaries of certain officers and directors which were converted into warrants and options to purchase shares of common stock of the Company.

 

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(3)

In September 2015, the Company’s officers, and certain employees owning options and warrants to purchase 57,974,414 shares of the Company’s common stock entered into an agreement with the Company that such persons cannot exercise their options and warrants and that the Company does not have to reserve for issuance the issuance of shares of Common Stock underlying their options and warrants until the earlier of August 1, 2016 or the Company having unreserved shares sufficient for all outstanding options to be exercised. This could happen through an increase in authorized common shares, cancellation of outstanding convertible notes or warrants, or shareholder approved reverse stock split.

     
(4)

In July 2016, the Company’s officers, and certain employees owning options and warrants to purchase 60,670,933 shares of the Company’s common stock entered into an agreement with the Company that such persons cannot exercise their options and warrants and that the Company does not have to reserve for issuance the issuance of shares of Common Stock underlying their options and warrants until the earlier of June 30, 2017 or the Company having unreserved shares sufficient for all outstanding options to be exercised. This could happen through an increase in authorized common shares, cancellation of outstanding convertible notes or warrants, or shareholder approved reverse stock split.

     
(5) The exercise price of Mr. Doderer’s options to purchase 738,636 shares is subject to adjustment such that the intrinsic value of the warrants at the time of exercise cannot exceed $121,875.  
     
(6) Includes options to purchase an aggregate of 1,537,500 shares owned by Robin Squires, his wife, and options to purchase an aggregate of 20,031,250 shares owned by Mr. Squires.  
     
(7) In February 2016, the Board of Directors authorized certain performance based stock options to be earned upon the Company signing its first solitary sales contract worth in excess of $1,000,000 revenue. The option exercise price of the unexercised unearned options is the greater of (i) $0.30 and (ii) the market price when deemed earned by the Board.  

 

Salary or Consulting Accruals

 

In October 2015, certain officers, employees, and consultants of the Company listed below converted accrued salaries (and/or consulting fees) into common stock warrants as follows:

 

Name   $ Amount Converted     # Warrants Received  
Craig Lindberg   $ 30,000       500,000  
David Doderer     186,250       3,104,167  
Toshi Ando     82,000       1,366,667  
Brett Lamensky     20,000       333,333  
Art Lamstein     91,417       1,523,611  
Total   $ 409,667       6,827,778  

 

As of June 30, 2016, the Company has accrued salaries (and/or consulting fees) and expense reimbursements to our executive officers in the amounts set forth below .

 

Name   Salary
Accrued
    Expense
Reimbursements
Accrued
 
Stephen Squires   $ 0     $ 0  
Sriram Peruvemba     0       0  
Craig Lindberg     0       13,419  
David Doderer     100,000       0  
Dr. Ghassan Jabbour     130,000       0  
Total   $ 230,000     $ 13,419  

 

Employment Agreements

 

Our executive officers, Sriram Peruvemba, Craig Lindberg, and David Doderer and our former CEO, Stephen Squires, are each a party to an employment agreement with the Company. See “Other Employment Arrangements” for a description of monies paid to Dr. Jabbour, (former Chief Science Officer), Mr. Benjamin (former CFO) and Mrs. Squires, a former officer.

 

Name   Position   Annual Salary     Bonus  
Sriram Peruvemba   Chief Executive Officer   $ 180,000       (1)
Craig Lindberg   Chief Financial Officer   $ 120,000       (1)
David Doderer   VP Research & Development   $ 150,000       (1)
Stephen Squires   MD, Solterra (Former CEO)   $ 225,000       (1)

 

 

(1) Discretionary bonus as determined by the Compensation Committee based upon company and individual performance.

 

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Employment Agreement – Stephen Squires

 

Stephen Squires, former Chief Executive Officer, entered into an employment agreement dated October 26, 2012 to retain his services for the period January 1, 2013 through January 1, 2018. For a description of this employment agreement, reference is made to Item 11 of the Form 10-K/A of the Company filed with the Securities and Exchange Commission on October 27, 2015. On December 10, 2015, the Company entered into an amended and restated employment agreement with Mr. Squires. For a description of this amended agreement, reference is made to Form 8-K dated December 10, 2015. On June 13, 2016, Mr. Squires, then our Chief Executive Officer and a member of our Board of Directors, agreed to step down from these positions effective June 30, 2016 and to become Managing Director of our wholly-owned subsidiary, Solterra. Mr. Squires also agreed to serve as Chief Executive Officer of Quantum Materials Asia Co., Ltd., a joint venture in which the Company owns a minority interest. In connection with Mr. Squires’ appointment as Managing Director of Solterra, the Company entered into an Amended and Restated Employment Agreement (the “Squires Agreement”) with Mr. Squires which provides that, until such time as the Company records its first $10,000,000 in revenue (the “Revenue Trigger”), the Company shall pay Mr. Squires an annual base salary of no less than $225,000 and after the occurrence of the Revenue Trigger, the Company shall pay Mr. Squires an annual base salary of no less than $247,500. Mr. Squires shall also be eligible for certain annual bonuses and equity awards pursuant to the Squires Agreement. The term of the Squires Agreement is for two years, and provides for severance payments in the event of termination or a change in control of the Company equal to the sum of Mr. Squires’ base salary for the remainder of his employment agreement.

 

Employment Agreement — Sriram Peruvemba

 

On June 13, 2016, the Company entered into an employment agreement with Sriram Peruvemba effective June 30, 2016. Pursuant to the employment agreement, Mr. Peruvemba shall serve as Chief Executive Officer of the Company. While there is no definitive term in the employment agreement, either party may terminate the agreement by giving 30 days written advance notice to the other party. Mr. Peruvemba is receiving a base salary of $180,000 and is eligible to receive annual and special bonuses. Mr. Peruvemba received a signing bonus of options to purchase 6,000,000 shares at an exercise price of $0.13 per share with one-third vesting on June 30, 2017, one-third vesting on June 30, 2018 and the remaining balance vesting on June 30, 2019. The Company agreed to provide Mr. Peruvemba with certain employee benefits and indemnification. In the event that Mr. Peruvemba is terminated without cause or for good reason, Mr. Peruvemba is entitled to receive within seven days following the termination date a lump sum payment equal to two times the sum of Mr. Peruvemba’s base salary and targeted bonus for the year in which the termination date occurs.

 

Employment Agreements — David Doderer and Craig Lindberg

 

On October 26, 2012, David Doderer, our Vice President of Research and Development entered into an employment agreement to retain his services for the period January 1, 2013 through January 1, 2018. For a description of his employment agreement, reference is made to Item 11 of the Form 10K/A of the Company filed with the Securities and Exchange Commission on October 27, 2015. On December 10, 2015, the Company entered into an amended and restated employment agreement with Mr. Doderer. Pursuant to the amended and restated employment agreement, Mr. Doderer is currently receiving an annual base salary of $150,000 and upon the Company achieving the “revenue trigger” of our first $10 million in revenue, his base salary will increase to no less than $165,000.

 

On June 15, 2015, the Company entered into an employment agreement with Craig Lindberg effective April 2, 2015. Pursuant to the employment agreement, Mr. Lindberg shall serve as Chief Financial Officer of the Company. While there is no definitive term in the employment agreement, either party may terminate the agreement by giving 30 days’ written advance notice to the other party. Mr. Lindberg is receiving a base salary of $120,000 and is eligible to receive annual and special bonuses. Mr. Lindberg received a signing bonus of options to purchase 14,300,000 shares at an exercise price of $0.10 per share with one-third vesting on April 2, 2016, one-third vesting on April 2, 2017 and the remaining balance vesting on April 2, 2018. The Company agreed to provide Mr. Lindberg with certain employee benefits and indemnification. In the event that Mr. Lindberg is terminated without cause or good reason, Mr. Lindberg is entitled to receive within seven days following the termination date a lump sum payment equal to two times the sum of Mr. Lindberg’s base salary and targeted bonus for the year in which the termination date occurs.

 

Pursuant to a restated and amended employment agreement with Mr. Lindberg dated December 10, 2015, his agreement fully vested 10 million of his 14.3 million options which were granted on April 2, 2015 and terminated the balance of 4.3 million options. Pursuant to the amended and restated employment agreement, Mr. Lindberg’s annual base salary of $120,000 will increase to no less than $260,000 upon the Company achieving the “revenue trigger” of the first $10 million in revenue.

 

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While there is no definitive term in the amended and restated employment agreements of Messrs. Doderer and Lindberg, either party may terminate the respective agreement of any of its three executive officers by giving 30 days’ written advance notice to the other party. The Company has agreed to provide Messrs. Doderer and Lindberg with certain employee benefits and indemnification. In the event an executive officer is terminated without cause or for good reason, such officer is entitled to receive within seven days following the termination date a lump sum payment equal to two times the sum of such officer’s base salary and targeted bonus for the year in which the termination date occurs. Each officer is also eligible for annual bonuses based on personal performance and Company performance metrics to be determined by the Company and executive on an annual basis (the “Targeted Bonus”). To the extent the Company pays dividends or makes distribution of profit to its stockholders at a time when Mr. Lindberg’s options remain unexercised, the Company has agreed to pay a special bonus to Mr. Lindberg equal to the amount of dividend that he would have received had he exercised the unexercised portion of his 10,000,000 options. In the event of a change in control of the Company or the death or disability of an executive officer, the Company’s executive officers would receive certain defined benefits as provided for in each amended and restated employment agreement. In the case of a change of control in which the executive officer is terminated within 12 months of such an event, the executive officer shall be entitled to receive accrued amounts owed plus a lump sum equal to 2.99 times the sum of the executive’s base salary and target bonus in the year in which the termination date occurs, which shall be paid within seven days of the effective date of such executive officer’s release. In case of death or disability, the benefits payable to each respective officer shall be the same as if the executive officer was terminated without cause or good reason.

 

Other Compensation Arrangements

 

Chris Benjamin, former CFO and former director received compensation of $5,000 per month through February 2016 and $1,000 per month through May 2016 after which the Company terminated his consulting agreement in May 2016. Robin Squires, former executive officer and the wife of Stephen Squires received compensation of $5,000 per month, and Dr. Ghassan Jabbour, formerly our Chief Science Officer and a former director, received compensation of $2,500 per month. The Company has terminated the services of Mrs. Squires and Dr. Jabbour as of July 2016.

 

Participation in Private Placement

 

In the last six months of fiscal year 2016, the Company raised approximately $1,565,000 from the sale of its unsecured convertible promissory notes that have a maturity date of two years from the date of issuance and bear interest at the rate of 8% per annum and are convertible at $0.12 per share. For every $1,000 invested, the investor received warrants to purchase 4,166 shares of the Company’s common stock at $0.15 per share over a period of five years. The conversion price of the notes is subject to full ratchet adjustment in the event of issuance of common stock or derivative securities at a price less than $0.12 per share. Messrs. Peruvemba, Lindberg and Martin purchased $25,000, $15,000 and $10,000, respectively of this private placement.

 

Repayment Agreement – Christopher Benjamin

 

In September 2015, our former Chief Financial Officer, Christopher Benjamin, entered into a Repayment Agreement to retire a book value liability of the Company of approximately $79,000 by redeeming 638,300 shares of common stock to Quantum’s treasury at a price of $0.13 per share and canceling options to purchase 500,000 shares, exercisable at $0.05 per share and canceling options to purchase 487,500 shares of common stock at $0.08 per share.

 

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

 

In June 2016, Mr. Peruvemba was granted options to purchase 6,000,000 shares of common stock in connection with his services as our Chief Executive Officer. The options have a 10-year term, an exercise price of $0.13 per share, and vest in equal annual amounts over a period of three years.

 

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In April 2016, Mr. Peruvemba, Mr. Carlson and Mr. Martin were each granted options to purchase 150,000 shares for their services as directors in the Company’s fiscal year 2016. The options have a 10-year term, an exercise price of $0.12, and vest in equal annual amounts over a period of three years.

 

In April 2016, Mr. Carlson was granted options to purchase 500,000 shares in connection with his service as our Chairman. The options have a 10-year term, an exercise price of $0.12 per share, and vest in equal annual amounts over a period of three years.

 

In October 2015, Mr. Peruvemba was granted 500,000 stock options for his services as a director in the Company’s fiscal year 2016. The options have a 10-year term, an exercise price of $0.17, and vest in equal annual amounts over a period of three years.

 

In September 2015, Mr. Martin and Mr. Carlson were each granted 500,000 stock options for their services as directors in the Company’s fiscal year 2016. The options have a 10-year term, an exercise price of $0.17, and vest in equal annual amounts over a period of three years.

 

In December 2014, Mr. Martin and Mr. Heaton were granted 78,947 and 52,632 shares respectively for their services as directors during the Company’s fiscal year 2015.

 

The Company’s other directors in fiscal year 2016, namely, Stephen Squires, David Doderer, and Ghassan Jabbour were 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. Mr. Jabbour did not receive any restricted stock or options in fiscal year 2016.

 

Travel Expenses

 

All directors shall be reimbursed for their reasonable out of pocket expenses associated with attending the board meeting.

 

2016 Compensation

 

The following table shows the overall compensation earned for the 2016 fiscal year with respect to each non-employee director of the Company as of June 30, 2016.

 

    DIRECTOR COMPENSATION  
Name and
Principal
Position
  Fees
Earned
or Paid
in Cash
($)