Item 1. Business
Corporate Structure
Quantum Materials Corp. (“Quantum Materials” or “QMC”) owns 100% of its operating subsidiary, Solterra Renewable Technologies, Inc. (“Solterra”). The term “the Company” includes Quantum Materials and Solterra unless the context indicates otherwise.
History of Quantum Materials Corp.
Quantum Materials was formed under the laws of the State of Nevada on January 9, 2007. It acquired certain mineral claims located in Nevada. Quantum Materials has not pursued these rights to its mineral claims and is concentrating its business operations on those of its wholly-owned subsidiary described below.
Quantum Materials is a development stage nanotechnology and advanced materials company. We perceive an opportunity to acquire a significant amount of the nanomaterials market by commercializing a low cost high volume tetrapod quantum dot production process based on our exclusive license agreement with William Marsh Rice University and on additional proprietary processes and specialized knowledge that has been developed by the company and through our agreement with Access2Flow, a Netherlands based consortium focused on continuous flow chemistry. Our objective is to commercialize our high volume nanomaterials production processes and to use these materials to enable advanced and disruptive technologies that depend on a ready source of low cost materials in order for these technologies to become commercially viable.
Solterra Renewable Technologies, Inc.
Solterra was organized in the State of Delaware on the 19th day of May 2008. The principal executive office of Solterra is located at 12326 Scott Dr. Kingston OK 73439 and its phone number is (480) 466-6939. Solterra, which is a wholly-owned subsidiary of Quantum Materials, is focused on using our materials to commercialize a quantum dot based solar cell technology.
Business Accomplishments
The following is an outline of the business accomplishments of the Company since July 2011.
● Completed proof of concept for producing Tetrapod Quantum Dots (“TQD”) using the micro reactor process.
● Completed 30 grams per week pilot scale production of TQD’s using continuous flow micro reactor process and now working to scale production.
● Negotiated Memorandum of Understanding (“MOU”) with Saudi business group to establish TQD & solar cell production in the Kingdom of Saudi Arabia.
● Negotiated and consummated alliance agreement with Nanoaxis for the joint development of nanobio products with initial focus on in vitro diagnostic kits and drug delivery technologies using TQD’s.
● Successfully develop production process and shelling techniques that produces extremely high quantum yield TQD’s opening opportunities in nanobio, security ink and led markets.
● Developed and implemented plan to establish nanobio R&D and production lab in Texas.
● Negotiated rights to sub-license technologies with Rice University. This was necessary to complete the joint venture agreements that we have been negotiating in the Middle East and will be necessary as we pursue similar JV’s in other regions.
● Re-negotiated the Rice University license to split the single license agreement into two separate license agreements one with Quantum Materials Corp. for all medical applications and all electronics applications with the exception of solar, and one with Solterra Renewable Technologies Inc. just for solar. This is a significant step in structuring the parent company to be able to focus on developing new platform applications where quantum dots can be the enabling material and then forming wholly owned subsidiaries, like Solterra, to scale up and commercialize those technologies. The license agreements provide for the right to grant sublicenses subject to certain conditions.
● Developed numerous proprietary processes, and have made significant discoveries that we believe will result in additional intellectual properties for the company.
● Identified and began negotiations to license additional process and application oriented intellectual properties with recognized Universities for a broad range of nanotechnology related fields.
We can provide no assurances that our accomplishments to date will result in the grant of patents for our proprietary process, future sales and/or profitable operations. See "Risk Factors."
Business Development Overview
The following is an overview of the Company and its current operations. All descriptions of ongoing discussions involving potential business opportunities are subject to change and we can provide no assurances that such discussions will lead to the desired end result which is most favorable or beneficial to the Company, if at all, or that the Company will achieve profitable operations.
QMC is in early stage discussions with a worldwide manufacturer/distributor/retailer of consumer goods concerning participation in the development of quantum dot consumer products that could result in two or more possible product collaborations for retail mass production and distribution. This would provide QMC and Solterra with an experienced partner in design, production, marketing and sale outlets for new consumer products. Further research and discussions are needed and industrial and commercial applications of these products could be developed independently of any alliance.
QMC has a NDA with a Top 10 printing industry manufacturer specializing in security products and printing of bank cards, currency, passports and other documents. Initial discussions centered on Tetrapod quantum dots (“TQD”) uses as an ink. TQD can be used in many ways for security products. Inorganic TQD exhibit photostability, narrow bandwidth and wide spectrum with very unique signature property advantages over dyes and chromophores for identification, tracking and tracing purposes. QMC quantum dot patented printing capabilities for inkjet and R2R (roll to roll) can also be employed for mass production of secure passports, bank cards (for identification and interaction), money and other financial instruments. TQD’s have singular properties in multiple fields of science including Photonics, Plasmonics, Optoelectronics and Piezoelectric and are now being used in sophisticated security and sensor applications that cannot be duplicated by counterfeiters.
QMC has fielded inquiries from conductive metallic ink makers interested in non-exclusive licensing or co-development of a QD-Polymer ink for various printed electronics applications. These companies are conducting due diligence on quantum dot characteristics for their applications. One possible use is for RFID (radio frequency identification) antenna applications for tracking packages in-transit as part of an active track and trace system with greater range and information holding, replacing passive systems. Active RFID can be read at further distances and can contain more information than passive systems. Conductive metallic inks used in active RFID can experience decreased function due to heat and/or oxidation, and have had recent high price increases in base material costs. In another use, invisible tetrapod quantum dot ink could be painted on valuable property and be used for property identification if stolen and recovered.
QMC has a NDA and is in discussions with a large molecular biology company currently successfully marketing recombinant proteins to researchers to functionalize QMC TQD to their own recombinant proteins, antibodies, aptamers, and peptides as value added product to sell to researchers in the life sciences. QMC is actively pursuing this same biotech market for other companies amenable to non-exclusive licensing of our quantum dots for research purposes or joint venture for development of advanced diagnostic tools delivering instant results at low cost or the use of our TQD as a drug delivery platform.
Quantum dots in biotech offer improved performance at the same or lower cost of current technologies. For diagnostic purposes, TQD’s used in bioluminescent resonance energy transfer diagnostic assays have the major advantages over current state-of-the-art polymerase chain reaction of being near instantaneous and highly accurate besides offering the potential for mass production and much lower end-user costs. Assays, microarrays and point of care devices will also benefit from the high quantum yield, increased sensitivity and photostability of quantum dots over fluorphores and small organic dyes in identification, tracking and analysis of target cells. Polyethylene glycol coated PQD’s can be bioconugated to antibodies, proteins, peptides, aptamers and small molecules. TQD have a high surface area to mass ratio due to their small size, diseases or conditions. TQD’s offer the ability to multiplex by binding to both targeting and drug agents, with the added capability of fluorescing if needed generally under 10nm (Nanometers), as a drug delivery platform for theranostic treatment of cancer and other Nanobio applications.
Quantum Materials has an alliance agreement with Nanoaxis LLC. Nanoaxis specializes in developing leading edge bioimaging, biological diagnostic tools and drug therapies that rely on the unique properties of nanomaterials and more specifically TQD’s. Compared with the conventional organic dyes, quantum dots have several some attractive advantages: long-term photostability, higher fluorescent outcome, narrower fluorescence emission, sensitivity to the electric and magnetic field. These advantages give a broad prospect for quantum dots to be applied in the biophysics field. QMC is working with Nanoaxis for the joint development of these exciting new diagnostic tools and drug therapies. The immediate aim of the alliance is to develop TQD based Cancer diagnostic kits and theranostic applications including Alzheimer’s, Type 1 and Type 2 Diabetes, Breast Cancer and Major Depression.
Quantum Materials is developing specialized quantum dots for NanoAxis to functionalize with their proprietary biomedical nanomaterials for a multiplexing drug delivery platform for drug/gene therapy and diagnostic medical devices technologies. The technology alliance allows these technologies to be developed rapidly due to Quantum Materials’ ability to create the highest quality quantum dots in quantities necessary to support multiple projects with timely deliveries.
The immediate goal is to develop a QD microarray device for detection, diagnosis and quantification of early cancers. The QD-MI device will be designed for rapid detection and grading of various multiple cancers using blood assays; easily, with higher accuracy and at less cost than current single ELISA assays. All diagnostic and pharmaceutical products will include QMC quantum dots functionalized by NanoAxis biomedical IP nanotechnology. We anticipate we can achieve production and initiate sales in fiscal 2013 and based on our limited test marketing, we believe this product has the potential to be well received by the nanobio markets. However, no assurances can be given the aforementioned plans will occur or lead to profitable operations.
According to a recent report published by BCC Research the total market for nanobiotechnology products is $19.3 billion in 2010 and is growing at a compound annual growth rate of 9% to reach a forecast market size of $29.7 billion by 2015.According to a New Report by Global Industry Analysts, Inc. the Global BioImaging Technologies Market is forecast to Reach US$37.4 Billion by 2017. Another recently published report by Bharatbook.com entitled "Quantum Dots : Technologies and Global Markets" indicates that the global market for quantum dots (QDs) in 2010 was worth an estimated $67 million in revenues. This market is projected to grow over the next 5 years, reaching almost $670 million by 2015, representing a tenfold increase. Optoelectronics, which includes quantum dot photovoltaics, represents one of the greatest market sectors. This area was launched in 2010 and is expected to increase at a 128.4% compound annual growth rate to reach a value of $310 million in 2015. The more established biomedical sector was valued at $48 million in 2010. This sector is expected to increase at a 30% compound annual growth rate to reach a value of $179 million in 2015.
Solterra is a development stage quantum dot solar cell technology and manufacturing company. We perceive an opportunity for Solterra to acquire a significant amount of solar photovoltaic market share by commercializing a low cost quantum dot based third/fourth generation photovoltaic technology/solar cell, pursuant to an exclusive license agreement with William Marsh Rice University (“Rice University” or “Rice”). Our objective is to become the first TQD solar cell manufacturer and the first solar cell manufacture to be able to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in North America, South America, Europe, the Middle East and Asia.
Competitors are pursuing different nanotechnological approaches to developing solar cells, but the general idea is the same for all. When light hits an atom in a semiconductor, those photons of light with lots of energy can push an electron out of its nice stable orbital around the atom. The electron is then free to move from atom to atom, like the electrons in a piece of metal when it conducts electricity. Using nano-size bits of semiconductor embedded in a conductive plastic maximizes the chance that an electron can escape the nanoparticle and reach the conductive plastic before it is "trapped" by another atom that has also been stripped of an electron. Once in the plastic, the electron can travel through wires connecting the solar cell to an electronic device. It can then wander back to the nanocrystal to join an atom that has a positive charge, which scientifically is called electron hole recombination.
A quantum dot solar cell typically uses a thin layer of quantum dot semiconductor material, rather than silicon wafers, to convert sunlight into electricity. Quantum Dots, also known as nanocrystals, measure near one billionth of an inch and are a non-traditional type of semiconductor. Management believes that they can and will be used as an enabling material across many industries and that quantum dots are unparalleled in versatility and flexible in form.
Solterra intends to design and manufacture solar cells using a proprietary thin film semiconductor technology that we believe will allow us to reduce our average solar cell manufacturing costs and be extremely competitive in this market. Solterra will be one of the first companies to integrate non-silicon quantum dot thin film technology into high volume low cost production using proprietary technologies. Our objective is to become one of the first solar module manufacturers to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in North America, South America, Europe, the Middle East and Asia.
Management believes that the manufacture of our thin film quantum dot solar cells can introduce a cost effective disruptive technology that can help accelerate the conversion from a fossil fuel dependent energy infrastructure to one based on renewable, carbon-neutral energy sources. We believe that our proposed products also can be a part of the solution to greenhouse gases and global warming.
QMC/Solterra plans to:
a) QMC will scale up Quantum Dot Production by applying proprietary technology licensed from Rice University for our quantum dot synthesis process and accomplishing large scale production using proprietary Micro-Reactor technology jointly developed through an agreement with Access2Flow an advanced flow chemistry consortium based in the Netherlands. These proprietary technologies enables QMC/Solterra to produce the highly desirable TQD’s at a cost savings of greater than 75% compared to competing suppliers, and will organically supply QMC/Solterra’s requirements for quantum dots for its solar cells and other quantum dot enabled products. Additionally, QMC intends to market these TQD’s through various existing supply channels into various markets, including but not limited to lighting, security and electronics. The initial pilot scale up will take place at the Access2Flow facilities in the Netherlands and once optimized, equipment will be relocated as required to the nanobiotechnology or solar cell production facility.
b) Solterra will fabricate solar cells and optimize the performance of solar cells based on a proprietary blend of TQD’s . The aim is to invest our best efforts to demonstrate and scale up production of low cost quantum dot solar cells having peak efficiency of greater than 10%. The efficiency of solar cells is the electrical power it puts out as percentage of the power in incident sunlight. Within the photovoltaic market, cell pricing and peak efficiency are key benchmarks for consumers in the decision for system selection and installation. The design and manufacture of Solterra's quantum dot based solar cells is projected to allow for the conversion of sunlight into usable electricity at a combination of efficiencies and cell cost at a very low "cents per kilowatt-hour" rate. The initial work was accomplished on site at the Arizona State University labs but such work was relocated to better accommodate the logistic requirements of our Chief Science Officer, Professor Ghassan Jabbour, who is now located at KAUST University in Saudi Arabia.
c) Identify, license and or develop additional quantum dot enabled applications in the lighting, memory and medical fields.
Objectives:
The Current Objectives of the Company upon receipt of additional financing are as follows:
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Become the first bulk manufacture of high TQD’s and have Solterra become the first solar cell manufacturer to be able to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in the Middle East, Asia, North America, South America, and Europe.
Build a robust intellectual property portfolio in Nanomaterials, Nanobio technologies, nanomaterials processes, third & fourth generation photovoltaics, quantum dot process technologies and numerous other quantum dot enabled technologies. Success criteria include completion of preparation and filing of numerous patent applications in the area of Nanomaterials, tetrapod quantum dots, continuous flow chemistry and Quantum Dot Solar Cell technology, although no assurances can be given that these goals will be achieved.
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Initiate scaled manufacturing of tetrapod quantum dots, based in part on technology licensed from William H. Marsh Rice University, and building on continued research. Planning includes the implementation of one or more TQD pilot lines The design of the pilot line is intended such that the initial target output of the line, at approximately one kilogram per day, can be further scaled at least by an order of magnitude to 100 Kilograms per day in 2012. The output of the tetrapod quantum dots manufacturing will be used for QMC’s Nanobio products and Solterra’s quantum dot solar cells as well as stand-alone sales to third party developers of quantum dot products such as lighting, battery’s, displays, memory and computer and consumer electronics.
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Continue to develop and characterize the Quantum Dot Solar Cell product; moving towards pilot proof line for solar cells and leading to high throughput print line ultimately capable of yearly solar cell output near Gigawatt range. Target cell efficiencies are 15% within 1 year and greater than 25% within five years. Coupled within cell cost per watt decreasing below $.75/Watt, we intend to pursue initial product sales in 2013.
Products:
Nano Materials
Quantum dots
A quantum dot is a semiconductor nanostructure that confines the motion of conduction band electrons, valence band holes, or excitons (bound pairs of conduction band electrons and valence band holes) in all three spatial directions. A Quantum Dot is also a semiconductor whose excitons are confined in all spatial dimensions. As a result, they have properties that are between those of bulk semiconductors and those of discrete molecules.
Quantum dots also refers to one of several promising materials niche sectors that recently have emerged from the burgeoning growth area of nanotechnology. Quantum dots fall into the category of nanocrystals, which also includes quantum rods and nanowires. As a materials subset, quantum dots are characterized by particles fabricated to the smallest of dimensions from only a few atoms and upwards. At these tiny dimensions, they behave according to the rules of quantum physics, which describe the behavior of atoms and sub atomic particles, in contrast to classical physics that describes the behavior of bulk materials, or in other words, objects consisting of many atoms.
Current and future applications of quantum dots impact a broad range of industrial markets. These include, for example, biology and biomedicine; computing and memory; electronics and displays; optoelectronic devices such as LEDs, lighting, and lasers; optical components used in telecommunications; and security applications such as covert identification tagging or biowarfare detection sensors.” Quantum dots, are inorganic semi-conductor nanoparticles that fluoresce when excited, and have widely been used by researchers in the biotechnology space. Research has shown that these nanoparticles offer a host of benefits when compared to organic fluorophores such as biological dyes. These benefits include:
●Increased photo-stability
●Longer shelf life
●Resilience to photo bleaching
●Increased sensitivity
●Narrow emission peaks
●Broad excitation profile
●Multiplexing capability
Tetrapod quantum dots are a form of inorganic fluorophores that offer not only the same advantages over organic dyes but also additional benefits over existing inorganic fluorophores.
Tetra-Pod Quantum Dots
QMC/Solterra have worldwide exclusive licenses with Rice University for the manufacture of low cost, high quality TQD’s using Rice developed intellectual property. QMC/Solterra is planning the scale up the bulk production of quantum dots based on this technology and an advanced continuous flow micro-reactor technology being developed in collaboration with Access2Flow. QMC intends to manufacture and sell these semiconductor materials for a broad range of emerging applications both in the United States and abroad. Solterra intends to manufacture TQD;s for its own use in producing solar cells.
The global market for quantum dots is expected to grow at a compound annual growth rate (“CAGR”) of over 90% during 2009-2013, according to a 2011 research report from RNCOS (www.rncos.com) and based upon a report available at Electronics.ca Publications, the global market for quantum dots, is projected to grow over the next five years at a CAGR of 90.7%, reaching over $700 million by 2013. Following the initially modest revenues generated by standalone colloidal quantum dots - primarily serving the life sciences, academic, and other industrial research and development communities - within the next 2 years several product launches with colloidal or in situ quantum dot underpinning will bolster market revenue considerably.
According to another RNCOS report entitled “Nanotechnology Market Forecast to 2013”, the global nanotechnology market is projected to grow at a CAGR of around 19% during 2011-2013. The report expects that the global market for nanotechnology based manufactured goods will be worth US$ 1.6 Trillion, representing a CAGR of around 50% during 2009-2013.
Quantum Dot Solar Cells
A solar cell or photovoltaic cell is a device that converts solar energy into electricity by the photovoltaic effect. Photovoltaics is the field of technology and research related to the application of solar cells as solar energy. Sometimes the term solar cell is reserved for devices intended specifically to capture energy from sunlight, while the term photovoltaic cell is used when the source is unspecified. Assemblies of cells are used to make solar modules or solar panels (as we refer to them), which may in turn be linked in larger photovoltaic arrays that can produce substantial amounts of electricity.
Solar cells have many applications. Individual cells are used for powering small devices such as electronic calculators. Photovoltaic (“PV”) arrays generate a form of renewable electricity, particularly useful in situations where electrical power from the grid is unavailable such as in remote area power systems, Earth-orbiting satellites and space probes, remote radiotelephones and water pumping applications. Photovoltaic electricity is also increasingly deployed in grid-tied electrical systems. Similar devices intended to capture energy radiated from other sources include thermophotovoltaic cells, betavoltaics cells, and optoelectric nuclear batteries.
Thin Film Quantum Dot PV Solar Cell: Solterra is expected to produce a low cost, easily processed quantum dot derived solar cell that operates at peak efficiency greater than 6%, and more importantly has a cost per kilowatt hour (“kWH”) comparable to conventional grid supplied power. Within the photovoltaic market, cell pricing and peak efficiency are key benchmarks for consumers in the decision for system selection and installation. At the end of the day, a combination of the two is what is really important for the consumer -- the actual cost for each kilowatt-hour produced. The cleanliness of all renewable energies makes these technologies attractive, and delivery of electricity at or near an equivalent cost to conventional fossil fuel produced energy will make total clean energy adoption inevitable. The design and manufacture of Solterra's quantum dot based solar cells is projected to allow for the conversion of sunlight into usable electricity at a combination of efficiencies and cell cost at a very low "cents per kilowatt-hour" rate. As Solterra approaches this "grid parity," we believe the decision for Solterra Solar Cells will be quickly made.
Advantages of Quantum Dot Based Solar Cells
The efficiency of solar cells is the electrical power it puts out as percentage of the power in incident sunlight. One of the most fundamental limitations on the efficiency of a solar cell is the ‘band gap’ of the semi-conducting material used in conventional solar cells: the energy required to boost an electron from the bound valence band into the mobile conduction band. When an electron is knocked loose from the valence band, it goes into the conduction band as a negative charge, leaving behind a ‘hole’ of positive charge. Both electron and hole can migrate through the semi-conducting material.
In a solar cell, negatively doped (n-type) material with extra electrons in its otherwise empty conduction band forms a junction with positively doped (p-type) material, with extra holes in the band otherwise filled with valence electrons. When a photon with energy matching the band gap strikes the semiconductor, it is absorbed by an electron, which jumps to the conduction band, leaving a hole.
Both electron and hole migrate in the junction’s electric field, but in opposite directions. If the solar cell is connected to an external circuit, an electric current is generated. If the circuit is open, then an electrical potential or voltage is built up across the electrodes.
Photons with less energy than the band gap slip right through without being absorbed, while photons with energy higher than the band gap are absorbed, but their excess energy is wasted, and dissipated as heat. The maximum efficiency that a solar cell made from a single material can theoretically achieve is about 30 percent, but Management believes that in practice, the best achievable is about 25 percent.
It is possible to improve on the efficiency by stacking materials with different band gaps together in multi-junction cells. Stacking dozens of different layers together can increase efficiency theoretically to greater than 70 percent. But this results in technical problems such as strain damages to the crystal layers. The most efficient multi-junction solar cell is one that has three layers: gallium indium phosphide/gallium arsenide/germanium (GaInP/GaAs/Ge) made by the National Center for Photovoltaics in the US, which achieved an efficiency of 34 percent in 2001.
Recently, entirely new possibilities for improving the efficiency of photovoltaics based on quantum dot technology have opened up. Quantum dots have quantum optical properties that are absent in the bulk material due to the confinement of electron-hole pairs (called excitons) on the particle.
The first advantage of quantum dots is their tunable bandgap. It means that the wavelength at which they will absorb or emit radiation can be adjusted at will: the larger the size, the longer the wavelength of light absorbed and emitted. The greater the bandgap of a solar cell semiconductor, the more energetic the photons absorbed, and the greater the output voltage.
On the other hand, a lower bandgap results in the capture of more photons including those in the red end of the solar spectrum, resulting in a higher output of current but at a lower output voltage. Thus, there is an optimum bandgap that corresponds to the highest possible solar-electric energy conversion, and this can also be achieved by using a mixture of quantum dots of different sizes for harvesting the maximum proportion of the incident light.
Another advantage of quantum dots is that in contrast to traditional semiconductor materials that are crystalline or rigid, quantum dots can be molded into a variety of different form, in sheets or three-dimensional arrays. They can easily be combined with organic polymers, dyes, or made into porous films in the colloidal form suspended in solution, they can be processed to create junctions on inexpensive substrates such as plastics, glass or metal sheets.
When quantum dots are formed into an ordered three-dimensional array, there will be strong electronic coupling between them so that excitons will have a longer life, facilitating the collection and transport of ‘hot carriers’ to generate electricity at high voltage. In addition, such an array makes it possible to generate multiple excitons from the absorption of a single photon.
Quantum dots are offering the possibilities for improving the efficiency of solar cells in at least two respects, by extending the band gap of solar cells for harvesting more of the light in the solar spectrum, and by generating more charges from a single photon.
Infrared photovoltaic cells - which transform infrared light into electricity - are attracting much attention, as nearly half of the approximately 1000W/m2 of the intensity of sunlight is within the invisible infrared region. So it is possible to use the visible half for direct lighting while harvesting the invisible for generating electricity.
Photovoltaic cells that respond to infrared - ‘thermovoltaics’ - can even capture radiation from a fuel-fire emitter; and co-generation of electricity and heat are said to be quiet, reliable, clean and efficient. A 1 cm2 silicon cell in direct sunlight will generate about 0.01W, but an efficient infrared photovoltaic cell of equal size can produce theoretically 1W in a fuel-fired system.
One development that has made infrared photovoltaics attractive is the availability of light-sensitive conjugated polymers - polymers with alternating single and double carbon-carbon (sometimes carbon-nitrogen) bonds. It was discovered in the 1970s that chemical doping of conjugated polymers increased electronic conductivity several orders of magnitude. Since then, electronically conducting materials based on conjugated polymers have found many applications including sensors, light-emitting diodes, and solar cells.
Conjugated polymers provide ease of processing, low cost, physical flexibility and large area coverage. They now work reasonably well within the visible spectrum.
Researchers led by Arthur Nozik at the National Renewable Energy Laboratory Golden, Colorado in the United States have demonstrated that the absorption of a single photon by their quantum dots yielded - not one exciton as is usually the case, but three of them.
The formation of multiple excitons per absorbed photon happens when the energy of the photon absorbed is far greater than the semiconductor band gap. This phenomenon does not readily occur in bulk semiconductors where the excess energy simply dissipates away as heat before it can cause other electron-hole pairs to form.
In semi-conducting quantum dots, the rate of energy dissipation is significantly reduced, and the charge carriers are confined within a minute volume, thereby increasing their interactions and enhancing the probability for multiple excitons to form.
Solterra’s Quantum Dot Solar Cell Architecture
Although there are many different nanotechnological approaches to developing solar cells, the general idea is the same for all. When light hits an atom in a semiconductor which in our case is the QTD, those photons of light with lots of energy can push an electron out of its nice stable orbital around the atom. The electron is then free to move from atom to atom, like the electrons in a piece of metal when it conducts electricity.
Using nano-size bits of semiconductor, again in our case quantum dots, embedded in a conductive plastic maximizes the chance that an electron can escape the nanoparticle and reach the conductive plastic before it is "trapped" by another atom that has also been stripped of an electron. Once in the plastic, the electron can travel through wires connecting the solar cell to your electronic device. It can then wander back to the nanocrystal to join an atom that has a positive charge.
As stated above, quantum dots improve the efficiency of solar cells in at least two respects, by extending the band gap of solar cells for harvesting more of the light in the solar spectrum, and by generating more charges from a single photon. Management believes that solar cells based on quantum dots theoretically could convert more than 65 percent of the sun’s energy into electricity, approximately doubling the efficiency of solar cells.
This technology is also applicable to other thin-film devices--where it offers a potential four-fold increase in power-to-weight ratio over the state of the art. Intermediate-band gap solar cells require that quantum dots be sandwiched in an intrinsic region between the photovoltaic solar cells ordinary p- and n-type regions. The quantum dots form the intermediate band of discrete states that allow sub-band gap energies to be absorbed. However, when the current is extracted, it is limited by the bandgap, not the individual photon energies. The energy states of the quantum dot can be controlled by controlling the size of the dot.
Solterra’s high quality tetrapod quantum dots provide access to quantum effects that provide for greater power generation potential, and therefore greater efficiency per cell area and thus lower cost per watt produced. Prior research has shown that four-legged quantum dots are many times more efficient at converting sunlight into electricity than regular quantum dots.
Solterra’s manufacturing design relies on state-of-the-art but widely available high volume silkscreen and inkjet printing technologies. Solterra’s cell ingredients are formulated into an ink medium compatible with such equipment.
The solar power industry:
Today’s top ten solar cell manufactures are all manufacturing silicon based solar cells. Since the complex and relatively high cost of dicing and polishing pure silicon will never be a trivial task, it is unlikely we will see a significant drop in cost. The solar photovoltaic industry is divided into three generations of technology. The first generation technology PV products account for over 86% of the total market. This segment of the industry is made up of numerous large players including Sharp and Sanyo.
Three Generations of Photovoltaic Technology
1. The first generation photovoltaic, consists of a large-area, single layer p-n junction diode, which is capable of generating usable electrical energy from light sources with the wavelengths of solar light. These cells are typically made using silicon wafer. First generation photovoltaic cells (also known as silicon wafer-based solar cells) are the dominant technology in the commercial production of solar cells, accounting for more than 86% of the solar cell market.
2. The second generation of photovoltaic materials is based on the use of thin-film deposits of semiconductors. These devices were initially designed to be high-efficiency, multiple junction photovoltaic cells. Later, the advantage of using a thin-film of material was noted, reducing the mass of material required for cell design.
3. Solterra is seeking to accomplish large scale commercialization of third generation photovoltaic. Third generation photovoltaics are very different from the other two, broadly defined as semiconductor devices which do not rely on a traditional p-n junction to separate photo generated charge carriers. These new devices include photo electrochemical cells, Polymer solar cells, and nanocrystal solar cells.
The installed base of photovoltaics worldwide is only slightly more than 18 Gigawatts (12.6 GW is the electrical power generated by the Itaipu Dam, the world's largest hydroelectric power plant) out of 18 Terawatts (18 Terawatts =18,000 Gigawatts) that is used worldwide.
Electricity growth is projected to grow 76% from 2010 to 2030 (growing at average 2.5% per year from 18,429 Terawatts to 28,930 Terawatts) in the reference case. Increased demand is most dramatic in Asia, averaging 4.7% per year to 2030. Currently some two billion people have no access to electricity, and it is a high priority to address this need.
Competitive Strengths
We believe that QMC/Solterra’s licensed and proprietary technologies provide us with a number of competitive strengths that position us to become a leader in both the Nano-materials industry and the solar cell industry.
QMC’s Cost-per-Gram advantage. Our proprietary and patent pending chemistry, process technology and metering technologies enable us to produce high purity, highly uniform tetra-pod quantum dots in high volumes at a very competitive price point. Our intellectual property provides for a number of base elements from which we can produce these unique, highly desirable materials , including non-toxic materials that are well suited for medical and consumer electronics applications.
Solterra’s Cost-per-Watt advantage. Our proprietary thin film technology should allow us to achieve an average manufacturing cost per watt less than $.75 and position Solterra’s cells as one of the lowest priced in the world and significantly less than the per watt manufacturing cost of crystalline silicon solar modules.
Continuous and scalable production process. We intend to manufacture our solar cells on high-throughput production lines that complete all manufacturing steps, from semiconductor printing to final assembly and testing, in an automated, proprietary, continuous process.
Replicable production facilities. We anticipate using a systematic replication process to build new production lines with operating metrics that are comparable to the performance of best of bread production lines. By expanding production, we believe we can take advantage of economies of scale, accelerate development cycles and leverage our operations, enabling further reductions in the manufacturing cost per watt of our solar cells.
Stable supply of raw materials. We will not be constrained by shortages of semiconductor material, as we will be positioned to produce our own quantum dot materials.
Pre-sold capacity through Long Term Supply Contracts. We expect to pursue long term supply contracts which, if successfully entered into, would provide us with predictable net sales and enable us to realize economies of scale from capacity expansions quickly. By pre-selling the solar cells to be produced on future production lines, we intend to minimize the customer demand risk of our expansion plans.
Favorable system performance. Under real-world conditions, including variation in ambient temperature and intensity of sunlight, we believe systems incorporating our solar cells will generate more kilowatt hours of electricity per watt of rated power than systems incorporating crystalline silicon solar modules, increasing our end-users’ return on investment. Solterra solar cells successfully blend the needs for efficiency, low cost, and time to recoup investment. Furthermore, the solar panels will be easy to install due to their flexibility and low weight.
Market Opportunity
Global demand for electricity is expected to increase from 16.8 Terawatt hours in 2007 to 29 Terawatt hours in 2030, according to the Energy Information Administration. However, supply constraints, rising prices, dependence on foreign countries for fuel feedstock and environmental concerns could limit the ability of many conventional sources of electricity to supply the rapidly expanding global demand. These challenges create a growth opportunity for the renewable energy industry, including solar energy. According to the Department of Energy, solar energy is the only source of renewable power with a large enough resource base to supply a significant percentage of the world’s electricity needs. The solar industry has grown steadily as new technologies emerge for improved solar cell performance and higher volume production. The market for solar energy has grown at an annual rate of 20% since the 1990s, and credible estimates project growth rates above 25% annually in the next decade. The photovoltaics ("PV") industry generated $38.5 billion in global revenues in 2009, while successfully raising over $13.5 billion in equity and debt, the PV industry is expected to be a $60 billion market by 2016. With technological innovations lowering costs, and increased market growth leading to new jobs and export opportunities, solar energy is expected to contribute significantly to the economic growth of various nations. The properties of Solterra’s quantum dot technology, combined with emerging technologies for high-volume, low cost production of solar cells, positions Solterra to capture a significant share of the international market over time. That said, the company’s initial focus will be on providing new, high-efficiency cells in the Middle East where there is rapidly expanding need, but little or no local manufacturing capacity. In addition, Solterra’s proprietary quantum dot technology creates new opportunities in a number of other rapidly expanding markets. Using quantum dots for computer screens, televisions, advertising displays, cell phones, and other electronic devices, for example, can produce clearer, sharper pictures at significantly lower cost. There are also medical uses, such as biomarkers, which have tremendous potential in deepening the understanding of diseases and innovating new and dramatically better treatments. There are a large number of companies across the globe that manufacture and sell conventional and thin panel solar systems. According to a recent market survey, 2009 global production of photovoltaic (PV) cells and modules was 12.3 GW, with the top ten manufacturers accounting for 45% of the total Thin films represented 16.8% of total production, up from 12.5% in 2008. The most direct means for establishing the competitive value of Solterra’s quantum dot and high-volume printing approach is to note that, while classic PV installed cost is approximately $0.50/kWh, and today’s least expensive residential PV systems still cost approximately $0.38/kWh, the cells produced by Solterra are expected to provide electricity in the $0.08 - $0.14/kWh range. This translates into a cost saving of 66% under the cost of the current least expensive residential PV systems.
Target Market Segment Strategy
Strategies
Our goal is to create a sustainable market for our solar modules by utilizing our proprietary thin film semiconductor technology to develop a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in North America, Europe, the Middle East and Asia. We intend to pursue the following strategies to attain this goal:
Penetrate key markets. We expect to be a fully-integrated solar cell manufacturer. To the extent that our finances will permit in the future, we intend to place production lines in strategic locations over the course of many years across the globe which will enable us to diversify our customer base, gain market share in key solar cell markets and reduce our dependence on any individual country’s subsidy programs.
Reduce manufacturing costs. We anticipate deploying continuous improvement systems and tools to increase the throughput of all of our production lines and the efficiency of our workforce and to reduce our capital intensity and raw material requirements. In addition, as we expand production, we believe we can absorb fixed costs over higher production volumes, reduce fixed costs by manufacturing in low-cost regions such as Malaysia, negotiate volume-based discounts on certain raw material and equipment purchases and gain production and operational experience that translate into improved process and product performance.
Increase sellable Watts per module. We will constantly be driving several programs designed to increase the number of sellable watts per solar module, which is driven primarily by conversion efficiency.
Enter the mainstream market for electricity. We believe that our ability to enter the non-subsidized, mainstream market for electricity will require system development and optimization, new system financing options and the development of new market channels. As part of these activities, we anticipate developing other quantum dot renewable energy solutions beyond the solar cell that we plan to offer in select market segments.
The grid-tied Photovoltaic market is of importance because it is the fastest growing segment for Photovoltaics. Many of the early niche markets for solar were off-grid solutions such as emergency phone boxes, sail boats, and, of course, outer space. However, now that the price for Photovoltaic solar has dropped and can compete effectively with additional electric power sources (especially when energy rebates are considered), the grid-tied Photovoltaic systems has become the largest growing segment. An appealing aspect of the potential large projects is that a large project can represent the sales volume in one transaction that might require hundreds of individual transactions for residential Photovoltaic solar applications and successfully obtaining these contracts can help us obtain other customer contracts. In addition, the lifetime requirements for some custom large projects may not be as stringent as for the regulated residential electricity market.
GROWTH OPPORTUNITIES
From 1990 to 2008, the average use of energy per person increased 10 % and the world population increased 27 %. Regional energy use grew from 1990 to 2008. The following demonstrates a specific location with the percentage of growth indicated beside each location: Middle East 170 %, China 146 %, India 91 %, Africa 70 %, Latin America 66 %, USA 20 %, EU-27 7 % and world 39 %.Source: IEA/OECD, Population OECD/World Bank.
Comparing 2007 - the most recent year for which data are available through the International Energy Agency and the World Bank - with the demand exactly a decade earlier provides a snapshot of just how much that energy appetite has grown in the Middle East. Growth figures include:
Oman, up 135.9%
Qatar, up 112.9%
Iran, up 95.9%
Yemen, up 94.5%
Egypt, up 73.2%
Saudi Arabia, up 61.8%
That’s compared to an 80% growth in China and a 9.1% growth in the U.S.
In North America, where we use far more oil than anywhere else on Earth, the vast majority (71%) of electrical power generation is entirely dependent on fossil fuels - coal (52%), gas (16%), and oil (3%). The world's natural gas is running out along with the oil, and the coal supply is not unlimited either. Nuclear energy contributes only one-fifth to the US power network, and 7% of power is hydroelectric. Only 2% of US electricity production is from renewable sources. As we continue to burning up the world's dwindling fossil energy sources at a terrifying rate, we simultaneously unleash catastrophic damage to the natural environment.
Photovoltaic production has been doubling every 2 years, increasing by an average of 48 percent each year since 2002, making it the world’s fastest-growing energy technology. Still, solar power installations can grow 50% a year for several years and still represent less than 1% of worldwide power generation capacity.
The top five photovoltaic producing countries are Japan, China, Germany, Taiwan, and the USA. At the end of 2010, cumulative global photovoltaic (PV) installations surpassed 40 GW. Roughly 90% of this generating capacity consists of grid-tied electrical systems. Such installations may be ground-mounted (and sometimes integrated with farming and grazing) or built into the roof or walls of a building (known as Building Integrated Photovoltaics, or BIPV for short).
Photovoltaics, which directly convert sunlight into electricity, include both traditional, polysilicon-based solar cell technologies and new thin-film technologies. Thin-film manufacturing involves depositing extremely thin layers of photosensitive materials on glass, metal, or plastics. While the most common material currently used is amorphous silicon, the newest technologies use non-silicon-based materials such as cadmium telluride.
Efforts to build large solar generation facilities have progressed as well. Currently operational solar PV power stations have capacities ranging from 10-60 MW several proposed solar PV power stations will have a capacity of 150 MW or more, and even larger facilities are on the drawing boards around the world. Driven by advances in technology and increases in manufacturing scale and sophistication, the cost of photovoltaics has declined steadily since the first solar cells were manufactured. Net metering and financial incentives, such as preferential feed-in tariffs (FiTs) for solar-generated electricity, have supported solar PV installations in many countries. The result is that global industry revenues are expanding rapidly, from $15.6 billion in 2006 to $38.5 billion in 2009 with the expectation of a $60 billion market by 2016. The possible deployments for our solar cells are many, and include: Building-integrated PV (BIPV, i.e., homes and offices); transportation systems; standalone devices; and remote, rural areas where large systems are either not possible or not appropriate. Much additional information is available on each of these possible deployments, but our initial target in the Middle East will be large solar power generation facilities to provide production economies of scale, marketing efficiencies, and rapid penetration into the broader market for photovoltaic production.
Government Support
Ongoing US Department of Energy (DOE) grant announcements have been made pursuant to the US economic stimulus package. We will continue to review these grant opportunities to see if there is a good fit for funding for our near and long term goals. Regrettably, much of the stimulus money seems to be earmarked for solar generation from established sources like conventional silicon-based solar cells that otherwise may not be economically feasible. We believe that cost effective solar such as ours, of high volume production capability is the only way that nationally we can meet these clean energy consumption goals. As national and state program mandates are enforced, the economic incentives to purchase the energy from solar will undoubtedly mount.
Additionally, for consumers and manufactures of solar, impressive tax incentives have been established. A commercial tax credit of 30% of the cost (plus installation and labor) for any installation at the Company’s facilities for the generation of electricity. This tax credit currently expires on December 31, 2016. The tax credit applies to existing homes and new construction. Both principal residences and second homes qualify, but rentals do not qualify. The tax credit applies to the following:
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 Geothermal Heat Pumps, 
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 Small Wind Turbines (Residential), and 
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 Solar Energy Systems.
Note: taking this credit may preclude participation in the following credit for PV cell manufacturers). The American Recovery and Reinvestment Act of 2009 (H.R. 1), enacted in February 2009, established a new investment tax credit to encourage the development of a U.S.-based renewable energy manufacturing sector. In any taxable year, the investment tax credit is equal to 30% of the qualified investment required for an advanced energy project that establishes, re-equips or expands a manufacturing facility that produces equipment and/or technologies used to produce energy from the sun, wind, geothermal or "other" renewable resources. Qualified investments generally include personal tangible property that is depreciable and required for the production process. Other tangible property may be considered a qualified investment only if it is an essential part of the facility, excluding buildings and structural components.
SALES AND MARKETING
Out of the top 45 major solar module manufacturers, only about half manufacture their own solar cells. The remaining half is purchasing their cells from third party suppliers. We believe Solterra’s solar cells will have a high probability of being an attractive alternative for these established manufacturers. Our initial sales strategy for both quantum dots and solar cells will be to develop and execute a value added reseller’s channel strategy. We are also pursuing strategic alliances with companies that have established sales, marketing and distribution networks. In some cases, we may sub-license our products and technologies in select territories throughout the world, subject to the consent of Rice University, where needed. We also intend to penetrate into the Middle East and Asian markets in order to gain access to large grid tied renewable energy initiatives that are currently underway in these emerging markets. We intend to hire sales and marketing personnel as needed and attend applicable trade shows.
COMPETITION
Some of the largest and well financed enterprises in the solar manufacturing market do not have very much manufacturing capacity. Management believes that these companies have been waiting to see what technologies are the most efficient. As market trials begin to be successful, it is certain that there will be a significant number of acquisition and merger activities as companies move to achieve strategic advantage in the growing solar markets.
Adoption of solar energy has a simple market driving force. If people do not adopt solar energy, the planet will become unfit for human habitation. The fossil fuels are warming the planet at an increasing rate that makes life unsustainable if something does not change.
There are a large number of companies across the globe that manufacture and sell conventional and thin panel solar systems. According to a recent market survey, Worldwide solar photovoltaic (PV) market installations reached a record high of 27.4 gigawatts (GW) in 2011, up 40% Y/Y, according to the annual PV market report, 2012 Marketbuzz® issued by NPD Solarbuzz.
Global PV cell production grew by 36 percent from 2010 to 2011, according to a March 26, 2012 market survey.
The survey by PHOTON International found that PV cell production rose from 27.4 GW in 2010 to 37.2 GW in 2011. Despite the rising capacity, 2011was actually the smallest year-on-year growth rate since 2003.
The survey also found that Asian manufacturers continue to dominate the market, with six out of the top ten coming from China, and two from Taiwan. This was the first year, since PHOTON began its survey, that no European or Japanese PV cell producers made the top ten.
The most direct means for establishing the competitive value of Solterra’s quantum dot and high-volume printing approach is to note that, while classic PV installed cost is approximately $0.50/kWh, and today’s least expensive residential PV systems still cost approximately $0.38/kWh.
As stated above, there are less than 50 major solar module manufacturers, but only half manufacture their own solar cells. The remaining half is purchasing their cells from third party suppliers. We believe Solterra’s solar cells will have a high probability of being an attractive alternative for these established value added resellers.
Worldwide, solar currently provides less than one percent of electricity demand but is projected to supply 26% of the world’s consumption by 2040. This industrial transition is expected to occur as solar generated electricity becomes cost effective throughout the United States and much of the world. Competition for sources of energies and the sale thereof is intense. Most companies have far greater experience and resources than our company. Fortunately, Management believes that the size and more importantly the ever increasing demand for cheap clean energy can provide consistent long term demand for low cost high efficiency solar cells which is the market that we intend to compete.
Solar power, whose output volume increased year-on-year by 56.4%, must take credit as the most outstanding renewable sector in 2010. Worldwide solar power production rose to 33.2 TWh in 2010, which is 12 TWh more than in 2009. The installed capacity figure at the end of 2010 (38.5 GW) augurs well for sailing past 40 TWh in 2011 and the sector should continue grow at a vigorous pace for a number of years. Grid parity should be effective before 2020 in countries, such as Germany and Italy, where the electricity price is very high. China’s recent decision to develop a large-scale solar sector will also contribute to solar power’s growth. The country has set a 50-GW solar capacity target by 2020 as part of its 12th five-year plan. The revival of concentrated solar power production currently witnessed in Spain, the United States, and other regions such as North Africa and Australia, will add to this growth.Source: http://www.energies-renouvelables.org/observ-er/html/inventaire/Eng/conclusion.asp
License Agreement with Rice University
On August 20, 2008, Solterra entered into a License Agreement with Rice University. In September 2011, Solterra entered into an amended License Agreement and Quantum Materials entered into a new License Agreement with Rice. Rice is the owner of certain inventions and patent applications, know-how and rights pertaining to the synthesis of uniform nanoparticle shapes with high selectivity. We have obtained the exclusive rights to license and sublicense (subject to Rice’s consent, which shall not be unreasonably withheld), develop, manufacture, market and exploit Rice’s inventions, patent applications and any issued patents in the case of Solterra, for the manufacture and sale of photovoltaic cells and photovoltaic applications and in the case of Quantum Materials for the manufacture and sale of quantum dots for electronic and medical applications (excluding photovoltaic applications). With respect to Rice’s patent applications, Rice made a provisional filing for an invention disclosure titled “synthesis of uniform nanoparticle shapes with high selectivity” with the United States Patent and Trademark Office on April 13, 2007 and a subsequent utility filing on April 11, 2008 under the Patent Cooperation Treaty (“PCT”). PCT enables the U.S. applicant to file one application, "an international application," in a standardized format in English in the U.S. Receiving Office (the U.S. Patent and Trademark Office), and have that application acknowledged as a regular national or regional filing in any State or region that is party to the PCT. Dr. Michael Wong is a director of our company and is the inventor of Rice’s patent application licensed by Solterra.
Our initial agreement with Rice requires the payment of certain patent fees to Rice and for us to acquire additional funding and to meet certain milestones by specific dates. Rice and the Company recently established new milestones for the Company to achieve in the months and years ahead, the failure of which could lead to the termination of the license agreement.
Rice is entitled to receive during the term of each License Agreement certain royalties under the License Agreement of adjusted gross sales (as defined) ranging from 2% to 4% for photovoltaic cells and 7.5% of adjusted gross sales for quantum dots sold in electronic and medical applications. Minimum royalties payable under the License Agreement include $129,412 due August 1, 2012, $473,250 due August 1, 2013, $1,746,000 due August 1, 2014 and $3,738,600 due August 1, 2015 and each August 1 of every year thereafter, subject to adjustments for changes in the consumer pricing index. We are currently in discussions with Rice to modify these milestones to better coincide with the availability of the capital necessary to accomplish the scale up in the most efficient manner possible. In the event of a Liquidity Event (as defined), Rice is entitled to receive from Licensee a fee of $750,000 within five business days of the Liquidity Event. The term of the License Agreement is to expire on the expiration date of Rice’s rights in its intellectual property and the Licensee’s rights are worldwide. Our Agreement, as amended, with Rice provides for termination of each Agreement in the event that we are determined to be insolvent as defined in the Agreements. The milestones of each License Agreement also require a quantum dot production pilot plant to be established by February 28, 2012, capable of producing 1,000 grams per week, which condition was met by us in the Netherlands and a full scale quantum dot production plant to be established by May 31, 2012, which condition has not been met. No assurances can be given that the University will agree to modify the minimum royalties and certain milestones for the Company on terms satisfactory to us, if at all.
Agreement with Arizona State University
Solterra had an agreement with Arizona State University (“ASU”) pursuant to which ASU at a cost of $835,000 will assist Solterra under the direction of Dr. Ghassan Jabbour in scaling up or optimizing the solar cells so that they can be printed. As of June 30, 2010, $630,000 of these costs in this agreement have been incurred and a further $205,000 were to accrue before the end of the fiscal year ended June 30, 2010. During February 2010, Dr. Jabbour accepted a Directorship at the King Abdullah University of Science and Technology (KAUST), in Saudi Arabia, as a result of Dr. Jabbour now being located in Saudi Arabia it is no longer logistically feasible for him to conduct the development work at ASU. We have paid ASU $175,000 under our contract with ASU. Dr. Jabbour is continuing his development work at the KAUST facilities and we have attempted to negotiate a substantially reduced fee payable to ASU. Dr. Jabbour is also our Chief Science Officer and is an employee of QMC/Solterra.
Agreement with University of Arizona
Solterra has entered into an exclusive Patent License Agreement with the University of Arizona ("UA") to license US Patent # 7,015,052, which was issued on March 21, 2006, entitled Screen Printing Techniques for the Fabrication of Organic Light - Emitting Diodes. Pursuant to the License Agreement, Solterra has an exclusive license to market, sell and distribute licensed products within its field of use which is defined as organic light emitting diodes in printed electronic displays and all other printed electronic components. Solterra has the right to grant sublicenses with respect to the licensed product and the license method (as defined in the agreement). Pursuant to said agreement, as amended. We are obligated to pay the following minimum annual royalties, the first of which was due June 30, 2012 has already been paid.
The Minimum Annual Royalty payment will be creditable against Royalties due in each respective royalty year, July 1st to June 30th following the due date.
Royalties based on net sales are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products for printed electronic displays. Our Agreement with UA may be terminated by UA in the event that we are in breach of any provision of this Agreement and said breach continues for 60 days after receiving written notice. Our Agreement with UA will also automatically terminate if Solterra becomes insolvent or unable to pay its debts as they become due. We can provide no assurances that we will be able to meet our obligations under our Agreement with UA. Termination of our Agreement with UA could materially adversely affect our operations.
Employees
As of June 30, 2012, we have seven full-time staff (including Stephen Squires) and one part-time employee namely, Dr. Ghassan E. Jabbour. We anticipate that we will hire additional key staff upon receipt of financing in areas of Chief Operating Officer, research and development, administration/accounting, , operations and sales/marketing.
Item 1.A. Risk Factors
You should carefully consider the following risk factors, in addition to the other information presented in this Form 10-K, in evaluating us and our business. Any of the following risks, as well as other risks and uncertainties, could harm our business and financial results and cause the value of our securities to decline, which in turn could cause you to lose all or part of your investment.
RISKS ASSOCIATED WITH INVESTING IN OUR COMPANY
Our business, operations and financial condition are subject to various risks. Some of these risks are described below and you should take these risks into account in making a decision to invest in our common stock. If any of the following risks actually occurs, we may not be able to conduct our business as currently planned and our financial condition and operating results could be seriously harmed. In that case, the market price of our common stock could decline and you could lose all or part of your investment in our common stock.
We need to continue as a going concern if our business is to succeed, if we do not we will go out of business.
Our independent auditors’ report to our audited consolidated financial statements for the past three years indicate that there are a number of factors that raise substantial doubt about our ability to continue as a going concern. Such factors identified in the report are our accumulated deficit since inception, our failure to attain profitable operations and our dependence upon financing to pay our liabilities. If we are not able to continue as a going concern, it is likely investors will lose their investments.
Our business plans for the sale of quantum dots may not materialize.
“Business Development” overview in Item 1 of this Form 10-K described various potential business opportunities for the production and sale of quantum dots. We can provide no assurances that these opportunities will have the desired end result which is most favorable or beneficial to the Company, if at all, or that the Company will achieve profitable operations.
Our intended business is based on rights granted to Solterra pursuant to a license agreement with William Marsh Rice University.
We have entered into exclusive license agreements, as amended (the “License”) with Rice University to use, develop, manufacture, market and exploit certain inventions, patent applications and issued patents of licensor with respect to the manufacture and sale of photovoltaic cells and the manufacture and sale of quantum dots for electronic and medical applications. Our license agreements with Rice University require us to be financially solvent, meet certain milestones and other obligations, conditions and to make certain royalty and other payments during the term of the license agreement. Any default under the terms of our license agreement, which if not cured or waived by Rice University, could result in the loss of our exclusive license agreements and the right to manufacture and sell our intended products. The loss of our exclusive license agreement with Rice University would have a material adverse effect on our operations and investors could lose their entire investment.
Our intended business is dependent on our patent license agreement with University of Arizona. Our ability to print electronics, such as solar cells, is based upon our Agreement with the University of Arizona.
Solterra has entered into an exclusive Patent License Agreement with the University of Arizona ("UA") to license US Patent # 7,015,052, which was issued on March 21, 2006, entitled Screen Printing Techniques for the Fabrication of Organic Light - Emitting Diodes. Pursuant to the License Agreement, Solterra has an exclusive license to market, sell and distribute licensed products within its field of use which is defined as organic light emitting diodes in printed electronic displays and all other printed electronic components. Solterra has the right to grant sublicenses with respect to the licensed product and the license method (as defined in the agreement). Pursuant to said agreement, as amended, we are obligated to pay minimum annual royalties. We can provide no assurances that we will be able to meet our obligations under our Agreement with UA. Termination of our Agreement with UA could materially adversely affect our operations.
Our recent business accomplishments do not assure the success of the Company.
The following is an outline of the business accomplishments of the Company since July 2010.
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Completed proof of concept for producing Tetrapod Quantum Dots (TQD) using the micro reactor process.
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Completed 30 grams per week pilot scale production of TQD’s using continuous flow micro reactor process and next step is now large scale production.
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Negotiated Memorandum of Understanding (“MOU”) with Saudi business group to establish TQD & solar cell production in the Kingdom of Saudi Arabia.
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Negotiated and consummated alliance agreement with Nanoaxis for the joint development of nanobio products with initial focus on in vitro diagnostic kits and drug delivery technologies using TQD’s.
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Established focused R&D effort to develop production process and shelling techniques to produce extremely high quantum yield TQD’s.
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Developed and implemented plan to establish nanobio R&D and production lab in Texas.
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Negotiated rights to sub-license technologies with Rice University. This was necessary to complete the joint venture agreements that we have been negotiating in the middle east and will be necessary as we pursue similar JV’s in other regions.
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Re-negotiated the Rice University license to split the single license agreement into two separate license agreements one with Quantum Materials Corp. for all medical applications and all electronics applications with the exception of solar, and one with Solterra Renewable Technologies, Inc. just for solar. This is a significant step in structuring the parent company to be able to focus on developing new platform applications where quantum dots can be the enabling material and then forming wholly owned subsidiaries, like Solterra, to scale up and commercialize those technologies.
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Developed numerous proprietary processes, and have made significant discoveries that we believe will result in additional intellectual properties for the company.
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Identified and began negotiations to license additional process and application oriented intellectual properties with recognized Universities for a broad range of nanotechnology related fields.
We can provide no assurances that our accomplishments to date will result in the grant of patents for our proprietary process, future sales and/or profitable operations.
Quantum Materials is developing specialized quantum dots for Nanobio applications, including those for Nanoaxis. NanoAxis intends to functionalize with their proprietary biomedical nanomaterials for a multiplexing drug delivery platform for drug/gene therapy and diagnostic medical devices technologies. The technology alliance allows these technologies to be developed rapidly due to Quantum Materials’ ability to create the highest quality quantum dots in quantities necessary to support multiple projects with timely deliveries.
The immediate goal is to develop a QD microarray device for detection, diagnosis and quantification of early cancers. The QD-MI device will be designed for rapid detection and grading of various multiple cancers using blood assays; easily, with higher accuracy and at less cost than current single ELISA assays. All diagnostic and pharmaceutical products will include QMC quantum dots functionalized by NanoAxis biomedical IP nanotechnology. We anticipate we can achieve production and initiate sales in the first quarter of 2012 and based on our limited test marketing, we believe this product has the potential to be well received by the nanobio markets. However, no assurances can be given that the aforementioned plans will occur or lead to profitable operations.
We will need additional funds to meet our obligations under our Secured Debentures which become due and payable upon the earlier of November13, 2012 or a default under the Transaction Documents.
Pursuant to Transaction Documents (as defined under item13), we borrowed $1,500,000 from certain non-affiliated parties on November 4, 2008 and issued Debentures secured by a pledge of stock from Mr. Squires, our Chief Executive Officer and by our assets. Recently, the Debenture holders agreed to extend the due date of these Debentures to November 4, 2012. We can provide no assurances that we will be able to meet our obligations under the Transaction Documents, the failure of which could materially adversely affect our operations and business prospects and our ability to meet our obligations as they become due and payable under the Debentures.
We will need to raise significant additional capital in order to continue to grow our business and fund our operations which subject us to the risk that we may be unable to grow our business and fund our operations as planned.
Our business plans are based upon the immediate need to raise substantial funds to become operational and to support our intended operations and plans for expansion and growth. As such, we can provide no assurances that we will be able to successfully raise additional financing as needed, on terms satisfactory to us, if at all. Any additional financing will also likely cause substantial dilution to our stockholders. Our License Agreement with Rice also requires us to raise substantial additional financing. We can provide no assurances that these funds will be obtained on satisfactory terms to us, if at all.
We have a limited operating history and limited historical financial information upon which you may evaluate our performance.
We are in our early stages of development and face risks associated with a new company 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.
We are a development stage company and it may be difficult to evaluate our business prospects due to rapidly changing market landscape.
Solterra is a development stage company formed in May 2008 in order to commercialize low cost Quantum Dot production and low cost highly efficient Solar Panels incorporating Quantum Dots and Thin Film Technology pursuant to an exclusive license agreement with William Marsh Rice University. We have limited historical information about our company on which you can base an evaluation of our business and prospects. As a development stage company, we are subject to all the risks involved in a start-up business. We can provide no assurances that our operations will be profitable in the future.
The solar power market is rapidly evolving and is experiencing technological advances and new market entrants. Our future success will require us to scale our manufacturing capacity significantly; even though our business model, technologies and processes are unproven at significant scale. We are in the early stages of final product development, and we have limited experience upon which to predict whether it will be successful. As a result, you should consider our business and prospects in light of the risks, expenses and challenges that we will face as a development stage company seeking to develop and manufacture new products in a growing and rapidly evolving market. We expect to continue to make significant capital expenditures and anticipate that our expenses will increase as we seek to:
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establish our manufacturing operations, initially domestically or potentially internationally at a future date;
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develop our distribution network;
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continue to research and develop our products and manufacturing technologies;
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implement internal systems and infrastructure to support our growth; and
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hire additional personnel.
We do not know whether our revenues will grow at all or grow rapidly enough to absorb these costs, and our limited operating history makes it difficult to assess the extent of these expenses or their impact on our operating results.
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.
We can provide no assurance that we will be successful in establishing production facilities or, once established, that we will attain the expected manufacturing capacity or financial results. Our ability to complete the planning, construction and equipping of manufacturing facilities is subject to significant risk and uncertainty, including:
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We will need to raise significant additional capital in order to finance the costs of constructing and equipping of large scale manufacturing facilities, which we may be unable to do so on reasonable terms or at all, and which could be dilutive to our existing stockholders;
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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; and
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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.
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 solar power products at these production levels or that we will increase our revenues or achieve profitability.
We may be unable to effectively manage the expansion of our operations.
We expect to expand our business in order to satisfy demand for our quantum dots and solar power products and obtain market share. To manage the development and expansion of our operations, we will be required to improve our operational and financial systems, procedures and controls and expand, train and manage a larger employee base. Our management will also be required to maintain and expand our relationships with distribution partners, suppliers and other third parties and attract new 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.
There are significant risks associated with the completion of development and facilities which may cause budget overruns or delays in completion of the projects.
Construction, equipment or staffing problems or difficulties in obtaining all of the requisite licenses, permits or authorizations from regulatory authorities could delay or prevent the construction or opening or otherwise affect our development and manufacturing facilities. Failure to complete our manufacturing facilities within budget or on schedule may have a significant negative effect on our financial condition and results of operations.
Any damage to or breakdown of our manufacturing equipment at a time when we are manufacturing commercial quantities of our products may have a material adverse impact on our business. For example, a supplier’s failure to supply this equipment in a timely manner, with adequate quality and on terms acceptable to us, could delay our manufacturing capacity expansion and otherwise disrupt our production schedule or increase our costs of production. If we fail to develop successfully our new solar power products or technologies, we will likely be unable to recover the costs we have incurred to develop these products and technologies and may be unable to increase our revenues and to become profitable. Some of our new product and manufacturing technologies are unproven at commercial scale and represent a departure from conventional solar power technologies, and it is difficult to predict whether we will be successful in completing their development. In addition, we intend to invest significantly in developing state of the art manufacturing processes designed to reduce our total costs of production. If our development efforts regarding new manufacturing processes are not successful, and we are unable to increase the efficiency and decrease the costs of our intended manufacturing process, we may not be able to reduce the price of our products, which might prevent our products from gaining wide acceptance, and our gross margins may be negatively impacted.
Our solar power 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 solar power products may be adversely affected by a number of factors, many of which are beyond our control, including:
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our failure to produce solar power products that compete favorably against other solar power products on the basis of cost, quality and performance;
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our failure to produce solar power products that compete favorably against conventional energy sources and alternative distributed generation technologies, such as wind and biomass, on the basis of cost, quality and performance;
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whether or not customers will accept our new technology; and
● our failure to develop and maintain successful relationships with distributors, systems integrators, project developers and other resellers, as well as strategic partners.
If our solar power products fail to gain market acceptance, we would be unable to increase our revenues and market share and to achieve and sustain profitability.
Technological changes in the solar power industry could render our solar power products uncompetitive or obsolete, which could reduce our market share and cause our revenues to decline.
The solar power market is characterized by continually changing technology requiring improved features, such as increased efficiency, higher power output and lower price. Our failure to further refine our technology and develop and introduce new solar power products could cause our products to become uncompetitive or obsolete, which could reduce our market share and cause our revenues to decline. The solar power 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 solar power industry and to effectively compete in the future. A variety of competing solar power technologies are under development by other companies that could result in lower manufacturing costs or higher product performance than those expected for our solar power 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 solar power 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 solar power products and if we are unable to effectively manage these risks, it could impair our ability to develop expand our business.
Significant management attention and financial resources will be required to develop successfully our sales channels. In addition, the marketing, distribution and sale of our solar power 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:
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difficult and expensive compliance with the commercial and legal requirements;
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encountering trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could affect the competitive pricing of our solar power products and reduce our market share in some countries;
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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:
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fluctuations in currency exchange rates relative to the U.S. dollar;
● limitations on dividends or restrictions against repatriation of earnings;
● difficulty in recruiting and retaining individuals skilled in international business operations; and
● increased costs associated with maintaining international marketing efforts.
Problems with product quality or product performance may cause us to incur warranty expenses and may damage our market reputation and prevent us from achieving increased sales and market share.
Consistent with standard practice in the solar industry, the duration of our product warranties is lengthy. Our standard product warranty is expected to include a five-year warranty period for defects in material and workmanship and a 20-year warranty period for declines in power performance beyond specified levels. We believe our warranty periods are consistent with industry practice. Due to the long warranty period, we bear the risk of extensive warranty claims long after we have shipped product and recognized revenues. 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, loss of control of operations that are material to our business and profit-sharing arrangements. Moreover, strategic alliances may be expensive to implement, require us to issue additional shares of our common stock and subject us to the risk that the third party will not perform its obligations under the relationship, which may subject us to losses over which we have no control or expensive termination arrangements. As a result, even if our strategic alliances with third parties are successful, our business may be adversely affected by a number of factors that are outside of our control.
The success of our business depends on the continuing contributions of our key personnel and our ability to attract and retain new qualified employees in a competitive labor market.
Our future success depends to a significant degree on the skills, experience and efforts of our executive officers, namely, Stephen Squires and Ghassan E. Jabbour, SPIE, Fellow. The loss of the services of either of these individuals could harm our business. We have not obtained life insurance on any key executive officers. If any executive officer left us or were seriously injured and become unable to work, our business could be harmed.
If solar power technology is not suitable for widespread adoption or sufficient demand for solar power products does not develop or takes longer to develop than we anticipate, our revenues would not significantly increase and we would be unable to achieve or sustain profitability.
The market for solar power products is emerging and rapidly evolving, and its future success is uncertain. If solar power technology proves unsuitable for widespread commercial deployment or if demand for solar power products fails to develop sufficiently, we would be unable to generate enough revenues to achieve and sustain profitability. In addition, demand for solar power products in the markets and geographic regions we target may not develop or may develop more slowly than we anticipate. Many factors will influence the widespread adoption of solar power technology and demand for solar power products, including:
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cost-effectiveness of solar power technologies as compared with conventional and non-solar alternative energy technologies;
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performance and reliability of solar power products as compared with conventional and non-solar alternative energy products;
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success of alternative distributed generation technologies such as fuel cells, wind power and micro turbines;
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fluctuations in economic and market conditions that impact the viability of conventional and non-solar alternative energy sources, such as increases or decreases in the prices of oil and other fossil fuels;
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capital expenditures by customers that tend to decrease when the United States or global economy slows;
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continued deregulation of the electric power industry and broader energy industry; and
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availability of government subsidies and incentives.
We face intense competition from other companies producing solar power and other energy generation products. If we fail to compete effectively, we may be unable to increase our market share and revenues.
The solar power market is intensely competitive and rapidly evolving. Management believes that there are over 100 companies that are engaged in manufacturing photovoltaic products or have announced an intention to do so. Many of our competitors have established a market position more prominent than ours, and if we fail to attract and retain distribution partners and establish a successful distribution network for our solar power products, we may be unable to obtain anticipated sales and market share. There are a large number of companies in the world with substantially more capital and experience than us that produce solar power products, including, without limitation, BP Solar International Inc., First Solar, Inc., Kyocera Corporation, Mitsubishi, RWE Schott Solar, Inc., Sanyo Corporation, Sharp Corporation, Evergreen Solar, Solar World AG, SunPower Corporation and SunTech Power Holdings Co., Ltd. We also expect that future competition will include new entrants to the solar power market offering new technological solutions. We can provide no assurances that we will be able to successfully compete in our intended markets.
If we are unable to protect our intellectual property adequately, we could lose our competitive advantage in the solar power market.
Our ability to compete effectively against competing solar power 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 the solar power market and materially harm our business and profitability. We face the following risks in protecting our intellectual property and in developing, manufacturing, marketing and selling our products:
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possible loss of our exclusive licenses with William Marsh Rice University and the University of Arizona;
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we cannot be certain that Rice University’s pending patent applications will result in issued patents or that the claims in any issued patents are or will be sufficiently broad to prevent others from developing or using technology similar to ours or in developing, using, manufacturing, marketing or selling products similar to ours;
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given the costs of obtaining patent protection, we may choose not to file patent applications for or not to maintain issued patents for certain innovations that later turn out to be important, or we may choose not to obtain foreign patent protection at all or to obtain patent protection in only some of the foreign countries, which later turn out to be important markets for us;
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although we intend to have a number of foreign patents and applications as well as the two held by Rice University, 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;
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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;
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third parties may seek to challenge or invalidate any licensed patents, which can result in a narrowing of or invalidating our patents, or rendering our licensed patents unenforceable;
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we may have to participate in proceedings such as interference, cancellation, or opposition, before the United States Patent and Trademark Office, or before foreign patent and trademark offices, with respect to our licensed patents, patent applications, trademarks or trademark applications or those of others, and these actions may result in substantial costs to us as well as a diversion of management attention;
● although we are not currently involved in any litigation involving intellectual property rights, we may need to enforce our intellectual property rights against third parties for infringement or misappropriation or defend our intellectual property rights through lawsuits, which can result in significant costs and diversion of management resources, and we may not be successful in those lawsuits;
● we rely on trade secret protections to protect our interests in proprietary know-how and processes for which patents are difficult to obtain or enforce; however, we may not be able to protect our trade secrets adequately; and
● the contractual provisions on which we rely to protect our trade secrets and proprietary information, such as our confidentiality and non-disclosure agreements with our employees, consultants and other third parties, may be breached, and our trade secrets and proprietary information may be disclosed to competitors, strategic partners and the public, or others may independently develop technology equivalent to our trade secrets and proprietary information.
Our technology and products could infringe intellectual property rights of others, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages and disrupt our business.
In recent years, there has been significant litigation involving patents and other intellectual property rights in many technology-related industries. There may be patents or patent applications in the United States or other countries that are pertinent to our products or business of which we are not aware. The technology that we incorporate into and use to develop and manufacture our current and future solar power products may be subject to claims that they infringe the patents or proprietary rights of others. The success of our business will also depend on our ability to develop new technologies without infringing or misappropriating the proprietary rights of others. Third parties may allege that we infringe patents, trademarks or copyrights, or that we misappropriated trade secrets. These allegations could result in significant costs and diversion of the attention of management.
If a successful claim were brought against us and we are found to infringe a third party’s intellectual property right, we could be required to pay substantial damages, including treble damages if it is determined that we have willfully infringed such rights, or be enjoined from using the technology deemed to be infringing or using, making or selling products deemed to be infringing. If we have supplied infringing products or technology to third parties, we may be obligated to indemnify these third parties for damages they may be required to pay to the patent holder and for any losses they may sustain as a result of the infringement. In addition, we may need to attempt to license the intellectual property right from such third party or spend time and money to design around or avoid the intellectual property. Any such license may not be available on reasonable terms, or at all. Regardless of the outcome, litigation can be very costly and can divert management’s efforts. An adverse determination may subject us to significant liabilities and/or disrupt our business.
We may be unable to protect adequately or enforce our proprietary information, which may result in its unauthorized use, reduced revenues or otherwise reduce our ability to compete.
Our business and competitive position depend upon our ability to protect our licensed and other proprietary technology, including any manufacturing processes and solar power 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 solar power 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 the related solar power products.
Our means of protecting our proprietary rights may not be adequate, and our competitors may:
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independently develop substantially equivalent proprietary information, products and techniques;
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otherwise gain access to our proprietary information; or
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design around our licensed patents (if any) or other intellectual property.
We intend to pursue a policy of having our employees, consultants and advisors execute proprietary information and invention agreements when they begin working for us. However, these agreements may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. If we fail to maintain trade secret and patent protection, our potential, future revenues may be decreased.
Licenses for technologies and intellectual property may not be available to us.
We have entered into license agreements for technologies and intellectual property rights, including quantum dots. Our license agreements with Rice University, which currently do not permit us the right to grant sublicenses without their prior written consent, which consent shall not be unreasonably withheld, is subject to terms and conditions which may limit our ability to use the licensed intellectual property under certain circumstances. For example, our quantum dot license may terminate if we materially breach the license agreement or if we abandon the construction of a manufacturing facility to exploit the licensed technology. We may need to enter into additional license agreements in the future for other technologies or intellectual property rights of third parties. Such licenses, however, may not be available to us on commercially reasonable terms or at all.
Existing regulations and changes to such regulations concerning the electrical utility industry may present technical, regulatory and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products.
The market for electricity generation products is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as internal policies and regulations promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies are being modified and may continue to be modified. Customer purchases of, or further investment in the research and development of, alternative energy sources, including solar power technology, could be deterred by these regulations and policies, which could result in a significant reduction in the potential demand for our solar power products. For example, utility companies commonly charge fees to larger, industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could increase the cost to our customers of using our solar power products and make them less desirable, thereby harming our business, prospects, results of operations and financial condition.
We anticipate that our solar power products and their installation will be subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters. There is also a burden in having to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our solar power products may result in significant additional expenses to us and our resellers and their customers and, as a result, could cause a significant reduction in demand for our solar power products.
Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in potentially significant monetary damages and penalties and adverse publicity.
If we fail to comply with present or future environmental laws or regulations we may be required to pay substantial civil or criminal penalties, incur significant capital expenditures, suspend or limit production or cease operations. Any failure by us to control the use of or generation of, or to restrict adequately the discharge or disposal of, hazardous substances or wastes or to otherwise comply with the complex, technical environmental regulations governing our activities could subject us to potentially significant monetary damages and penalties, criminal proceedings, third party property damage or personal injury claims, natural resource damage claims, cleanup costs or other costs, or restrictions or suspensions of our business operations. In addition, under some foreign, federal and state statutes and regulations governing liability for releases of hazardous substances or wastes to the environment, a governmental agency or private party may seek recovery of response costs or damages from generators of the hazardous substances or operators of property where releases of hazardous substances have occurred or are ongoing, even if such party was not responsible for the release or otherwise at fault. Also, federal, state or international environmental laws and regulations may ban or restrict the availability and use of certain hazardous or toxic raw materials that are or may be used in producing our products, and substitute materials may be more costly or unsatisfactory in performance. We believe that we either have all environmental permits necessary to conduct our business or have initiated the process to obtain additional or modified environmental permits needed to conduct our business. While we are not aware of any outstanding, material environmental claims, liabilities or obligations, future developments such as the implementation of new, more stringent laws and regulations, more aggressive enforcement policies, or the discovery of unknown environmental conditions associated with our current or past operations or properties may require expenditures that could have a material adverse effect on our business, results of operations or financial condition. Any noncompliance with or incurrence of liability under environmental laws may subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of our products.
Compliance with occupational safety and health requirements and best practices can be costly, and noncompliance with such requirements may result in potentially significant monetary penalties and adverse publicity.
Our intended manufacturing operations and research and development activities involve the use of mechanical equipment which involve a risk of potential injury to our employees. These operations are subject to regulation under the Occupational Safety and Health Act, or OSHA. If we fail to comply with OSHA requirements, or if an employee injury occurs, we may be required to pay substantial penalties, incur significant capital expenditures, suspend or limit production or cease operations. Also, any such violations, employee injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of our products.
Product liability claims against us could result in adverse publicity and potentially significant monetary damages.
Like other retailers, distributors and manufacturers of products that are used by consumers, we face an inherent risk of exposure to product liability claims in the event that the use of the solar power products we sell results in injury. Since our products are electricity producing devices, it is possible that consumers could be injured or killed by our products, whether by product malfunctions, defects, improper installation or other causes. In addition, since revenues generated from our existing products have been modest and the products we are developing incorporate new technologies and use new installation methods, we cannot predict whether or not product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. We intend to rely on our general liability insurance to cover product liability claims and currently do not expect to obtain separate product liability insurance. The successful assertion of product liability claims against us could result in potentially significant monetary damages and if our insurance protection is inadequate to cover these claims, they could require us to make significant payments. Also, any product liability claims and any adverse outcomes with respect thereto may subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of our products.
Our sales, marketing and distribution plans may substantially rely on the efforts and abilities of third parties and such plans may not be successful.
We intend to sell our solar panels using domestic and international distributors, system integrators, project developers and other resellers, who will often add value through system design by incorporating our solar panels with inverters and other electronics, mounting structures and wiring systems. Most of our distribution partners will have a geographic or applications focus. Our distribution partners will likely include companies that are exclusively solar power system resellers as well as others for whom solar power is an extension of their core business, such as engineering design firms or other energy product marketers.
We expect to collaborate closely with a relatively small number of resellers both domestically and in the future internationally. We are actively working to recruit our distribution partners by very careful selection of a few accounts and channel partners. We intend to selectively pursue additional strategic relationships with other companies worldwide for the joint marketing, distribution and manufacturing of our products. These resellers are expected to range from large, multinational corporations to small, development-stage companies, each chosen for their particular expertise. We believe that these relationships will enable us to leverage the marketing, manufacturing and distribution capabilities of other companies, explore opportunities for additional product development and more easily enter new geographic markets in a cost effective manner, attract new distribution partners and develop advanced solar power applications. 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 solar power products internationally
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 solar panels using domestic and international distributors, system integrators, project developers and other resellers, who will often add value through system design by incorporating our solar panels with inverters and other electronics, mounting structures and wiring systems. Most of our distribution partners will have a geographic or applications focus. Our distribution partners will likely include companies that are exclusively solar power system resellers as well as others for whom solar power is an extension of their core business, such as engineering design firms or other energy product marketers.
We expect to collaborate closely with a relatively small number of resellers both domestically and in the future internationally. We are actively working to recruit our distribution partners by very careful selection of a few accounts and channel partners. We intend to selectively pursue additional strategic relationships with other companies worldwide for the joint marketing, distribution and manufacturing of our products. These resellers are expected to range from large, multinational corporations to small, development-stage companies, each chosen for their particular expertise. We believe that these relationships will enable us to leverage the marketing, manufacturing and distribution capabilities of other companies, explore opportunities for additional product development and more easily enter new geographic markets in a cost effective manner, attract new distribution partners and develop advanced solar power applications. 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 solar power products internationally, and if we are unable to effectively manage these risks, it could impair our ability to expand our business abroad.”
RISKS RELATED TO OUR COMMON STOCK
Our common stock trades in the OTCQB and there can be no assurance that an established trading market will develop.
Our common stock trades in the pink sheets and has in the past traded on the OTCQB until our common stock was deleted due to failure to meet the broker-dealer requirements of Rule 15c2-11 of the Exchange Act of 1934, as amended. Such Rule includes a requirement that at least one broker-dealer quotes our common stock each trading day and the removal from the system if this requirement is failed for a specific number of consecutive trading days. Our common stock does not have an established trading market.
In order to be listed on the OTC Electronic Bulletin Board, at least one broker-dealer member of FINRA must file a Form 15c2-11 application and become a market maker on the system and remain on the system quoting a market for our common stock. Also, in order to maintain the quotation of our shares of common stock on the OTC Bulletin Board, we must remain a reporting company under the Securities Exchange Act of 1934 (the “Exchange Act”). This requires us to comply with the periodic reporting and proxy statement requirements of the Exchange Act. It is possible that our common stock could be listed on the OTC Bulletin Board and again removed from the Bulletin Board and then be traded on the potentially less desirous OTCQB. In either venue, an investor may find it difficult to obtain accurate quotations as to the market value of the common stock. In addition, if we failed to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling the common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital.
If an established trading market for our common stock does develop, trading prices may be volatile.
In the event that an established trading market develops in the future, of which there can be no assurances given, the market price of our shares of common stock may be based on factors that may not be indicative of future market performance. Consequently, the market price of our common stock after this transaction may vary greatly. If a market for our common stock develops, there is a significant risk that our stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control:
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variations in our quarterly operating results;
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announcements that our revenue or income/loss levels are below analysts' expectations;
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general economic slowdowns;
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changes in market valuations of similar companies;
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announcements by us or our competitors of significant contracts; and/or
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acquisitions, strategic partnerships, joint ventures or capital commitments.
We are subject to the reporting requirements of the federal securities laws, which can be expensive.
We are a public reporting company in the United States and, accordingly, subject to the information and reporting requirements of the Securities Exchange Act of 1934 and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports and other information with the SEC will cause our expenses to be higher than they would be if we were a privately-held company.
Our Common Stock may be considered to be a “penny stock” and, as such, the market for our Common Stock may be further limited by certain Commission rules applicable to penny stocks.
To the extent the price of our Common Stock remains below $5.00 per share or we have a net tangible assets of $5,000,000 or less, our common shares will be subject to certain “penny stock” rules promulgated by the Commission. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm. These rules and regulations adversely affect the ability of brokers to sell our common shares in the public market should one develop and they limit the liquidity of our Shares.
The issuance or sale of equity, convertible or exchangeable securities in the market, or the perception of such future sales or issuances, could lead to a decline in the price, if any, of our common stock.
Any issuance of equity, convertible or exchangeable securities, including for the purposes of financing acquisitions and the expansion of our business, may have a dilutive effect on our existing stockholders. In addition, the perceived risk associated with the possible issuance of a large number of shares or securities convertible or exchangeable into a large number of shares could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline. Subsequent sales of our common stock in the open market or the private placement of our common stock or securities convertible or exchangeable into our common stock could also have an adverse effect on the market price, if any, of our shares. If our stock price declines, it may be more difficult for us to or we may be unable to raise additional capital.
In addition, future sales of substantial amounts of our currently outstanding common stock in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. We cannot predict what effect, if any, future sales of our common stock, or the availability of shares for future sales, will have on the market price of our stock.
The price of common stock may fluctuate significantly, which could result in substantial losses for our stockholders and subject us to litigation.
The market price, if any, of our common stock also may be adversely impacted by broad market and industry fluctuations regardless of our operating performance, including general economic and technology trends. The various stock markets in general have, from time to time, experienced extreme price and trading volume fluctuations, and the market prices of technology companies such as ours have been extremely volatile. In addition, some companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. We may be involved in securities class action litigation in the future. This litigation often results in substantial costs and a diversion of management’s attention and resources.
Our operating results will be subject to quarterly fluctuations which could lead to uncertainty in the marketplace.
Our revenue may fluctuate significantly from quarter to quarter in the future due to a variety of factors, including, without limitation:
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the size and timing of orders and shipments of our intended products;
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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, thin film technology;
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our ability to establish and expand key distribution partners and supplier relationships;
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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;
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our ability to establish strategic relationships with third parties to accelerate our growth plans;
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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;
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delays associated with the supply of specialized materials necessary for the manufacture of our solar power products;
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our ability to execute our cost reduction programs;
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charges resulting from replacing existing equipment or technology with new or improved equipment or technology as part of our strategy to expand our manufacturing capacity and to decrease our per unit manufacturing cost;
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developments in the competitive environment, including the introduction of new products or technological advancements by our competitors; and
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the timing of adding the personnel necessary to execute our growth plan.
We anticipate that our operating expenses will continue to increase significantly, particularly as we develop our internal infrastructure to support our anticipated growth. If our product revenues in any quarter do not increase correspondingly, our net losses for that period will increase. Moreover, given that a significant portion of our operating expenses is largely fixed in nature and cannot be quickly reduced, if our product revenues are delayed or below expectations, our operating results are likely to be adversely and disproportionately affected. For these reasons, quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and you should not rely on results of operations in any particular quarter as an indication of future performance. If our quarterly revenue or results of operations fall below the expectations of investors or public market analysts in any quarter, the market value of our common stock would likely decrease, and it could decrease rapidly and substantially.
THE FOREGOING RISK FACTORS DO NOT PURPORT TO BE A COMPLETE EXPLANATION OF THE RISKS INHERENT IN AN INVESTMENT IN THE COMPANY.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Description of Property
Since inception of Solterra, Solterra utilizes the home of Stephen Squires in Arizona as an executive office. During the years ended June 30, 2009, 2010, 2011 and 2012, the Company has reimbursed Stephen Squires $11,040, $11,520, $11,520 and $11,520, respectively, for the use of his premises. The Company also had leased about 200 square feet of laboratory office space from Arizona State University ("ASU") at a cost of $410 per month. This lease arrangement terminated in June, 2010. The principal executive office of the Company will be moved in fiscal 2013 to a new research facility to be opened in Austin, Texas. All mail sent to our principal executive office mentioned on the cover page of this Form 10-K is being sent to Mr. Squire's home until we move into our new facility in Austin, Texas.
Item 3. Legal Proceedings
We are not a party to any pending legal proceedings. Our property is not the subject of any pending legal proceedings. To our knowledge, no governmental authority is contemplating commencing a legal proceeding in which we would be named as a party.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The principal United States market for our common equity is the Over-the-Counter Market, which includes the pink sheets and the OTC Electronic Bulletin Board. Since February 27, 2008, our common stock has been available for quotation and trading under the former symbol “HGUE” and later under the symbol "QTMM." Our common stock was traded on the OTC Bulletin Board and in the pink sheets until our common stock was removed from trading on the OTC Bulletin Board due to failure to comply with Rule 15c2-11. Under this rule, at least one market maker must quote our common stock at the close of trading and if this requirement is failed for a specific number of consecutive trading days, then our common stock can be delisted, which event happened during the trading session on October 13, 2010. Our common stock continues to be available for quotation and trading in the Over-the-Counter Market in the OTCQB.
The table below sets out the range of high and low sales information for our common stock for each quarterly period from July 1, 2010 through June 30, 2012.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Holders
As of September 19, 2012, there were 91 record holders accounting to the Company’s transfer agent. However, Management believes that there are over 900 beneficial holders of our common stock.
Dividends
We have not paid dividends on our common stock, and do not anticipate paying dividends on our common stock in the foreseeable future.
Issuer Repurchases of Equity Securities
During fiscal 2012, there were no repurchases of our equity securities.
Recent Sales of Unregistered Securities
(a)
From July 1, 2011 to June 30, 2012, we had the following sales of unregistered Common Stock.
(b)
Rule 463 of the Securities Act is not applicable to the Company.
(c)
In the year ended June 30, 2012, there were no repurchases by the Company of its Common Stock.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-K. All statements contained herein that are not historical facts, including, but not limited to, statements regarding anticipated future capital requirements, our future plan of operations, our ability to obtain debt, equity or other financing, and our ability to generate cash from operations, are based on current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties that may cause the Company’s actual results in future periods to differ materially from forecasted results.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of our Company. Our Company and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in this report and other Company filings with the Securities and Exchange Commission and in our reports to stockholders. Statements that relate to other than strictly historical facts, such as statements about the Company's plans and strategies and expectations for future financial performance are forward-looking statements within the meaning of the Act. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will” and other similar expressions identify forward-looking statements. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and operating performance, and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See “Risk Factors” for a discussion of events and circumstances that could affect our financial performance or cause actual results to differ materially from estimates contained in or underlying our forward-looking statements.
Business Overview
We are a start-up solar technology and quantum dot manufacturing firm. We perceive an opportunity to acquire a significant amount of both quantum dot and solar photovoltaic market share by commercializing a low cost quantum dot processing technology and a low cost quantum dot based third generation photovoltaic technology/solar cell, pursuant to exclusive license agreements with William Marsh Rice University (“Rice University” or “Rice”). Our objective is for Quantum to become the first bulk manufacture of high quality tetrapod quantum dots and for Solterra to be the first solar cell manufacturer to be able to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in North America, Europe, the Middle East and Asia.
Competitors are pursuing different nanotechnological approaches to developing solar cells, but the general idea is the same for all. When light hits an atom in a semiconductor, those photons of light with lots of energy can push an electron out of its nice stable orbital around the atom. The electron is then free to move from atom to atom, like the electrons in a piece of metal when it conducts electricity. Using nano-size bits of semiconductor embedded in a conductive plastic maximizes the chance that an electron can escape the nanoparticle and reach the conductive plastic before it is "trapped" by another atom that has also been stripped of an electron. Once in the plastic, the electron can travel through wires connecting the solar cell to an electronic device. It can then wander back to the nanocrystal to join an atom that has a positive charge, which scientifically is called electron hole recombination.
A quantum dot solar cell typically uses a thin layer of quantum dot semiconductor material, rather than silicon chips, to convert sunlight into electricity. Quantum Dots, also known as nanocrystals, measure near one billionth of an inch and are a non-traditional type of semiconductor. Management believes that they can be used as an enabling material across many industries and that quantum dots are unparalleled in versatility and flexible in form.
Quantum intends to design and manufacture solar cells using a proprietary thin film semiconductor technology that we believe will allow us to reduce our average solar cell manufacturing costs and be extremely competitive in this market. Quantum will be one of the first companies to integrate non-silicon quantum dot thin film technology into high volume low cost production using proprietary technologies. Our objective is to become one of the first solar module manufacturers to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in North America, Europe and Asia. Management believes that the manufacture of our thin film quantum dot solar cells can introduce a cost effective disruptive technology that can help accelerate the conversion from a fossil fuel dependent energy infrastructure to one based on renewable, carbon-neutral energy sources. We believe that our proposed products also can be a part of the solution to greenhouse gases and global warming.
Outstanding Debentures
On November 4, 2008, the Company entered into a Securities Purchase Agreement, Debenture, Security Agreement, Subsidiary Guarantee Agreement, Registration Rights Agreement, Escrow Agreement, Stock Pledge Agreement and other related transactional documents (the “Transaction Documents”) to obtain $1,500,000 in gross proceeds from three non-affiliated parties (collectively hereinafter referred to as the “Lenders”) in exchange for 3,525,000 restricted shares of Common Stock of the Company (the “Restricted Shares”) and Debentures in the principal amount aggregating $1,500,000. Each Debenture had a term of three years maturing on November 4, 2012, bearing interest at the rate of 8% per annum and is prepayable by the Company at anytime without penalty, subject to the Debenture holders’ conversion rights. Each Debenture is convertible at the option of each Lender into the Company’s Common Stock (the “Debenture Shares”, which together with the Restricted Shares shall collectively be referred to as the “Securities”), currently at a conversion price of $.12 per share (the “Conversion Price”). The Registration Rights Agreement requires the Company to register the resale of the Securities within certain time limits and to be subject to certain penalties in the event the Company fails to timely file the Registration Statement, fails to obtain an effective Registration Statement or, once effective, to maintain an effective Registration Statement until the Securities are saleable pursuant to Rule 144 without volume restriction or other limitations on sale. The Debentures are secured by the assets of the Company and are guaranteed by Solterra as the Company’s subsidiary. In the event the Debentures are converted in their entirety, the Company would be required to issue an aggregate of 12,500,000 shares of the Company’s Common Stock, subject to anti-dilution protection for stock splits, stock dividends, combinations, reclassifications and sale of the Company’s Common Stock a price below the Conversion Price. Certain changes of control or fundamental transactions such as a merger or consolidation with another company could cause an event of default under the Transaction. As of the filing date of this Form 10-K, the Debenture Holders have taken no action under a Registration Rights Agreement or other transaction documents to notify the Company that it is in default under any of such agreements even though an event of default may be deemed to exist. See "Risk Factors."
Critical Accounting Policies
Cash and cash equivalents
Cash and cash equivalents include cash and all highly liquid financial instruments with original purchased maturities of three months or less. At various times during the year, the Company maintained cash balances in excess of FDIC insurable limits. Management feels this risk is mitigated due to the longstanding reputation of these banks.
Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents, inventory, sales tax receivable and prepaids, deposits and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates
Deferred Finance Costs
Deferred finance costs which arose from the Company’s convertible debenture financing are amortized using the effective interest method over the three year term of the debentures.
Equipment
Office furniture and office equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized: minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives which are generally three to seven years.
Long-lived assets
We review our long-lived assets, which include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as “the asset”) may not be recoverable. Such circumstances include, but are not limited to:
● a significant decrease in the market price of the asset;
● a significant change in the extent or manner in which the asset is being used;
● a significant change in the business climate that could affect the value of the asset;
● a current period loss combined with projection of continuing loss associated with use of the asset; and
● a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life.
Beneficial conversion
Equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible equity instruments. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as a deemed dividend or interest expense and an increase to additional paid-in-capital.
Research and development costs
Research and development costs are expensed as they are incurred. Research and development expense was $15,000 and $16,649 for the years ended June 30, 2011 and June 30, 2012, respectively.
Basic and diluted loss per share
The Company reports basic loss per share in accordance with the ASC 260, “Earnings Per Share”. Basic loss per share is computed using the weighted average number of shares outstanding during the period. Diluted loss per share has not been provided as it would anti-dilutive. Dilution is computed by applying the treasury stock method.
Plan of Operation
QMC/Solterra plans to:
a)
QMC will scale up Quantum Dot Production by applying proprietary technology licensed from Rice University for our quantum dot synthesis process and accomplishing large scale production using proprietary Micro-Reactor technology jointly developed through an agreement with Access2Flow an advanced flow chemistry consortium based in the Netherlands. These proprietary technologies enables QMC/Solterra to produce the highly desirable tetrapod quantum dots at a cost savings of greater than 75% compared to competing suppliers, and will organically supply QMC/Solterra’s requirements for quantum dots for its solar cells and other quantum dot enabled products. Additionally, QMC intends to market these TQD’s through various existing supply channels into various markets, including but not limited to lighting, security and electronics. The initial pilot scale up will take place at the Access2Flow facilities in the Netherlands and once optimized, equipment will be relocated as required to the nanobiotechnology or solar cell production facility.
b)
Solterra will fbricate solar cells and optimize the performance of solar cells based on a proprietary blend of TQD’s . The aim is to invest our best efforts to demonstrate and scale up production of low cost quantum dot solar cells having peak efficiency of greater than 10%. The efficiency of solar cells is the electrical power it puts out as percentage of the power in incident sunlight. Within the photovoltaic market, cell pricing and peak efficiency are key benchmarks for consumers in the decision for system selection and installation. The design and manufacture of Solterra's quantum dot based solar cells is projected to allow for the conversion of sunlight into usable electricity at a combination of efficiencies and cell cost at a very low "cents per kilowatt-hour" rate. The initial work was accomplished on site at the Arizona State University labs but such work was relocated to better accommodate the logistic requirements of our Chief Science Officer, Professor Ghassan Jabbour, who is now located at Kaust University in Saudi Arabia.
c)
Identify, license and or develop additional quantum dot enabled applications in the lighting, memory and medical fields.
Objectives:
The Current Objectives of the Company upon receipt of additional financing are as follows:
●
Become the first bulk manufacture of high quality tetrapod quantum dots and have Solterra become the first solar cell manufacturer to be able to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in the Middle East ,Asia, North America, South America, and Europe.
Build a robust intellectual property portfolio in Nanomaterials, Nanobio technologies, nanomaterials processes, third & fourth generation photovoltaics, quantum dot process technologies and numerous other quantum dot enabled technologies. Success criteria include completion of preparation and filing of numerous patent applications in the area of Nanomaterials, tetrapod quantum dots, continuous flow chemistry and Quantum Dot Solar Cell technology, although no assurances can be given that these goals will be achieved.
●
Initiate scaled manufacturing of tetrapod quantum dots, based in part on technology licensed from William H. Marsh Rice University, and building on continued research. Planning includes the implementation of one or more TQD pilot lines The design of the pilot line is intended such that the initial target output of the line, at approximately one kilogram per day, can be further scaled at least by an order of magnitude to 100 Kilograms per day in 2012. The output of the tetrapod quantum dots manufacturing will be used for QMC/Nnaoaxis Nanobio products and Solterra’s quantum dot solar cells as well as stand-alone sales to third party developers of quantum dot products such as lighting, battery’s, displays, memory and computer and consumer electronics.
●
Continue to develop and characterize the Quantum Dot Solar Cell product; moving towards pilot proof line for solar cells and leading to high throughput print line ultimately capable of yearly solar cell output near gigawatt range. Target cell efficiencies are 15% within 1 year and greater than 25% within five years. Coupled within cell cost per watt decreasing below $.75/Watt, we intend to pursue initial product sales in fiscal 2013.
Liquidity and Capital Resources
At June 30, 2012 the Company had a working capital deficit of approximately $3,074,656 with total liabilities of approximately $3,089,917. Approximately $1,018,945 of these liabilities is owed to our officers, directors and employees for services rendered and accrued through June 30, 2012. The Company has been in the development stage since inception. As a result, the Company has relied on financing through the issuance of common stock and a convertible debenture as well as advances from a director, shareholder and employees’ wages being partially or fully accrued but not paid.
As of June 30, 2012, the Company lacks cash or cash equivalent assets and continues to incur losses in its development stage operations. In fiscal 2012, the Company relied on sales of its Common Stock to support its operations. The Company has also relied on various universities performing work and providing U.S. licensing rights under business agreements in which the Company is in arrears in payments as well as employees and consultants agreeing to defer payment of wages and fees owed to them. Currently, the Company is seeking additional financing in excess of $3,000,000; however, no definitive agreements for additional financing have been received and the Company cannot provide any assurance that additional funding will be available to finance our operations on terms acceptable to us, if at all, in order to support our plan of operations. If we are unable to achieve the financing necessary to continue our plan of operations, then our stockholders may lose their entire investment in the Company. See "Notes to Financial Statements."
Cash was used in operating activities of $429,837 for fiscal 2012. This is a result of a net loss of $1,365,690 partially offset by stock issued for services of $870,000, option and warrant expenses recognized in the amount of $215,530, stock issued for debenture interest of $161,544, consideration of convertible debenture discount of $586,729 and amortization of deferred finance cost of $36,167. There were no cash flows used in investing activities in 2012. Cash flows from financing activities during 2012 were $445,000 which consisted of proceeds of the sale of common stock. In 2010, our board approved granting Mr. Squires the right to convert loans made by him of up to $200,000 into a maximum 5% interest in the common stock of Solterra. This is a two-year option. As of June 30, 2012, Mr. Squires does not have any unreimbursed cash advances due to him, and has accrued payroll and expenses totaling $68,933 owed to him and accrued payroll of $122,577 owed to his wife in her role as a bookkeeper for the Company.
Cash was used in operating activities of $227,054 for fiscal 2011. This is a result of a net loss of $3,816,028 partially offset by stock issued for services of $1,244,000, increases in accounts payables and accrued liabilities of $929,261, change in fair value of warrants and embedded conversion feature of $388,943, consideration of convertible debenture discount of $586,322 and amortization of deferred finance cost of $105,000. There were no cash flows used in investing activities in 2011. Cash flows from financing activities during 2011 were $227,133 which consisted of $297,500 from the proceeds of the sale of common stock and $70,367 from related party advances from Stephen Squires, our Chief Executive Officer, for certain loans to the Company. In 2010, our board approved granting Mr. Squires the right to convert loans made by him of up to $200,000 into a maximum 5% interest in the common stock of Solterra. This is a two-year option. As of June 30, 2011, Mr. Squires does not have any unreimbursed cash advances due to him, and has accrued payroll and expenses totaling $75,124 owed to him and accrued payroll of $62,577 owed to his wife in her role as a bookkeeper for the Company.
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying value and classification of assets and liabilities should the Company be unable to continue as a going concern. At June 30, 2012, the Company had not yet achieved profitable operations, has accumulated losses of $11,467,027 since its inception, at June 30, 2012, has a working capital deficit of $3,074,656 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company requires immediate and substantial additional financing during fiscal 2013 to maintain its development stage operations. The Company is exploring all reasonable avenues of financing at this time, including, without limitation, the sale of equity, debt borrowing and/or the receipt of product licensing fees and royalties. We can provide no assurances that such financing will be obtained on terms satisfactory to the Company, if at all. Further, we can provide no assurances that one or more mutually acceptable licensing agreement(s) will be entered into on terms satisfactory to us, if at all. In this respect, see “Note 2” in our notes to the consolidated financial statements for additional information as to the possibility that we may not be able to continue as a “going concern.”
Off-balance sheet arrangements
We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.
Officers convert accrued salaries and bonus into warrants
In November 2010, Steven Squires ($125,000), Brian Lukian ($234,375), David Doderer ($62,500), Robert Glass ($37,500), Ghassan Jabbour ($243,750), Andrew Robinson ($50,000) and Toshinon Ando ($35,000) converted the amount of monies set forth beside their names into five-year warrants to purchase 1,666,666 shares, 3,125,000 shares, 833,333 shares, 500,000 shares, 3,250,000 shares, 666,666 shares and 466,666 shares, respectively, In summary, a total of $788,125 was converted into warrants to purchase 10,508,331 shares exercisable at $.075 per share through the expiration date of November 4, 2015.
In May 2011, David Doderer ($81,250), Robert Glass ($61,250), Ghassan Jabbour ($62,500), Andrew Robinson ($50,000) and Toshinon Ando ($65,000) converted the amount of monies set forth beside their names into five-year warrants to purchase 738,636 shares, 556,818 shares, 568,181 shares, 454,545 shares and 590,909 shares, respectively, In summary, a total of $320,000 was converted into warrants to purchase 2,909,089 shares exercisable at $.11 per share through the expiration date of May 18, 2016.
Loans from Stephen Squires
In November 2008, Mr. Squires received 35,500,000 shares of the Company's Common Stock as part of a plan of reorganization, 20,000,000 of which he pledged to secure certain company indebtedness. Between December 2008 and December 2010, Mr. Squires privately sold an aggregate of approximately 13,431,000 shares of the Company's Common Stock for an aggregate of $595,000. Mr. Squires advanced to the Company cash loans and made payment of Company expenses utilizing $270,145 of the net proceeds of these private sales. On December 30, 2010, the Board of Directors authorized Mr. Squires to receive 10,000,000 restricted shares of Quantum Material Corp. in recognition of his support of the Company and in cancellation of all outstanding cash loans and advanced expenses totaling $270,145.
In January 2010, the board of directors granted Mr. Squires the option to convert his cash loans to the Company into common stock of the Company's subsidiary. In this respect, Mr. Squires has a two-year option to convert up to $200,000 into a maximum of 5% of the outstanding common stock of Solterra. As of the filing date of this Form 10-K, Mr. Squires has declined to exercise this option.
Results of Operations - June 30, 2012 versus June 30, 2011
Balance Sheet
Cash
At June 30, 2012, the Company’s balance sheet included cash of $15,261 compared to cash of $98 at June 30, 2011, representing an increase in cash of $15,163 for the year. An amount of $445,000 was raised through the sale of common stock in the current year as compared to $297,500 in the prior year, however operating costs have consumed the majority of the amount leaving the current cash balance of $15,261.
The Company has been in a development stage since inception. As a result, the Company has relied on financing through the issuance of common stock and a convertible debenture in November 2008 as well as advances from related parties.
License
In July 2009, the Company concluded a license agreement with the University of Arizona. This agreement gives the Company exclusive rights for the creation, manufacturing, use, production, distribution, and marketing of products and services from innovations represented by the technical information and patent rights regarding the light emitting diodes in printed electronic displays and all other printed electronic components. Of the total $55,000 recorded, $15,000 represents the license fee paid. The license agreement also specifies minimum royalty payments starting in January 2011. This agreement also requires the Company to pay for all patent costs on the patents owned by University of Arizona and licensed to the Company.
In August 2008, the Company concluded a license agreement with Rice. This agreement gives the Company exclusive use of the issued patents and patent applications as well as the know-how owned by Rice University to develop, manufacture and market Quantum Dots. This licensed technology enables the Company to produce highly desirable CdSe tetrapod quantum dots at an anticipated cost savings of greater than 50% compared to competing suppliers, and will organically supply Solterra’s requirements for quantum dots for its solar cells. The balance of $40,000 represents the license fee paid to Rice University. The license agreement also specifies minimum royalty payments starting in August 2010. This agreement also requires the Company to pay for all patent costs on the patents owned by Rice and licensed to the Company.
Patent license costs have been expensed as professional fees in general and administrative expenses and amounted to $6,671 and $4,331 respectively in the year ended June 30, 2012 and June 30, 2011.
Furniture and equipment
During the years ended June 30, 2012 and June 30, 2011, the company did not have any acquisitions or disposals of office equipment and furniture. The company is amortizing the office equipment and furniture on a straight line basis over 3 and 7 years, respectively, and has charged operations with $2,660 of amortization for this year and $4,048 in the prior year.
Deferred financing costs
Deferred finance cost, net were $0 at June 30, 2012. This amount relates to the $315,000 of expenses associated with the $1,500,000 convertible debenture financing raised in November 2008. The deferred financing cost is being amortized using the effective interest method over the thirty-six month life of the debenture. The balance at June 30, 2011 was $36,167.
Accounts payable and accrued liabilities
The balance at June 30, 2012 was $151,573. Included in accounts payable is legal fees of $125,432, accounting fees of $19,000, and other operating expenses of $7,141. The balance at June 30, 2011 was $861,635 which included accrued interest on the convertible debenture of $10,000, development expenses of $516,893, patent maintenance fees associated with the licenses of $27,405, legal and auditor expenses of $92,375, and other operating expenses of $214,962. During the year ended June 30, 2012 the Company wrote off $652,505 of accounts payable, previously recorded, upon confirmations with certain vendors related to the concluded license agreements, that there is no expectation of payments and matters have been closed.
Accounts payable related party
At June 30, 2012 there was $1,018,945 due to related parties. This represents unpaid wages to officers and executive directors of the Company. At June 30, 2011 the balance was $446,027.
Advances related party
At June 30, 2012 there were no advances due to related party. On December 30, 2010, the Board of Directors authorized Mr. Squires to receive 10,000,000 restricted shares of Quantum Material Corp. in recognition of his support of the Company and in cancellation of all outstanding cash loans and advanced expenses totaling $270,144. At June 30, 2011 the balance was $0.
Fair value of embedded conversion feature
The Company has evaluated the application of ASC 815 to the Convertible Note issued November 4, 2008. Based on the guidance in ASC 815, the Company concluded these instruments were required to be accounted for as derivatives as of July 1, 2009 due to the down round protection feature on the conversion price and the exercise price. The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected in the statements of operations as “Gain (loss) on derivative liabilities.” Further explanation can be found in Note 7.
As part of implementing ASC 815-40-14 the Company adjusted accumulated deficit by $162,643 and additional paid in capital by $212,184. The fair value of the derivatives as of June 30, 2012 was estimated by management to be $346,000 as compared to the estimated fair value at June 30, 2011 of $1,223,000. The decrease of $877,000 has been charged to operations in the current year.
Convertible debenture
On November 4, 2008, the Company entered into a Securities Purchase Agreement, Debenture, Security Agreement, Subsidiary Guarantee Agreement, Registration Rights Agreement, Escrow Agreement, Stock Pledge Agreement and other related transactional documents to obtain $1,500,000 in gross proceeds from three non-affiliated parties in exchange for 3,525,000 restricted shares of Common Stock of Hague Corp and Debentures in the principal amount aggregating $1,500,000. Each Debenture currently matures on November 4, 2012 bearing interest at the rate of 8% per annum and is pre payable by the Company at anytime without penalty, subject to the Debenture holders’ conversion rights. The Company recorded a discount of $1,155,826 associated with the 3,525,000 shares issued. The discount was amortized over the original three year life of the debenture. Each Debenture is currently convertible at the option of each Lender into Hague Corp’s Common Stock, at a conversion price of $.12 per share. The Debentures are secured by the assets of Hague Corp and are guaranteed by Solterra as Hague Corp’s subsidiary and through a pledge of 20,000,000 shares by Stephen Squires, the Company’s Chief Executive Officer. In the event the Debentures are converted in their entirety, the Company would be required to issue and aggregate of 12,500,000 shares of Quantum Material Corp’s Common Stock, subject to anti-dilution protection for stock splits, stock dividends, combinations, reclassifications and sale of the Company’s Common Stock at a price below the Conversion Price. Certain changes of control or fundamental transactions such as a merger or consolidation with another company or other material event could cause an event of default under the Transaction Documents. The balance of the convertible debenture net of the discount at June 30, 2012 was $1,500,000 and at June 30, 2011 the balance was $908,405. The discount was amortized resulting in the convertible debenture balance being $1,500,000 at November 4, 2011. In partial consideration of such a loan extension, the Company agreed to issue to the Debenture holders warrants to purchase an aggregate of 2,000,000 shares of Common Stock exercisable at $.08 per share. See “Item 11” and “Item 1A
Item 8. Consolidated Financial Statements
Consolidated Financial Statements
The report of the Independent Registered Public Accounting Firm on the Consolidated Financial Statements and Schedules are set forth beginning on the next page of this Annual Report on Form 10-K following this page.
Peter Messineo
Certified Public Accountant
1982 Otter Way Palm Harbor FL 34685
peter@pm-cpa.com
T 727.421.6268 F 727.674.0511
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Quantum Materials Corp.:
I have audited the consolidated balance sheets of Quantum Materials Corp., a development stage company, as of June 30, 2012 and 2011 and the related consolidated statements of operations, consolidated changes in stockholders’ deficit, and consolidated cash flows for the years then ended and for the period May 19, 2008 (date of inception) through June 30, 2012. These consolidated financial statements are the responsibility of the Company’s management. My responsibility is to express an opinion on these consolidated financial statements based on my audits.
I conducted my audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements were free of material misstatement. The Company was not required to have, nor was I engaged to perform, an audit of its internal control over financial reporting. My audit included consideration of internal control over financial reporting as a basis for designing audit procedures that were appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, I express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements, referred to above, present fairly, in all material respects, the consolidated financial position of Quantum Materials Corp. as of June 30, 2012 and 2011, and the results of its consolidated operations and its consolidated cash flows for the years then ended and for the period May 19, 2008 (date of inception) through June 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has had no revenues, has incurred recurring losses resulting in an accumulated deficit, has negative cash flows from operations and is requiring traditional financing or equity funding to commence its operating plan. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Further information and management’s plans in regard to this uncertainty were also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Peter Messineo, CPA
Palm Harbor, Florida
October 8, 2012
Quantum Materials Corp.
(A Development Stage Company, formerly Hague Corp.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended June 30, 2012 and 2011
and for the period May 19, 2008 (inception) to June 30, 2012
Note 1. Basis of Presentation
The consolidated balance sheets and the consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years ended June 30, 2012 and 2011 and the period from May 19, 2008 (inception) through June 30, 2012 of Quantum Materials Corp ("Quantum Materials" or the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC").
Since November 4, 2008, the Company has changed its business plans and is no longer intending to pursue the mining of mineral rights located in Nevada. The Company intends to pursue the business plans of its subsidiary, Solterra Renewable Technologies, Inc. (“Solterra”). The following is a brief business overview of Solterra.
Solterra is a start-up solar technology and quantum dot manufacturing firm which was founded by Stephen Squires. Mr. Squires perceives an opportunity to acquire a significant amount of both quantum dot and solar photovoltaic market share by commercializing a low cost quantum dot processing technology and a low cost quantum dot based third generation photovoltaic technology/solar cell, pursuant to an exclusive license agreement with William Marsh Rice University (“Rice University” or “Rice”). Our objective is to become the first bulk manufacture of high quality tetrapod quantum dots and the first solar cell manufacturer to be able to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in North America, Europe, the Middle East and Asia.
Note 2. Nature and Continuance of Operations
In November 2008, the Company acquired Solterra, through an Agreement and Plan of Merger and Reorganization (the “Merger”) by and among Solterra, the Shareholders of Solterra and Quantum Materials Corp and Gregory Chapman as “Indemnitor” which resulted in Solterra becoming a wholly-owned subsidiary of Quantum Materials Corp. Pursuant to the Merger, Mr. Chapman cancelled 40,000,000 shares of Common Stock of Quantum Materials Corp owned by him and issued a general release in favor of Quantum Materials Corp terminating its obligations to repay Mr. Chapman approximately $34,000 in principal owed to him. In accordance with the Merger, Quantum Materials Corp issued 41,250,000 shares of its Common Stock to the former stockholders of Solterra. Certain existing stockholders of Quantum Materials Corp in consideration of Solterra and its shareholders completing the transaction, issued to Quantum Materials Corp a Promissory Note in the amount of $3,500,000 due and payable on or before January 15, 2009, through the payment of cash or, with the consent of Quantum Materials Corp, the cancellation of up to 12,000,000 issued and outstanding shares of Quantum Materials Corp owned by them. The Company has recorded the note receivable in equity as a subscription receivable which is offset by additional paid in capital, thus this entry has a zero net effect in the financial statements. As of November 6, 2009, the $3,500,000 Promissory Note has not been collected and the Company has made demand for payment or the cancellation of 12,000,000 shares per agreement. The Company is considering all legal options to pursue collection of the funds or cancellation of the shares. However, management believes that it is unlikely to collect monies under this Note.
Quantum Materials Corp. ceased the mining business that we had previously conducted, we closed our offices in Canada, and we moved our offices to the offices of Solterra in Arizona.
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying value and classification of assets and liabilities should the Company be unable to continue as a going concern. At June 30, 2012, the Company had not yet achieved profitable operations, has accumulated losses of $11,467,027 since its inception, has a working capital deficit of $3,074,656, and expects to incur further losses in the development of its business, all of which raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company requires immediate and substantial additional financing during fiscal 2013 to maintain its development stage operations. The Company is exploring all financing options at this time, including, without limitation, the sale of equity, debt borrowing and/or the receipt of product licensing fees and royalties. We can provide no assurances that such financing will be obtained on terms satisfactory to the Company, if at all. Further, we can provide no assurances that one or more mutually acceptable licensing agreement(s) will be entered into on terms satisfactory to us, if at all.
Note 3. Summary of Significant Accounting Policies
Cash and cash equivalents
Cash and cash equivalents include cash and all highly liquid financial instruments with original purchased maturities of three months or less. At various times during the year, the Company maintained cash balances in excess of FDIC insurable limits. Management feels this risk is mitigated due to the longstanding reputation of these banks.
Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates
Deferred Finance Costs
Deferred finance costs which arose from the Company’s convertible debenture financing are amortized using the effective interest method over the three year term of the debentures.
Equipment
Office furniture and office equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized: minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives which are generally three to seven years.
Long-lived assets
We review our long-lived assets, which include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as “the asset”) may not be recoverable. Such circumstances include, but are not limited to:
●a significant decrease in the market price of the asset:
●a significant change in the extent or manner in which the asset is being used:
●a significant change in the business climate that could affect the value of the asset:
●a current period loss combined with projection of continuing loss associated with use of the asset: and
●a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life.
Beneficial conversion
Equity instruments that contain a beneficial conversion feature are recorded as a deemed dividend to the holders of the convertible equity instruments. The deemed dividend associated with the beneficial conversion is calculated as the difference between the fair value of the underlying common stock less the proceeds that have been received for the equity instrument limited to the value received. The beneficial conversion amount is recorded as a deemed dividend or interest expense and an increase to additional paid-in-capital.
Research and development costs
Research and development costs are expensed as they are incurred. Research and development expense was $16,649, $15,000 and $783,542 for the years ended June 30, 2012 and 2011 and from May 19, 2008 (inception) to June 30, 2012, respectively.
Stock compensation awards
The Company follows ASC 718 when accounting for stock compensation awards to employees. Compensation cost is based on the stock’s fair value at grant date by the board of directors. Compensation cost was $890,264 (stock issued valued at $870,000 and ratably recognized option expense in the amount of $20,264) in the year ended June 30, 2012 and $1,244,000 in the year ended June 30, 2011.
Basic and diluted loss per share
The Company reports basic loss per share in accordance with the ASC 260, “Earnings Per Share”. Basic loss per share is computed using the weighted average number of shares outstanding during the period. Diluted loss per share has not been provided as it would anti-dilutive. Dilution is computed by applying the treasury stock method.
Recently Adopted Accounting Standards
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company's consolidated financial position, consolidated results of operations or consolidated cash flow.
Note 4. Furniture and equipment
Components of furniture and equipment consist of the following items as of June 30, 2012 and 2011:
Note 5. Related party transactions
The Company expensed management fees to the CEO / major shareholder as well as other related party executives of $843,405 and $612,500 respectively in the years ended June 30, 2012 and 2011, respectively. The Company was not able to pay the majority of these fees with cash; however, in November 2010 and May 2011 the Company’s executive officers and directors converted accrued salaries of $726,500 and bonuses of $181,625 totaling $908,125 into warrants to purchase 9,374,999 shares, exercisable at $0.075 per share over a period of five years expiring November 4, 2015 and warrants to purchase 1,863,635 shares, exercisable at $0.11 per share over a period of five years expiring May 18, 2016.
As a result the accrued liabilities related party was $1,108,945 and $446,027 as of June 30, 2012 and 2011, respectively.
During the twelve months ended June 30, 2012 the Company recorded $11,520 of rent expense for the use of executive office space in the home of the CEO / major shareholder, all of which was included in the accrued liabilities for related parties.
In January 2011 the Company issued 10,000,000 restricted shares to Stephen Squires the CEO in recognition of his support of the Company and in cancellation of all outstanding cash loans and payments made on behalf of the Company totaling $270,145.
Note 6. Convertible debentures
Balance of convertible debentures consist of the following as of June 30, 2012 and 2011:
On November 4, 2008, Quantum Materials Corp entered into a Securities Purchase Agreement, Debenture, Security Agreement, Subsidiary Guarantee Agreement, Registration Rights Agreement, Escrow Agreement, Stock Pledge Agreement and other related transactional documents (the “Transaction Documents”) to obtain $1,500,000 in gross proceeds from three non-affiliated parties (collectively hereinafter referred to as the “Lenders”) in exchange for 3,525,000 restricted shares of Common Stock of Quantum Materials Corp (the “Restricted Shares”) and Debentures in the principal amount aggregating $1,500,000. Each Debenture originally had a term of three years maturing on November 4, 2011 bearing interest at the rate of 8% per annum and is prepayable by Quantum Materials Corp at any time without penalty, subject to the Debenture holders’ conversion rights. In 2011, the Company obtained a one year extension of the maturity date of the Debentures through November 4, 2012. In partial consideration of such a loan extension, the Company agreed to issue to the Debenture holders warrants to purchase an aggregate of 2,000,000 shares of Common Stock exercisable at $.08 per share, valued using the Black Scholes Model for options in the amount of $190,400.
In recognition of the 3,525,000 shares issued at originaltion, the Company recorded a discount of $1,155,826. The discount is made up of two components: $577,913 related to the discount for the relative fair value of the shares issued; and $577,913 related to a beneficial conversion feature. The discount will be amortized over the 3 year life of the debenture and recorded as interest expense. Each Debenture is convertible at the option of each Lender into Quantum Materials Corp’s Common Stock (the “Debenture Shares”, which together with the Restricted Shares shall collectively be referred to as the “Securities”) at a conversion price of $.2667 per share (the “Conversion Price”). In October 2010, the conversion price was decreased to $0.12 per share.
The Registration Rights Agreement requires Quantum Materials Corp to register the resale of the Securities within certain time limits and to be subject to certain penalties in the event Quantum Materials Corp fails to timely file the Registration Statement, fails to obtain an effective Registration Statement or, once effective, to maintain an effective Registration Statement until the Securities are saleable pursuant to Rule 144 without volume restriction or other limitations on sale. The Debentures are secured by the assets of Quantum Materials Corp and are guaranteed by Solterra as Quantum Materials Corp’s subsidiary. To date, no registration statement has been filed by the Company.
In the event the Debentures are converted in their entirety, Quantum Materials Corp would be required to issue an aggregate of 12,500,000 shares of Quantum Materials Corp’s Common Stock, subject to anti-dilution protection for stock splits, stock dividends, combinations, reclassifications and sale of Quantum Materials Corp’s Common Stock a price below the Conversion Price. Certain changes of control or fundamental transactions such as a merger or consolidation with another company could cause an event of default under the Transaction Documents.
We also entered into a 120-day Standstill Agreement with the Debenture Holders effective June 1, 2009 which was amended to expire at the close of business on December 1, 2009. The Standstill Agreement provided for the resignation of a director, the transfer of Solterra’s License Agreement with Rice to Hague and for Solterra to obtain from Hague a worldwide exclusive license to purchase quantum dots for solar purposes and to grant sublicenses. To date, the Company has not obtained the consent of Rice to accomplish these objectives. The Standstill Agreement had put a moratorium on the rights of Debenture Holders, subject to certain conditions set forth in the Standstill Agreement. Since the Standstill Agreement was not extended, the Company may be deemed to have failed to file a Registration Statement with the SEC and to timely obtain an effective date as required by the Transaction Documents, thereby causing an event of default to exist. However, the Company believes that as the securities held by the debenture holders are presently saleable pursuant to Rule 144 without volume restrictions or other limitations that the Company is not in default of this provision. As of the filing date of this Form 10-K, the Debenture Holders have taken no action under the Transaction Documents to accelerate the payment date under the Debentures or any other rights or remedies that they may have thereunder. Should penalties be applicable the Company shall pay to each Holder an amount in cash or shares of the Company’s Common Stock (“Liquidated Damages Shares”), at the option of the Company. The penalty equals to 2% of the aggregate purchase price paid by such Holder pursuant to the Purchase Agreement for any unregistered Registrable Securities then held by such Holder. The number of Liquidated Damages Shares to be issued will be determined by dividing the liquidated damages payment by 80% of the VWAP for the 10 consecutive Trading Days prior to the Event Date.
In connection with the Standstill Agreement, the Company recorded $34,148 as additional debt discount for the modification of terms, which will be amortized over the life of the debt. The Company determined the conversion feature issued to the Noteholders to convert their interest into the common stock of Solterra was a derivative liability. The Company determined the value of the derivative liability was nominal due to the low probability of the Company or Solterra raising $2.0 million during the Standstill Agreement.
The deferred financing costs related to the issuance of the debenture are recorded as deferred charges and are being amortized over 36 months using the effective interest method. Amortization expense was $36,167 and $105,000 respectively for the years ended June 30, 2012 and June 30, 2011.
The Transaction Documents include a Stock Pledge Agreement pursuant to which Stephen Squires, the Company's Chief Executive Officer, has pledged 20,000,000 shares of our Common Stock to the Debenture holders (the “Holders”) until such time as the Debentures are paid in their entirety.
Standstill Agreement
On June 1, 2009, the Company and its Debenture Holders entered into a Standstill Agreement which provided for a 120-day standstill period pursuant to which the Debenture Holders would not exercise their rights under the Debentures, security agreements, guarantee, pledge agreement and other related “Transaction Documents.” In October 2009 by separate agreement, the Standstill Period was extended by the Debenture Holders through the close of business on December 1, 2009 and it expired on that date. On November 12, 2009, Dr. Horton resigned from the Board of Directors in accordance with the Standstill Agreement.
The Debenture Holders received warrants to purchase 1,000,000 shares of the Company’s Common Stock, exercisable at $.25 per share over a period of 18 months together with cashless exercise provisions in the event no registration statement is effective at the time of exercise. Of the 1,000,000 warrants, the Debenture Holders assigned 175,000 warrants and 75,000 warrants to Dr. Isaac Horton and Richard Patton, respectively. Messrs. Horton and Patton served as directors of Hague in accordance with the Debenture Holders’ right to appoint two members to the Board of Directors. Warrants to purchase 2,000,000 shares exercisable at $.10 per share through October 31, 2014 were issued for an extension of the Standstill Agreement. These Warrants also contain cashless exercise provisions in the event that there is no current registration statement effective at the time of exercise.
Note 7. Derivatives and Fair Value
The Company has evaluated the application of ASC 815 to the Convertible Note issued November 4, 2008. Based on the guidance in ASC 815, the Company concluded these instruments were required to be accounted for as derivatives as of July 1, 2009 due to the down round protection feature on the conversion price and the exercise price. The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected in the statements of operations as “Gain (loss) on derivative liabilities.” These derivative instruments are not designated as hedging instruments under ASC 815 and are disclosed on the balance sheet under Derivative Liabilities.
ASC 825-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 825-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 describes three levels of inputs that may be used to measure fair value: Level 1 - Quoted prices in active markets for identical assets or liabilities; Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3 - Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company’s Level 3 liabilities consist of the derivative liabilities associated with the November 4, 2008 note. At June 30, 2012, all of the Company’s derivative liabilities were categorized as Level 3 fair value assets. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Level 3 Valuation Techniques
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. We have valued the convertible note that contains down round provisions using a lattice model, with the assistance of a valuation consultant, for which management understands the methodologies. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of July 1, 2009 and June 30, 2011. The fair value of the derivatives as of July 1, 2009 upon implementation of ASC 815-40-15 was estimated by management to be $495,912. As part of implementing ASC 815-40-14 the Company decreased the accumulated deficit by $162,643 and decreased additional paid in capital by $212,184 and increased the discount on the convertible debenture by $446,371. The adjustment to the accumulated deficit was a result of the interest expense recorded in connection with the original derivative liability and the reversal of prior amortization expense, and the change in fair value of the derivative liability as of July 1, 2009.
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the twelve months of fiscal year 2012:
Note 8. Equity Transactions:
Common stock
On January 20, 2010 the stockholders of the Company by majority of written consent approved the filing of an amendment to the Company's Article of Incorporation to change the name of the corporation from Hague Corp. to Quantum Materials Corp. and to increase the authorized common stock to 200,000,000 shares, $.001 par value. The stockholders also ratified the Company's compensation plan covering 10,000,000 options to purchase shares of common stock. This plan provides for the direct issuance of common stock or the grant of options thereunder. The Amendment to the Company's Article of Incorporation was filed March 23, 2010 with the secretary of the state of Nevada.
In November 2009, according to the provisions of the Convertible Debenture agreement the Company elected to issue 843,674 shares of the Company’s restricted Common Stock to pay for accrued interest on the debentures of $60,000. In December 2009 the Company issued 317,796 shares of the Company’s restricted Common Stock to pay for accrued interest on the debentures of $30,000. In March 2010, the Company issued a further 350,467 shares of the Company’s restricted Common Stock to pay for accrued interest on the debentures of $30,000. As the provision to pay stock for interest discounts the market price of the stock the Company has attributed this discount to interest expense and additional paid in capital. The cumulative effect of this extra interest expense for the year ended June, 30 2010 is $75,841.
In October 2009, the Company issued 3,000,000 restricted shares of Common Stock in accordance with the terms of a consulting agreement entered into with Steven Posner and Oasianceanus Capital LLC in exchange for certain introductions made by them to the Company and various other related services. The shares were valued at the closing price on the date of the transaction resulting in a $300,000 professional fee expense and $297,000 recorded as additional paid in capital.
In November 2009, the Company issued 3,000,000 restricted shares of Common Stock in accordance with the terms of a business development and public relation consulting contract with Sound Capital, Inc. This contract is for a period of one year and requires the Company to issue 3,000,000 restricted shares of Common Stock to the consultant upon the execution of the agreement and an additional 1,000,000 free trading shares to the consultant on or before February 12, 2010. The agreement may be terminated for cause or convenience upon 30 days prior written notice. Of the 1,000,000 shares, 500,000 shares were issued in January 2010 as restricted securities. The 3,000,000 shares were valued at the closing price on the date of the transaction resulting in a $360,000 professional fee expense and $357,000 recorded as paid in capital. The 500,000 shares were valued at the closing price on the date of the transaction resulting in a $60,000 professional fee expense and $59,500 recorded as paid in capital. The remaining 500,000 shares of Common Stock related to this agreement was issued resulting in a $60,000 professional fee expense and $59,500 recorded as paid in capital.
In January 2010, the Board of Directors approved a Public Relations Agreement with American Capital Partners. According to the terms of this Agreement the Company issued 100,000 restricted shares of common stock. The 100,000 shares were valued at the closing price on the date of the transaction resulting in a $24,000 professional fee expense and $23,900 recorded as paid in capital.
According to employment agreements approved by the Board in January 2010 the Company approved the issuance of 250,000 and 2,000,000 common shares to Dr. Robert Glass, the Company's Chief Technology Officer, and Stephen Squires, the Company's CEO, respectively.
In the fourth quarter ended June 30, 2010 the Company issued 3,125,000 Common Shares at $0.08 per share for total proceeds of $250,000. Of this $3,125 was attributed to common stock and $246,875 was attributed to additional paid in capital.
In January 2011 the Board approved the issue of 10,000,000 restricted shares to Stephen Squires the CEO in cancellation of all outstanding cash loans and payments made on behalf of the Company totaling $270,145, at a price of $.027 per share.
During the year ended June 30, 2011, the Company issued 300,000 of restricted common shares as stock based compensation. In accordance to the terms of employment contracts approved by the board of directors, the Company issued 300,000 common shares with a fair value of $30,000 to two new employees.
During the year ended June 30, 2011 the Company issued 3,141,277 common shares for total cash proceeds of $297,500. The selling price per share ranged from $0.08 to $0.14 per share or an average price of $0.095 per share.
In September 2010, January 2011, March 2011 and June 2011 the Company issued 1,629,239 of restricted common shares to pay accrued interest on the convertible debentures of $177,693 for the 12 months from June 1, 2010 to June 1, 2011.
During the year ended June 30, 2011 the Company issued 11,525,000 of restricted common shares for consulting services. These shares were valued at the closing price of the stock on the date of approval by the board of directors resulting in the Company recording $1,214,000 in professional fees expenses.
In September 2011, January 2012, March 2012 and June 2012 the Company issued 1,316,608 of restricted common shares to pay accrued interest on the convertible debentures of $161,544, which included provisional interest in the amount of $40,877, for the 12 months from June 1, 2011 to June 1, 2012.
During the year ended June 30, 2012 the Company issued 4,895,833 common shares for total cash proceeds of $445,000. The selling price per share ranged from $0.08 to $0.12 per share or an average price of $0.091 per share.
During the year ended June 30, 2012 the Company issued 7,250,000 shares of common stock in exchange for services, valued at the fair market value of the stock at the date of grant, valued at $870,000.
Stock Options and Warrants
In December 2011, the Company issued 2,000,000 warrants, for the extension of the debenture maturity date the warrants are exercisable at $.08 per share, expiring December 18, 2014. The Company valued these options using the Black Sholes Model, recognizing warrant expense in the amount of $190,400 for the year ended June 30, 2012.
In the quarter ended March 31, 2012 the Company issued stock options to employees for the purchase of 3,500,000 shares of common stock. The options are exercisable at a price per share of $0.03, for a five (5) year term. The Company will ratably recognize $392,500 of expense over the period. The Company recognized $19,718 of compensation expense (included in general and administrative expense) for the year ended June 30, 2012.
In the quarter ended June 30, 2012 the Company issued stock options to employees for the purchase of 250,000 shares of common stock. The options are exercisable at a price per share of $0.04, for a five (5) year term. The Company will ratably recognize $10,925 of expense over the period. The Company recognized $546 of compensation expense (included in general and administrative expense) for the year ended June 30, 2012.
The following assumptions were used in the calculation of warrant and option expense:
Note 9. Commitments and Contingencies
Contingency
Certain default clauses related to the various agreements discussed in Note 6 would result in a change of control of the board of directors. Certain debt holders would have the option to appoint independent members to the board under such default.
From time to time the Company may become a party to litigation matters involving claims against the Company. Management believes that there are no current matters that would have a material effect on the Company’s financial position or results of operations.
License Agreement - Work-Study Arrangements
License Agreement with Rice University
On August 20, 2008, Solterra entered into a License Agreement with Rice University. In September 2011, Solterra entered into an amended License Agreement and Quantum Materials entered into a new License Agreement with Rice. Rice is the owner of certain inventions and patent applications, know-how and rights pertaining to the synthesis of uniform nanoparticle shapes with high selectivity. We have obtained the exclusive rights to license and sublicense (subject to Rice’s consent, which shall not be unreasonably withheld), develop, manufacture, market and exploit Rice’s inventions, patent applications and any issued patents in the case of Solterra, for the manufacture and sale of photovoltaic cells and photovoltaic applications and in the case of Quantum Materials for the manufacture and sale of quantum dots for electronic and medical applications (excluding photovoltaic applications). With respect to Rice’s patent applications, Rice made a provisional filing for an invention disclosure titled “synthesis of uniform nanoparticle shapes with high selectivity” with the United States Patent and Trademark Office on April 13, 2007 and a subsequent utility filing on April 11, 2008 under the Patent Cooperation Treaty (“PCT”). PCT enables the U.S. applicant to file one application, "an international application," in a standardized format in English in the U.S. Receiving Office (the U.S. Patent and Trademark Office), and have that application acknowledged as a regular national or regional filing in any State or region that is party to the PCT. Dr. Michael Wong is a director of our company and is the inventor of Rice’s patent application licensed by Solterra.
Our initial agreement with Rice requires the payment of certain patent fees to Rice and for us to acquire additional funding and to meet certain milestones by specific dates. Rice and the Company recently established new milestones for the Company to achieve in the months and years ahead, the failure of which could lead to the termination of the license agreement.
Rice is entitled to receive during the term of each License Agreement certain royalties under the License Agreement of adjusted gross sales (as defined) ranging from 2% to 4% for photovoltaic cells and 7.5% of adjusted gross sales for quantum dots sold in electronic and medical applications. Minimum royalties payable under the License Agreement include $129,412 due August 1, 2012, $473,250 due August 1, 2013, $1,746,000 due August 1, 2014 and $3,738,600 due August 1, 2015 and each August 1 of every year thereafter, subject to adjustments for changes in the consumer pricing index. In the event of a Liquidity Event (as defined), Rice is entitled to receive from Licensee a fee of $750,000 within five business days of the Liquidity Event. The term of the License Agreement is to expire on the expiration date of Rice’s rights in its intellectual property and the Licensee’s rights are worldwide. Our Agreement, as amended, with Rice provides for termination of each Agreement in the event that we are determined to be insolvent as defined in the Agreements. The milestones of each License Agreement also require a quantum dot production pilot plant to be established by February 28, 2012, capable of producing 1,000 grams per week and a full scale quantum dot production plant be established by May 31, 2012. The Company was unable to meet the August 2012 minimum royalty and the aforesaid milestones and is in discussions with Rice regarding the License Agreement.
Agreement with Arizona State University
Solterra had an agreement with Arizona State University (“ASU”) pursuant to which ASU at a cost of $835,000 will assist Solterra under the direction of Dr. Ghassan Jabbour in scaling up or optimizing the solar cells so that they can be printed. As of June 30, 2010, $630,000 of these costs in this agreement have been incurred and a further $205,000 were to accrue before the end of the fiscal year ended June 30, 2010. During February 2010, Dr. Jabbour accepted a Directorship at the King Abdullah University of Science and Technology (KAUST), in Saudi Arabia, as a result of Dr. Jabbour now being located in Saudi Arabia it is no longer logistically feasible for him to conduct the development work at ASU. We have paid ASU $175,000 under our contract with ASU. Dr. Jabbour is continuing his development work at the KAUST facilities and we have attempted to negotiate a substantially reduced fee payable to ASU. Dr. Jabbour is also our Chief Science Officer and is an employee of QMC/Solterra.
Agreement with University of Arizona
Solterra has entered into an exclusive Patent License Agreement with the University of Arizona ("UA") to license US Patent # 7,015,052, which was issued on March 21, 2006, entitled “Screen Printing Techniques for the Fabrication of Organic Light - Emitting Diodes”. Pursuant to the License Agreement, Solterra has an exclusive license to market, sell and distribute licensed products within its field of use which is defined as organic light emitting diodes in printed electronic displays and all other printed electronic components. Solterra has the right to grant sublicenses with respect to the licensed product and the license method (as defined in the agreement). Pursuant to said agreement, as amended, we are obligated to pay minimum annual royalties of $5,000 by June 30, 2012, $25,000 by December 31, 2013, $50,000 by December 31, 2014, $125,000 by June 30, 2015 and $200,000 on each June 30th thereafter, subject to adjustments for increases in the Consumer Price Index. Royalties based on net sales are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products for printed electronic displays. Our Agreement with UA may be terminated by UA in the event that we are in breach of any provision of this Agreement and said breach continues for 60 days after receiving written notice. Our Agreement with UA will also automatically terminate if Solterra becomes insolvent or unable to pay its debts as they become due. We can provide no assurances that we will be able to meet our obligations under our Agreement with UA. Termination of our Agreement with UA could materially adversely affect our operations.
Development service agreements
In October 2008, the Company entered into a development service agreement with Arizona State University ("ASU") to optimize the printing process of solar cells. The agreement is for the period October 1, 2008 to January 30, 2010 with an option for two additional years of services. This Agreement has not been extended by the parties due to the departure of Dr. Jabour from ASU. The final balance due ASU is under negotiation. The table below summarizes these financial commitments under this agreement. These amounts are recorded as research and development expenses in the consolidated financial statements.
The Company is currently in arrears for payment of obligations due to ASU totaling $455,000 as of June 30, 2012.
In addition, the Company had one other service agreement with a major university for a twelve month period starting in November 2009. These services were not completed as the Professor responsible for exercising the agreement has moved out of the country. The Company is negotiating final settlement for this agreement.
ghts owned by the University pertaining to "Screen-Printing Techniques for the Fabrication for Organic Light-Emitting Diodes."
Employment agreements
The Company has two employment agreements in effect. The CEO has a three year agreement which started in January 2010 and the Chief Technology Officer has a one year agreement which was renewed in October 2011.
Summary
Note 10. Income taxes
Quantum Materials Corp. follows the guidance of ASC 740, " Income Taxes." Deferred income taxes reflect the net effect of (a) temporary difference between carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax reporting purposes, and (b) net operating loss carryforwards. No net provision for refundable Federal income tax has been made in the accompanying statement of loss because no recoverable taxes were paid previously. Similarly, no deferred tax asset attributable to the net operating loss carryforward has been recognized, as it is not deemed likely to be realized.
The provision for refundable Federal income tax consists of the following for the period ending June 30:
The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows:
At June 30, 2012, Quantum Materials Corp. had an unused net operating loss carryover approximating $3,291,450 that is available to offset future taxable income; expiring beginning in 2028. United States tax regulations impose limitations on the use of NOL carry forwards following certain changes in ownership. If such a change were to occur with respect to the Company, the limitation could significantly reduce the amount of benefits that would be available to offset future taxable income each year, starting with the year of ownership change, the subsequent merger result in limitation on the use of NOL carry forwards.
Note 11. Warrants
The Company issued 1,000,000 common stock warrants on June 1, 2009 in connection with the standstill agreement, see note 6. The Company has attributed $34,148 to the warrant value using the Black Scholes option price model. These warrants expired on December 31, 2010 and were not exercised.
The Company issued 2,000,000 common stock warrants on October 31, 2009. The warrants expire on October 31, 2014. The warrants were issued in connection with the extension of the standstill agreement see note 6. The Company has attributed $179,913 to the warrant value using the Black Scholes price model. The warrants were not exercised as of June 30, 2011.
As of November 4, 2010, the Company's executive officers, directors and employees converted accrued salaries of $630,500 and bonuses of $157,625 totaling $788,125 into warrants to purchase 10,508,331 shares, exercisable at $0.075 per share over a period of five years. On the date of board approval of this event the Company’s stock had a closing price of $0.075 cents per share. The Company has attributed $625,852 to the warrant value using the Black Scholes price model.
As of May 18, 2011, the Company's executive officers, directors and employees converted accrued salaries of $256,000 and bonuses of $64,000 totaling $320,000 into warrants to purchase 2,909,089 shares, exercisable at $0.11 per share over a period of five years. On the date of board approval of this event the Company’s stock had a closing price of $0.11 cents per share. The Company has attributed $252,100 to the warrant value using the Black Scholes price model.
During the year ended June 30, 2011 the Company issued 1,777,110 warrants to purchase the Company’s common stock. These warrants were issued through the sale of the company’s common stock. The warrants are exercisable in a range from $0.08 to $0.25 per share over a period with a range of 24 months to 36 months. The Company has attributed $122,808 to the warrant value using the Black Scholes price model.
During the year ended June 30, 2012 the Company issued 2,000,000 warrants to purchase the Company’s common stock. These warrants were issued to debenture holders related to the extension of the debenture expiration date to November 4, 2012. The warrants are exercisable at a price of $0.08 per share over a 36 month term. The Company has attributed $233,367 to the warrant value using the Black Scholes price model.
The following table summarizes warrants that are issued, outstanding and exercisable.
Note 12. Stock options
In October 2009 the Board of Directors authorized the approval of a stock option plan covering 7,500,000 shares of common stock, which was later increased to 10,000,000 shares on December 2, 2009 and approved by stockholders on January 25, 2010. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. The Company issued 9,200,000 options and valued the options at $955,242 using the Black Scholes pricing model. The Company recorded the entire $944,317 value of 2010 options as stock based compensation for the year ended June 30, 2010. The Company will recognize the value of the 2012 options over the five year exercise period, resulting in $546 in stock based compensation related to these options for the year ended June 30, 2012.
Option activity was as follows for the twelve months ended June 30, 2012 and the twelve months ended June 30, 2011.
In the quarter ended March 31, 2012, the Company issued 3,500,000 options with an exercise price of $0.03 per share of common stock with a five year expiration date to the company CEO Stephen Squires. These options were issued outside of the stock option plan with the approval of the Board of Directors. The Company valued the options at $392,500 using the Black Scholes pricing model. The Company will recognize the expense over the five year exercise period, recording $19,718 in stock based compensation related to these options for the year ending June 30, 2012.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9.A.(T) Controls and Procedures.
Scope of the Evaluation
The CEO and CFO’s evaluation of the our Disclosure Controls and Internal Controls included a review of the controls’ (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information generated for use in this annual report. In the course of the Evaluation, the CEO and CFO sought to identify data errors, control problems, acts of fraud, and they sought to confirm that appropriate corrective action, including process improvements, was being undertaken. This type of evaluation is done on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our quarterly reports on Form 10-Q and annual reports on Form 10-K. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and Internal Controls, and to make modifications if and as necessary. Our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including improvements and corrections) as conditions warrant.
Among other matters, the Evaluation was to determine whether there were any significant deficiencies or material weaknesses in our Internal Controls, which are reasonably likely to adversely affect our ability to record, process, summarize and report financial information, or whether the Evaluators identified any acts of fraud, whether or not material, involving management or other employees who have a significant role in our Internal Controls. This information was important for both the Evaluation, generally, and because the Rule 13a-14(a)/15d-14(a) Certifications require that the CEO and CFO disclose that information to our Board (audit committee), and our independent auditors, and to report on related matters in this section of the annual report. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions". These are control issues that could have significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce, to a relatively low level, the risk that misstatement cause by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employee in the normal course of performing their assigned functions. The Evaluators also sought to deal with other controls matters in the Evaluation, and in each case, if a problem was identified, they considered what revisions, improvements and/or corrections to make in accordance with our ongoing procedures.
Conclusions
Based upon the Evaluation, (i) our disclosure controls and procedures are effective in giving us reasonable assurance that they are designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms and to ensure that such information is accumulated and communicated to the our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, and (ii) the Company acknowledges it has a significant deficiency explained below in Management’s Report Over Internal Controls and after considering the remedy to overcome this deficiency also explained below in Management’s Report Over Internal Controls - our Internal Controls are effective at that assurance level to provide reasonable assurance that our financial statements are fairly presented in conformity with accounting principles generally accepted in the United States. Additionally, there has been no change in our Internal Controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our Internal Controls.
Report of Management on Internal Controls over Financial Reporting.
Board of Directors and Quantum Materials Corp.:
The Management of Quantum Materials Corp. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U. S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U. S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and, (iii) provide reasonable assurance regarding prevention of timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, the effectiveness of internal control over financial reporting was made as of a specific date. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2012, based on criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Company’s Board of Directors.
Based on this assessment, management determined that, as of June 30, 2012, Quantum Materials Corp. maintained effective internal control over financial reporting, although we did recognize a significant deficiency. This deficiency of not having sufficient qualified staff has resulted in the Company being unable to file our 10-K for the year ending June 30, 2012 in a timely manner. A significant deficiency is a deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.
Although currently we do not identify any material weaknesses in the process of self assessment, we have recognized a significant deficiency in our internal controls. Currently we do not have sufficient in-house expertise in US GAAP reporting. Instead, we rely very much on the expertise and knowledge of external financial advisors in US GAAP conversion. External financial advisors have helped prepare and review the consolidated financial statements. Although we have not identified any material errors with our financial reporting or any material weaknesses with our internal controls, no assurances can be given that there are no such material errors or weaknesses existing. Upon obtaining adequate financing we will seek to recruit experienced professionals to augment and upgrade our financial staff to address issues of timeliness and completeness in US GAAP financial reporting. In addition, we do not believe we have sufficient documentation with our existing financial processes, risk assessment and internal controls. We plan to work closely with external financial advisors to document the existing financial processes, risk assessment and internal controls systematically.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting as such attestation is not required by a smaller reporting company such as the Company.
Item 9.B. Other Information.
Not Applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The names, ages and principal occupations of the Company's present officers and directors are listed below, it being understood that there are currently two vacancies on the Board of Directors.
____________
(1)
Directors are elected at the annual meeting of stockholders and hold office until the following annual meeting.
The terms of all officers expire at the annual meeting of directors following the annual stockholders meeting. Officers serve at the pleasure of the Board and may be removed, either with or without cause, by the Board of Directors, and a successor elected by a majority vote of the Board of Directors, at any time.
Background
The following is a brief summary of the background of each director, director nominee and executive officer of our company:
Stephen Squires has over 25 years of experience in turnarounds, startups, business development, mergers and acquisitions and strategic planning. Mr. Squires is skilled at identifying emerging technologies and driving commercialization/global market introduction to position companies for growth. From 1977 to1983, he worked at McDonnell Douglas Corporation, a company engaged in the business of building advanced tactical fighter aircraft and space vehicles, developing and adapting advanced materials for combat aircraft applications. From1983 to 2001, Mr. Squires, as founder, served as President and Chief Executive Officer of Aviation Composite Technologies, Inc., a company whose principal business was the engineering, design, manufacture and refurbishment of advanced composite aero structures. Under Mr. Squire’s leadership the company grew from zero to over 200 employees and operated a 100,000 square foot state of the art facility. Aviation Composite was merged with USDR Aerospace in 2001. Prior to his employment with the Company which commenced upon the closing date of the Agreement and Plan of Reorganization, Mr. Squire’s principal occupation was consulting and advising in the areas of advanced materials, nanotechnology, applications engineering, strategic international marketing with emphasis on middle east and commercialization of emerging technologies for Orasi LLC. Since 1998, Mr. Squires has pursued his interests in advanced materials such as nano fibers and nanotubes where he quickly recognized the potential of the unique quantum features these materials held. Mr. Squires' extensive business, managerial, executive and leadership experience in a variety of industries, particularly qualifies him for service on the Board. Mr. Squires has had experience working for McDonnell Douglas Corporation and Aviation Composite Technologies, each of which brings valuable business experience to the Board.
Christopher Benjamin has served as Chief Financial Officer of the Company since June 2011. Mr. Benjamin's experience includes both public and private company financial reporting expertise. Based in Phoenix, AZ, Mr. Benjamin has served as President of Rogue CFO Consulting since November 2007. Prior to this, Chris spent 12 years in the corporate world, with his last several years spent as CFO to growth stage ventures. His responsibilities at these companies included monthly financial reporting and analysis, audit and cash management, forecasting, oversight of the General Ledger, as well as ensuring compliance with GAAP, FASB and SEC reporting standards. Earlier in his career when working with larger corporations his responsibilities included serving as Controller and being involved in Sarbanes Oxley process documentation, process flow creation and SEC reporting support. He received his M.B.A. from the University of Washington in Seattle in 2007 and a B.A. in accounting from the University of Fraser Valley in Abbotsford, British Columbia, Canada in 1997.
Dr. Ghassan E. Jabbour is the Director of the Solar and Alternative Energy Science and Engineering Research Center at KAUST (King Abdullah University of Science and Technology) In Saudi Arabia. Prior to this Dr Jabbour was the Director of Flexible and Organic Electronics Development at the Flexible Display Center (FDC) since 2006 and a Professor of Chemical and Materials Engineering at Arizona State University since 2006. He is also the Technical Advisory Board Leader on Optoelectronic Materials, Devices and Encapsulation at FDC. He has been selected to the Asahi Shimbun 100 New Leaders of the USA and has received the Presidential Award for Excellence from the Hariri Foundation in 1997. Dr. Jabbour's research experience encompasses flexible-roll-to-roll-electronics and displays, smart textile, moisture and oxygen barrier technology, transparent conductors, organic light emitting devices, organic and hybrid photovoltaics, organic memory storage, organic thin film transistors, combinatorial discovery of materials, nano and macro printed devices, micro and nanofabrication, biosensors, and quantum simulations of electronic materials. Dr. Jabbour attended Northern Arizona University, the Massachusetts Institute of Technology (MIT), and the University of Arizona. Dr. Jabbour is an SPIE fellow. Prof. Jabbour has authored and co-authored over 300 publications, invited talks, and conference proceedings. He is the editor of several books and symposia proceedings involving organic photonics and electronics, and nanotechnology. Prof. Jabbour is the guest editor of the MRS Bulletin issue on “Organic Photovoltaics”. He is the Chair and/or Co-Chair of over 50 conferences related to photonic and electronic properties of organic materials and their applications in displays and lighting, hybrid photosensitive materials, and hybrid integration of semiconducting and nanotechnology. Dr. Jabbour has scientific and technical experience with the Company's technology and proposed products. Much of our technology development was accomplished on site by Dr. Jabbour at the Arizona State University labs but such work was relocated to better accommodate the logistic requirements of our Chief Science Officer, Professor Ghassan Jabbour, who is working at Kaust University in Saudi Arabia. The foregoing scientific knowledge is an important asset to a technology driven company and to Dr. Jabbour's presence on the Board of Directors of the Company.
Dr. Michael S. Wong Principal Investigator, Associate Professor in Chemical and Biomolecular Engineering Associate Professor in Chemistry (Joint Appointment) at William Marsh Rice University. His accomplishments include:
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Smithsonian Magazine "37 Under 36" Young Innovator Award (2007)
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3M Non-tenured Faculty Award (2006, 2007)
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GOLD 2006 Conference Best Presentation Award, for "best new idea in gold catalysis" (2006)
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AIChE South Texas Section Best Applied Paper Award (2006)
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AIChE Nanoscale Science and Engineering Forum Young Investigator Award (2006)
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MIT Technology Review's TR35 Young Innovator Award (2006)
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Hershel M. Rich Invention Award (2006)
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National Academy of Engineering Indo-America Frontiers of Engineering Symposium, Invited Speaker (2006)
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Smalley/Curl Innovation Award (2005)
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National Academies Keck Futures Initiative (NAKFI) Symposium, Invited Participant (2004)
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Oak Ridge Associated Universities Ralph E. Powe Junior Faculty Enhancement Award (2003)
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National Academy of Engineering Japan-America Frontiers of Engineering (JAFOE)
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Symposium, Invited Participant (2002)
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Rice Quantum Institute (RQI), Fellow (2002)
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Robert P. Goldberg Grand Prize, MIT $50K Entrepreneurship Competition (2001)
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Union Carbide Innovation Recognition Award (2000)
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MIT Chemical Engineering Edward W. Merrill Outstanding Teaching Assistant Award (1997)
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Faculty advisor for Phi Lambda Upsilon, chemical sciences honorary society (2003 - present)
Dr. Michael S. Wong joined the Department of Chemical Engineering in 2001, and received a joint appointment in the Department of Chemistry in 2002. Before coming to Rice University, he did post-doctoral research with Dr. Galen D. Stucky of the Department of Chemistry and Biochemistry at University of California, Santa Barbara. Mr. Wong’s educational background includes a B.S. in Chemical Engineering from Caltech, an M.S. in Chemical Engineering Practice (“Practice School”) from MIT, and a Ph.D. in Chemical Engineering from MIT (under the supervision of Dr. Jackie Y. Ying, “Supramolecular Templating of Mesoporous Zirconia-Based Nanocomposite Catalysts”). With the underlying theme of designing and engineering novel materials for catalytic and encapsulation applications, his research interests lie in the areas of nanostructured materials (e.g. nanoporous materials, nanoparticle-based hollow spheres, and quantum dots), heterogeneous catalysis, and bioengineering applications. He is particularly interested in developing new chemical approaches to assembling nanoparticles into functional macrostructures. Dr. Wong, as a Professor at William Marsh Rice University, the licensor of our quantum dots technology, is 100% familiar with our licensing rights with Rice and the capabilities of this technology. His scientific experience is invaluable as a member of the Board of Directors.
David Doderer has over 15 years of research & development experience in emerging technologies including biotech, nanotech and quantum effects. From 2002 to 2005, he served as principal investigator for USGN, a company engaged in the business of defense, safety and security solutions, where he contributed to numerous patents/patents pending & proprietary processes. From 2006 to 2008, he managed Managing Hudler Titan LLC, a technology consulting company, specializing in advanced nanofiber filtration for gaseous streams; crowd sourcing to efficiently share and manage the information resource existing in personal experience; and a clean energy/ clean air/ clean water initiative through aggregation of retail level contributions in alternative energy based carbon offset programs. Mr. Doderer's experience in research and development in emerging technologies and his contributions to the filings of numerous patents and proprietary processes provides invaluable experience to the Board.
Dr. Robert Glass, Chief Techology Officer for the Company, works with the scientific, technical and marketing teams in developing the Company’s technologies and directions, as well as working with the nanotech industry in development of new standards, trade policy and joint ventures. Working with the CEO, he will help formulate strategic directions and time frames for the success of the Company.
Dr. Glass' experience includes running Scientific and Engineering teams at major industries including NIST (U.S. Dept. of Commerce's National Institute of Standards and Technology's- Photometry Division in the Center for Building Technology- he was chief of 13 scientists working in Illumination & Photometry standards development). As a scientist Dr. Glass led the design of LED displays used in open cockpit submarines for the Navy. At Lockheed Martin, he was in charge of Advanced Development for Space Station including designing a laminar flow bench for on orbit repairs of equipment which is onboard today's space station. He specialized in working with the astronauts on developing hardware for space walks (EVA missions). He and his team developed NASA 3000, the first hardware standard ever developed for NASA (variations still in used today). He worked with Rotary Rocket and Weaver Aerospace on the design of hardware for their private space program and the “Roton” delivery vehicle.
At Xerox as part of the Strategic Business Office, he led the design of their new graphic “human” interface and later at Apple, he led the development of a new software graphic interface designed to make computers usable by the masses. He also worked on the design of Apple's first generation Powerbooks.
At Sun Microsystems, Dr. Glass was responsible for developing long-term vision and strategy for Sun’s Solaris product and leveraged Business units to produce products for the future. Later he became one of the leading technologists (Director of Science for SunSoft).
DR. Glass’ first startup company was started in 1981 in the area of secure videoconferencing and satellite systems and it still exists today. Through his consulting firm Eou.com, he has served as CEO, CTO and VP of R&D for a variety of hardware and software companies. Dr. Glass is recognized as a leading technologist and technical entrepreneur in Silicon Valley and is frequently called upon as an advisor. He previously served with the National Academy of Science as a postdoctoral advisor and committee member and as an advisor to MIT, Georgia Tech. and Syracuse University's School of Information Studies, as well as the government's Standards representative on a variety of Standards Committee. He's a Fellow of the Silicon Valley World Internet Center.
He is best known for his predictions of a changed world built on nanotechnology, including MEMS through Sun's film "Starfire" and his hundreds of technology futures' speeches around the world throughout the 1990's. Dr. Glass earned his doctorate at the University of Maryland in Sensory Processes & Physiological Psychology and specialized in brain functioning and human color vision.
His work has been highlighted on NPR and in the international press numerous times and he is considered one of the “usual suspects” by technology journalists seeking an informed point of view from Silicon Valley. As an inventor (at Sun Microsystems), he holds 13 U.S. and International Patents jointly with Bruce Tognazzini and Dr. Jakob Nielsen, and is the author of more than a dozen research papers on electro-optics and human vision.
He previously served with the National Academy of Science as a postdoctoral advisor and committee member and as an advisor to MIT, Georgia Tech. and Syracuse University's School of Information Studies. He's a Fellow of the Silicon Valley World Internet Center. He is a frequent guest of the government as a reviewer for the National Institute of Standards and Technology's (NIST) Advanced Technology Program and government conferences on building high tech start-ups.
Dr. Glass served as an elected member of the Human Factors and Ergonomics Society's Executive Council and has been active in ergonomics ("ease of use") issues since the early 1970’s. Dr. Glass earned his doctorate at the University of Maryland in Sensory Processes Psychology and specialized in brain functioning and human color vision.
Triple B Enterprises, Inc. was a franchise coffee shop also known as Bad Ass Coffee of Hawaii - Santa Cruz location which was owned by Mr. Glass and his wife. Due to the economy, the coffee shop went bankrupt after being open for three years when it and Dr. Glass filed for Chapter 7 Bankruptcy (Case: 09-58885 Santa Cruz County in September 2009). Triple B Enterprises and Dr. Glass were discharged in November 2009.
Served on a variety of committees as senior technologist including:
• U.S. Member-at-Large of the National Committee of the Commission Internationale de L'Eclairage (CIE) - Color Standards
• Chairman, Computer Committee, National Institute of Standards & Technology (NIST) - National Engineering Laboratory,
• Vice Chairman, National Academy of Sciences, Federal Construction Council, Color designs
• Member, USNC-CIE Technical Committee on Visual Signaling (TC1.6)
Dr. Glass brings to the Board a wealth of experience in working with scientific technical and marketing teams. Dr. Glass has worked for Xerox and Sun Micro Systems and has brought management and other leadership and vision to the Board. Management believes that he will be an integral part of its growth strategies.
Possible Expansion of the Board in the event of Default under Outstanding Debentures
The Transaction Documents described under Item 7 include a Stock Pledge Agreement pursuant to which Stephen Squires has pledged 20,000,000 shares of our Common Stock to the Debenture holders (the “Holders”) until such time as the Debentures are paid in their entirety. Also, the Securities Purchase Agreement provides until such time as the Holders no longer hold any Debentures, we shall appoint two (2) members to our Board of Directors, with such board members to be appointed by MKM Opportunity Master Fund, Ltd. (“MKM”). Each member appointed by MKM will be independent of, and not affiliated with, MKM. In addition, so long as MKM has the right to appoint two board members under this Agreement, we shall not expand the size of our Board of Directors to more than seven (7) board members. Notwithstanding the foregoing, in the event of a default under the Transaction Documents, MKM and Steven Posner Irrevocable Trust u/t/a Dated 06/17/65 (“The Posner Trust”) shall have the right to appoint three (3) and two (2) members, respectively, to our Board of Directors, which directors need not be independent of, and may be affiliated with, MKM or Posner. In the event that MKM or Posner exercises their right to appoint members of our Board of Directors in the event of a default, the Board of Directors shall set the size of the Board to no more than nine (9) members. Richard Patton served on our Board of Directors as a designee of MKM during fiscal 2009 until he resigned from the Board on August 17, 2009. Dr. Isaac Horton served on our Board of Directors as a designee of MKM during fiscal 2009 until he resigned from the Board on November 12, 2009. As of the filing date of this Form 10-K, MKM and The Posner Trust do not have any appointees on the Board of Directors.
Corporate Governance
Our business, property and affairs are managed by, or under the direction of, our Board, in accordance with the General Corporation Law of the State of Nevada and our By-Laws. Members of the Board are kept informed of our business through discussions with the Chief Executive Officer and other key members of management, by reviewing materials provided to them by management.
In the past, there have been no arrangements or understandings pursuant to which a director or executive officer was selected to be a director or executive officer other than employment contracts with two of our executive officers. We have had no nominating committee of the Board. Executive officers serve at the pleasure of the Board, subject to their rights under any employment contracts.
We review our corporate governance policies and practices by comparing our policies and practices with those suggested by various groups or authorities active in evaluating or setting best practices for corporate governance of public companies. Based on this review, we have adopted, and will continue to adopt, changes that the Board believes are the appropriate corporate governance policies and practices for our Company. We intend to comply with the Sarbanes-Oxley Act of 2002 and subsequent rule changes made by the SEC and any applicable securities exchange.
Director Qualifications and Diversity
The board seeks independent directors who represent a diversity of backgrounds and experiences that will enhance the quality of the board’s deliberations and decisions. Candidates shall have substantial experience with one or more publicly traded companies or shall have achieved a high level of distinction in their chosen fields. The board is particularly interested in maintaining a mix that includes individuals who are active or retired executive officers and senior executives, particularly those with experience in the renewable energy, finance and capital market industries.
In evaluating nominations to the Board of Directors, our Board also looks for certain personal attributes, such as integrity, ability and willingness to apply sound and independent business judgment, comprehensive understanding of a director’s role in corporate governance, availability for meetings and consultation on Company matters, and the willingness to assume and carry out fiduciary responsibilities. Qualified candidates for membership on the Board will be considered without regard to race, color, religion, sex, ancestry, national origin or disability. See “Lack of Nominating Committee.”
Risk Oversight
The full board has oversight of and will prioritize the following risks:
Risks and exposures associated with corporate governance, and management and director succession planning, strategic, financial and execution risks and other current matters that may present material risk to our operations, plans, prospects or reputation.
Risks and exposures associated with financial matters, particularly financial reporting, tax, accounting, disclosure, internal control over financial reporting, financial policies, investment guidelines and credit and liquidity matters.
Risks and exposures associated with leadership assessment, and compensation programs and arrangements, including incentive plans.
Board Leadership Structure
The Chairman of the Board presides at all meetings of the Board according to our bylaws. The Chairman is required to be appointed on an annual basis by at least a majority vote of the remaining directors. Currently, the offices of Chairman of the Board and Chief Executive Officer are separated and the chairman seat is vacant. The company has no fixed policy with respect to the separation of the offices of the Chairman of the Board and Chief Executive Officer. The Board believes that the separation of the offices of the Chairman of the Board and Chief Executive Officer could become part of the succession planning process and that it is in the best interests of the company to make this determination from time to time.
Lack of Committees; Independent Directors
We do not have standing audit, nominating or compensation committees, or committees performing similar functions. Our board of directors believes that it is not necessary to have standing audit, nominating or compensation committees at this time because the functions of such committees are adequately performed by our board of directors. The directors who perform the functions of auditing, nominating and compensation committees in the past were not independent because they were also officers of our company.
Our Board has determined that Dr. Michael Wong is considered an “Independent Director” but not as a “financial expert” as those terms are defined below. Under the National Association of Securities Dealers Automated Quotations (“NASDAQ”) definition, an independent director means a person other than an officer or employee of the Company or its subsidiaries or any other individuals having a relationship that, in the opinion of the Company’ board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director. The board’s discretion in determining director independence is not completely unfettered. Further, under the NASDAQ definition, an independent director is a person who (1) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years), employed by the company; (2) has not (or whose immediate family members have not) been paid more than $60,000 during the current or past three fiscal years; (3) has not (or whose immediately family has not) been a partner in or controlling shareholder or executive officer of an organization which the company made, or from which the company received, payments in excess of the greater of $200,000 or 5% of that organizations consolidated gross revenues, in any of the most recent three fiscal years; (4) has not (or whose immediate family members have not), over the past three years been employed as an executive officer of a company in which an executive officer of our Company has served on that company’s compensation committee; or (5) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years) a partner of our company’s outside auditor. The term “Financial Expert” is defined as a person who has the following attributes: an understanding of generally accepted accounting principals and financial statements; has the ability to assess the general application of such principals in connection with the accounting for estimates, accruals and reserves; experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements, or experience actively supervising one or more persons engaged in such activities; an understanding of internal controls and procedures for financial reporting; and an understanding of audit committee functions.
In the future, we intend to have an audit committee and such other committees as determined by the Board of Directors to be in the best interest of the Company and to be in compliance with all applicable securities and state laws and listing requirements of any applicable exchanges or NASDAQ that the Company’s securities may become listed on in the future, of which we can provide no assurances that this will occur. In the event we form an audit committee, we will seek to have a “financial expert” as an independent board member serving on the Audit Committee.
Section 16(a) Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders (the “Reporting Persons”) are required by the SEC regulations to furnish us with copies of all Section 16(a) reports that they file.
Based solely on our review of the copies of such forms received by us, or written representations from the Reporting Persons, we believe that Stephen Squires, David Doderer, Dr. Ghassan E. Jabbour and Robert Glass each had one or more forms 3,4 or 5 filed late for the fiscal year ended June 30, 2012.
Lack of Nominating Committee
The Board of Directors has acted as the nominating committee for the Company and no separate nominating committee has been formed to date. This type of committee, if one existed, would be responsible for identifying and recommending the director nominees to be selected by the Board of Directors for each annual meeting of shareholders and reviewing any stockholder nominees; implementing the Board’s criteria for selecting new directors; developing, reviewing and recommending to the Board a set of corporate governance policies applicable to Quantum; providing oversight for the evaluation of the performance of the Board of Directors; and adopting a written charter. Management believes that the cost of having a nominating committee for Quantum as a Smaller Reporting Company outweighs the benefits that may be derived from implementing such a committee.
The Board of Directors, acting as the nominating committee on December 2, 2009, by unanimous written consent, approved our five directors for election by the Consenting Stockholders in Lieu of an actual meeting, which occurred in January 2010. (Note: No other meeting of the Board acting as the nominating committee has been held since December 2009.) Based upon the size of the Company and the Board’s familiarity with the Company since its inception, the Board also has determined that each of the Directors is qualified to suggest nominees for consideration to the nominating committee. The Board of Directors, when acting as the nominating committee, is generally responsible for:
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Developing a nomination process for candidates to the Board of Directors;
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Establishing criteria and qualifications for membership to the Board of Directors;
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Identifying and evaluating potential Director nominees;
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Filling vacancies on the Board of Directors; and
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Recommending nominees for election or re-election.
The Board of Directors, when fulfilling the duties of a nominating committee, does not operate under a charter and it does not have a policy with regard to the consideration of any Director candidates recommended by members.
Director Qualifications. While the members of our Board have not established specific minimum qualifications for director candidates, the candidates for Board membership should have the highest professional and personal ethics and values, and conduct themselves consistent with our Code of Ethics. While the members of the Board have not formalized specific minimum qualifications they believe must be met by a candidate to be recommended by the members, the members of the Board believe that candidates and nominees must reflect a Board that is comprised of directors who (i) have broad and relevant experience, (ii) include some independent directors, (iii) are of high integrity, (iv) have qualifications that will increase overall Board effectiveness and enhance long-term stockholder value, and (v) meet other requirements as may be required by applicable rules, such as financial literacy or financial expertise with respect to potential Audit Committee members. These factors, and others as considered useful by our Board acting as its own nomination and governance committee, will be reviewed in the context of an assessment of the perceived needs of our Board of Directors at a particular point in time. As a result, the priorities and emphasis of our Board of Directors may change from time to time to take into account changes in business and other trends, and the portfolio of skills and experience of current and prospective directors. Consideration of new director candidates is expected to involve a series of Board discussions, review of information concerning candidates and interviews with selected candidates. The Board does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. Candidates for nomination to our Board of Directors may be suggested by other members of our Board of Directors. From time to time, our Board acting as its own nomination committee may in the future (although it has not done so in the past) engage the services of a third party search firm to identify director candidates.
Limitation of Directors’ Liability and Indemnification
Our company is incorporated under the laws of the State of Nevada, which laws provide for indemnification of officers and directors under certain circumstances. Our Bylaws provide for the indemnification of our directors to the fullest extent permitted under the general corporation law of the State of Nevada from time to time against all expenses, liability and loss (including attorneys’ fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered in connection with acting as directors of our company.
Our articles of incorporation provide that no Director or Officer of the corporation shall be personally liable to the corporation or any of its stockholders for damages for breach of fiduciary duty as a Director or Officer involving any act or omission of any such Director or Officer; provided, however, that: the foregoing provision shall not eliminate or limit the liability of a Director or Officer (i) for acts or omissions which involve intentional misconduct, fraud or a knowing violation of the law, or (ii) the payment of dividends in violation of Section 78.300 of the Nevada Revised Statutes. Any repeal or modification of this Article by the Stockholders of the corporation shall be prospective only, and shall not adversely affect any limitations on the personal liability of a Director or Officer of the corporation for acts or omissions prior to such repeal or modification.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of our company under Nevada law or otherwise, we have been advised the opinion of the Securities and Exchange Commission is that such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event a claim for indemnification against such liabilities (other than payment by us for expenses incurred or paid by a director, officer or controlling person of our company in successful defense of any action, suit, or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction, the question of whether such indemnification by it is against public policy in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
Code of Ethics
The Securities & Exchange Commission requires registrants like the Company to either adopt a code of ethics that applies to the Company’s Chief Executive Officer and Chief Financial Officer or explain why the Company has not adopted such a code of ethics. For purposes of item 406 of Regulation S-K, the term “code of ethics” means written standards that are reasonably designed to deter wrongdoing and to promote:
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Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
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Full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities & Exchange Commission and in other public communications made by the Company;
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Compliance with applicable governmental law, rules and regulations;
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The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and
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Accountability for adherence to the code.
The Code of Ethics was previously filed as an exhibit to our report on Form 10-K for the fiscal year ended June 30, 2008. Management intends to review the Code of Ethics and will consider appropriate amendments and revisions thereto.
Item 11.
Item 11. Compensation of Directors and Executive Officers.
The following table sets forth the overall compensation earned over the fiscal years ended June 30, 2011 and 2012 by (1) each person who served as the chief executive officer or chief financial officer of the Company or its subsidiary during fiscal year 2012; and (2) our most highly compensated executive officers as of June 30, 2012 with compensation during fiscal year ended 2012 of $100,000 or more.
(1) The options and restricted stock awards presented in this table for 2012 and 2011 reflect the entire fair value of such awards in the year of grant. However, the accompanying financial statements reflect the dollar amount expensed by the company during applicable fiscal year for financial statement reporting purposes pursuant to guidance issued by the FASB. Such guidance requires the company to determine the overall value of the stock awards and options as of the date of grant. The stock awards are valued based on the fair market value of such shares on the date of grant and are charged to compensation expense over the related vesting period. The options are valued at the date of grant based upon the Black-Scholes method of valuation, which is expensed over the service period over which the options become vested. As a general rule, for time-in-service-based options, the company will immediately expense any option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. For a description of the guidance issued by the FASB and the assumptions used in determining the value of the options under the Black-Scholes model of valuation, see the notes to the consolidated financial statements included with this Form 10-K.
(2)
Includes all other compensation not reported in the preceding columns, including (i) perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is less than $10,000; (ii) any “gross-ups” or other amounts reimbursed during the fiscal year for the payment of taxes; (iii) discounts from market price with respect to securities purchased from the company except to the extent available generally to all security holders or to all salaried employees; (iv) any amounts paid or accrued in connection with any termination (including without limitation through retirement, resignation, severance or constructive termination, including change of responsibilities) or change in control; (v) contributions to vested and unvested defined contribution plans; (vi) any insurance premiums paid by, or on behalf of, the company relating to life insurance for the benefit of the named executive officer; and (vii) any dividends or other earnings paid on stock or option awards that are not factored into the grant date fair value required to be reported in a preceding column.
(3)
Since inception of Solterra, Solterra utilizes the home of Stephen Squires in Scottsdale, Arizona as an executive office. Total compensation includes the amount accrued or reimbursed to Mr. Squires as it pertains to his home office.
(4)
Mr. Squire's compensation includes compensation paid to his wife, Robin Squires.
(5)
See “Salary Accruals” below for a description of accrued salaries of certain officers and directors, some of which were converted into warrants to purchase Common Stock of the Company.
(6)
In January 2011, the Board of Directors issued 10,000,000 restricted shares of Common Stock to Mr. Squires in exchange for loans owed to Mr. Squires in the amount of $270,145. No stock compensation has been attributed to this transaction or is reflected in the table above. Management believes that the price of $.027 per share was fair value for the number of shares issued at the time of issuance and approval by the Board of Directors.
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 2012 or 2011 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 that were outstanding, exercisable and/or vested as of June 30, 2012.
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(1)
On October 20, 2009, the Board of Directors granted Stephen Squires, Robin Squires (Mr. Squire's wife), Brian Lukian, David Doderer, Ghassan Jabbour and Dr. Michael S. Wong immediately vested ten-year non-statutory stock options to purchase 1,000,000 shares, 600,000 shares, 500,000 shares, 500,000 shares, 300,000 and 300,000 shares, respectively, exercisable at a price of $.05 per share.
(2)
On January 20, 2010, the Board of Directors approved employment contracts of Stephen Squires and Robert Glass, each of which contained the grant of 2,000,000 and 250,000 restricted shares of Common Stock, respectively. Mr. Squire's contract also contained the grant of ten-year non-statutory stock options to purchase 5,000,000 shares of common stock at an exercise price of $.05 per share. Mr. Glass' contract called for the grant of options to purchase 250,000 shares which were granted on May 24, 2010. These ten-year non-statutory stock options entitle Mr. Glass to purchase 250,000 shares at an exercise price of $.11 per share.
(3)
Mr. Squires' options include those of his wife.
(4)
See “Salary Accruals” below for a description of accrued salaries of certain officers and directors which were converted into warrants to purchase Common Stock of the Company.
Employment Agreements and Arrangements
Stephen Squires and Robert Glass are each a party to an employment agreement with the Company. The Company's other executive officers each has employment arrangements with the Company to be compensated at the rate of $10,000 per month.
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(1)
Includes $5,000 per month paid to his wife, Robin Squires.
(2)
Discretionary bonus as determined by the Compensation Committee based upon company and individual performance or $120,000 per annum.
(3)
Fiscal 2012 includes accrued salary of $60,000 for Mr. Squires and $120,000 for Mr. Glass.
Salary Accruals
As of November 4, 2010, the Company's executive officers, directors and employees converted accrued salaries of $630,500 and bonuses of $157,625 totaling $788,125 into warrants to purchase 10,508,331 shares, exercisable at $.075 per share over a period of five years. The following table lists the names of such persons, the dollar amount converted and the total number of warrants received.
As of May 18, 2011, the Company's executive officers, directors and employees converted accrued salaries of $256,000 and
bonuses of $64,000 totaling $320,000 into warrants to purchase 2,909,089 shares, exercisable at $.11 per share over a period of five years. The following table lists the names of such persons, the dollar amount converted and the total number of warrants received.
As of June 30, 2011 the Company has accrued salaries and expense reimbursements to our executive officers in the amounts set forth below.
As of June 30, 2012, the Company has accrued salaries and expense reimbursements to our executive officers in the amounts set forth below.
Employment Agreement - Stephen Squires
Pursuant to an employment agreement dated January 25, 2010, the Company entered into a three-year employment contract to retain the services of Stephen Squires as Chief Executive Officer of the Company. The agreement is subject to automatic successive renewal terms of one year, unless either party provides written notice to the other party terminating the initial term of any extension thereof at least 60 days prior to the scheduled termination date of the contract. Mr. Squires is to receive an annual salary of $120,000, paid in monthly installments at the rate of $10,000 per month. Mr. Squires also received a signing bonus of 2,000,000 restricted shares of Common Stock, effective with the filing of a certificate of amendment to the articles of incorporation to increase the authorized number of common shares to 200,000,000. Upon such filing being accomplished, Mr. Squires also received options to purchase 5,000,000 shares of the Company's Common Stock at an exercise price of $.05 per share fully vested and exercisable at any time and from time to time through January 20, 2020. In the event Mr. Squires' services as a director are terminated for any reason, including, termination by his own choice, within six months of a change in control event as defined in said agreement, he shall receive one year's fees of $120,000 payable in one lump sum no later than 30 days after the termination of his services as a director and, in such event, any options that are not fully vested shall become immediately vested and the options shall be extended for an additional one year following the final exercise date of said option agreement. Mr. Squires' employment agreement may be terminated for cause as defined in the agreement. In such event, he shall receive his unpaid portion of his base salary computed up to the date of termination, plus certain other benefits. In the event of death, his estate shall receive compensation of the unpaid portion of his base salary up to the date of his death, plus certain benefits. The agreement contains certain prohibitions against soliciting employees and clients of the Company for his own personal benefit during the term of the agreement and for a period of one year thereafter. Mr. Squires’ employment agreement does not reflect the following approved by the Company’s Board:
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Compensation of $5,000 per month paid to Mr. Squires’ spouse for administrative services;
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Prior to entering into his employment agreement, Mr. Squires and his spouse received in October 2009 options to purchase a total of 1,600,000 shares of the Company in 2009 at $.05 per share through October 2019;
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The November 2010 issuance of five year warrants to purchase 1,666,666 shares exercisable at $.005 per share in exchange for the cancellation of $125,000 of accrued salary;
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The issuance of 10,000,000 shares of Common Stock in January 2011 in exchange for the cancellation of indebtedness to Mr. Squires of $270,145 or $.027 per share.
Employment Agreement - Dr. Robert Glass
Pursuant to an employment agreement dated October 9, 2009, which was later ratified, adopted and approved by the board of directors on January 25, 2010, the Company entered into a one-year employment contract to retain the services of Dr. Robert Glass as Chief Technology Officer of the Company. The agreement is subject to automatic successive renewal terms of one year, unless either party provides written notice to the other party terminating the initial term of any extension thereof at least 60 days prior to the scheduled termination date of the contract. Dr. Glass is to receive an annual salary of $120,000, paid in monthly installments at the rate of $10,000 per month. Dr. Glass also received a signing bonus of 250,000 restricted shares of Common Stock, effective with the filing of a certificate of amendment to the articles of incorporation to increase the authorized number of common shares to 200,000,000. After such filing was accomplished, Dr. Glass also received options to purchase 250,000 shares of the Company's Common Stock at an exercise price of $.11 per share, vesting at the rate of 20,833.33 options for each full month of service and exercisable at any time and from time to time through May 24, 2020. Dr. Glass also received 2,500,000 shares of Common Stock as additional compensation for services rendered during fiscal 2012. In the event Dr. Glass' services as a director are terminated for any reason, including, termination by his own choice, within six months of a change in control event as defined in said agreement, he shall receive one year's fees of $120,000 payable in one lump sum no later than 30 days after the termination of his services as a director and, in such event, any options that are not fully vested shall become immediately vested and the options shall be extended for an additional one year following the final exercise date of said option agreement. Dr. Glass' employment agreement may be terminated for cause as defined in the agreement. In such event, he shall receive his unpaid portion of his base salary computed up to the date of termination, plus certain other benefits. In the event of death, his estate shall receive compensation of the unpaid portion of his base salary up to the date of his death, plus certain benefits. The agreement contains certain prohibitions against soliciting employees and clients of the Company for his own personal benefit during the term of the agreement and for a period of one year thereafter.
Employment Arrangements
Dr. Ghassan E. Jabbour and David Doderer are each receiving monthly salaries of $10,000. Christopher Benjamin is receiving a monthly salary of $5,000 since June 2011. Robin Squires, the wife of Stephen Squires, is receiving a monthly salary of $5,000 in recognition of her administrative services. The Company has the right to terminate the services of Dr. Jabbour, Messrs. Doderer and Benjamin and Mrs. Squires at any time. The Board of Directors granted Mr. Jabbour 250,000 shares of restricted Common Stock in exchange for services rendered during fiscal 2012. In fiscal 2011, Dr. Jabbour received Warrants to purchase 3,818,181 shares of Common Stock at exercise prices ranging from $.075 per share to $.11 per share over a period of five years. These Warrants were granted in exchange for the forgiveness of accrued salaries described elsewhere under “Salary Accruals.” In fiscal 2010, Dr. Jabbour also received Warrants to purchase 300,000 shares exercisable over a term of ten years at $.05 per share. In fiscal 2012, Mr. Doderer received 2,000,000 shares of restricted Common Stock in exchange for services rendered.
In fiscal 2011, Mr. Doderer received Warrants to purchase 1,571,969 shares of Common Stock at exercise prices ranging from $.075 per share to $.11 per share over a period of five years. These Warrants were granted in exchange for the forgiveness of accrued salaries described elsewhere under “Salary Accruals.” In fiscal 2010, Mr. Doderer also received Warrants to purchase 500,000 shares exercisable over a term of ten years at $.05 per share. In fiscal 2010, Mrs. Squires received options to purchase 600,000 shares of the Company’s Common Stock exercisable over a ten year period at $.05 per share.
Loans from Stephen Squires
In November 2008, Mr. Squires received 35,500,000 shares of the Company's Common Stock as part of a plan of reorganization, 20,000,000 of which he pledged to secure certain company indebtedness. Between December 2008 and December 2010, Mr. Squires privately sold an aggregate of approximately 13,431,000 shares of the Company's Common Stock for an aggregate of $595,000. Mr. Squires advanced to the Company cash loans and made payment of Company expenses utilizing $270,145 of the net proceeds of these private sales. On December 30, 2010, the Board of Directors authorized Mr. Squires to receive 10,000,000 restricted shares in cancellation of all outstanding cash loans and advanced expenses totaling $270,145. Not reflected in the foregoing, were additional cash loans that have been made by Mr. Squires to the Company and repaid to him.
In January 2010, the board of directors granted Mr. Squires the option to convert his cash loans to the Company into common stock of the Company's subsidiary. In this respect, Mr. Squires has a two-year option to convert up to $200,000 into a maximum of 5% of the outstanding common stock of Solterra. As of the filing date of this Form 10-K, Mr. Squires has declined to exercise this option.
DIRECTOR COMPENSATION
Cash Fees
As of the filing date of this Form 10-K, no cash fees have been paid to any directors of the Company, although the board reserves the right to pay such cash fees in the future.
Restricted Stock and Options
Dr. Michael Wong received in October 2009 and in June 2012, options to purchase 300,000 shares and 250,000 shares, respectively, under the Company’s 2009 Plan as defined herein under “2009 Stock Option Plan.” These options were granted over a term of ten years and five years, respectively, at exercise prices ranging from $.04 per share to $.05 per share.
The Company’s other directors, namely, Stephen Squires, David Doderer, Ghassan Jabbour and Robert Glass are each directors and executive officers of the Company. Their employment contracts and employment arrangements have included the receipt of restricted shares of Common Stock and options granted in connection with services rendered as employees of the Company. See the contents of this “Item 11” for a description of their compensation.
Travel Expenses
All directors shall be reimbursed for their reasonable out of pocket expenses associated with attending the meeting.
2012 Compensation
The following table shows the overall compensation earned for the 2012 fiscal year with respect to each non-employee -director of the Company as of June 30, 2012.
(1)
ASC 718 requires the company to determine the overall value of the restricted stock awards and the options as of the date of grant based upon the Black-Scholes method of valuation, which value is set forth in the table above, and to then expense that value over the service period over which the restricted stock awards and the options become exercisable vested. As a general rule, for time-in-service-based restricted stock awards and options, the company will immediately expense any restricted stock award or option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the restricted stock award and option. For a description of ASC 718 and the assumptions used in determining the value of the restricted stock awards and options under the Black-Scholes model of valuation, see the notes to the consolidated financial statements included with this Form 10-K.
(2)
Excludes awards or earnings reported in preceding columns.
(3)
Includes all other compensation not reported in the preceding columns, including (i) perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is less than $10,000; (ii) any “gross-ups” or other amounts reimbursed during the fiscal year for the payment of taxes; (iii) discounts from market price with respect to securities purchased from the company except to the extent available generally to all security holders or to all salaried employees; (iv) any amounts paid or accrued in connection with any termination (including without limitation through retirement, resignation, severance or constructive termination, including change of responsibilities) or change in control; (v) contributions to vested and unvested defined contribution plans; (vi) any insurance premiums paid by, or on behalf of, the company relating to life insurance for the benefit of the director; (vii) any consulting fees earned, or paid or payable; (viii) any annual costs of payments and promises of payments pursuant to a director legacy program and similar charitable awards program; and (ix) any dividends or other earnings paid on stock or option awards that are not factored into the grant date fair value required to be reported in a preceding column.
(4)
In fiscal 2012, the Board of Directors granted Dr. Wong five year stock options to purchase 250,000 shares of the Company’s Common Stock at an exercise price of $.04 per share.
2009 Stock Option Plan
On December 2, 2009, the Company established a 2009 Employee Benefit and Consulting Services Compensation Plan (the “2009 Plan”) covering 10,000,000 shares. The material features of the Plan are described below.
Administration
Our Board of Directors, Compensation Committee or both, in the sole discretion of our Board, administers the 2009 Plan, which was approved by the Company’s Board of Directors on December 2, 2009 and by stockholders as of January 25, 2010. The Board, subject to the provisions of the 2009 Plan, has the authority to determine and designate officers, employees, directors and consultants to whom awards shall be made and the terms, conditions and restrictions applicable to each award (including, but not limited to, the option price, any restriction or limitation, any vesting schedule or acceleration thereof, and any forfeiture restrictions). The Board may, in its sole discretion, accelerate the vesting of awards. The Board of Directors must approve all grants of Options and Stock Awards issued to our officers or directors.
Types of Awards
The 2009 Plan is designed to enable us to offer certain officers, employees, directors and consultants of us and our subsidiaries equity interests in us and other incentive awards in order to attract, retain and reward such individuals and to strengthen the mutuality of interests between such individuals and our stockholders. In furtherance of this purpose, the Plan contained provisions for granting incentive and non-statutory stock options and Common Stock Awards.
Stock Options. A "stock option" is a contractual right to purchase a number of shares of Common Stock at a price determined on the date the option is granted. The option price per share of Common Stock purchasable upon exercise of a stock option and the time or times at which such options shall be exercisable shall be determined by the Board at the time of grant. Such option price shall not be less than 100% of the fair market value of the Common Stock on the date of grant. The option price must be paid in cash, money order, check or Common Stock of the Company. The Options may also contain at the time of grant, at the discretion of the Board, certain other cashless exercise provisions.
Options shall be exercisable at the times and subject to the conditions determined by the Board at the date of grant, but no option may be exercisable more than ten years after the date it is granted. If the Optionee ceases to be an employee of our company for any reason other than death, any option granted as an Incentive Stock Option exercisable on the date of the termination of employment may be exercised for a period of thirty days or until the expiration of the stated term of the option, whichever period is shorter. In the event of the Optionee’s death, any granted Incentive Stock Option exercisable at the date of death may be exercised by the legal heirs of the Optionee from the date of death until the expiration of the stated term of the option or six months from the date of death, whichever event first occurs. In the event of disability of the Optionee, any granted Incentive Stock Options shall expire on the stated date that the Option would otherwise have expired or 12 months from the date of disability, whichever event first occurs. The termination and other provisions of a non-statutory stock option shall be fixed by the Board of Directors at the date of grant of each respective option.
Common Stock Award. “Common Stock Award” is shares of Common Stock that will be issued to a recipient at the end of a restriction period, if any, specified by the Board if he or she continues to be an employee, director or consultant of us. If the recipient remains an employee, director or consultant at the end of the restriction period, the applicable restrictions will lapse and we will issue a stock certificate representing such shares of Common Stock to the participant. If the recipient ceases to be an employee, director or consultant of us for any reason (including death, disability or retirement) before the end of the restriction period unless otherwise determined by the Board, the restricted stock award will be terminated.
Eligibility
The Company’s officers, employees, directors and consultants of the Company and its subsidiaries are eligible to be granted stock options, and Common Stock Awards. Eligibility shall be determined by the Board; however, all Options and Stock Awards granted to officers and directors must be approved by the Board.
Termination or Amendment of the Plan
The Board may at any time amend, discontinue, or terminate all or any part of the Plan, provided, however, that unless otherwise required by law, the rights of a participant may not be impaired without his or her consent, and provided that we will seek the approval of our stockholders for any amendment if such approval is necessary to comply with any applicable federal or state securities laws or rules or regulations.
Awards
As of June 30, 2012, options to purchase 9,200,000 shares at an exercise have been granted under the Plan. These include the following persons:
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(1)
Based upon the closing last sale of $0.07 per share as of June 29, 2012, after deducting the applicable exercise price.
It is not possible to predict the individuals who will receive future awards under the 2009 Plan or the number of shares of Common Stock covered by any future award because such awards are wholly within the discretion of the Board.
Shares Subject to the Plan
The maximum number of shares of Common Stock that may be issued pursuant to awards granted under the Plan is 10,000,000 shares. Such shares may be either authorized and unissued shares or issued shares reacquired by the Company and held in treasury. The Plan does not limit the number of shares of Common Stock with respect to which options or Stock Awards may be granted to any individual during any calendar year. The aggregate number of shares issuable under the Plan and the number of shares subject to options and awards to be granted under the Plan are subject to adjustment in the event of certain mergers, reorganizations, consolidations, recapitalizations, dividends (other than a regular cash dividend), stock split or other change in corporate structure affecting the Common Stock. Shares subject to options that expire, terminate or are canceled unexercised, shares of stock that have been forfeited to the Company and shares that are not issued as a result of forfeiture or termination of an award may be reissued under the Plan.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of June 30, 2012, shares of Common Stock beneficially owned by (1) each person (including any group) of more than five percent of our Common Stock, based solely on Schedule 13D and 13G filings with the Securities and Exchange Commission, and (2) the Company’s directors and officers.
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* Less than 1%
(1)
Unless otherwise indicated, ownership represents sole voting and investment power.
(2)
The address for each beneficial owner named above is c/o the Company at 12326 Scott Drive, Kingston, OK 73439.
(3)
Based upon 124,113,887 common shares outstanding.
(4)
Includes 20,000,000 shares pledged to our Debenture Holders. See “Item 10.”
(5)
Includes options to purchase 10,100,000 shares owned by Mr. Squires and his wife and warrants to purchase 1,666,666 shares owned by Mr. Squires.
(6)
Includes options to purchase 300,000 shares and warrants to purchase 3,818,181 shares.
(7)
Includes options to purchase 550,000 shares.
(8)
Includes options to purchase 500,000 shares and warrants to purchase 1,571,969 shares.
(9)
Includes options to purchase 250,000 shares and warrants to purchase 1,056,818 shares.
(10) Includes options to purchase 11,470,000 shares and warrants to purchase 8,113,634 shares.
(11) Includes warrants to purchase 2,000,000 shares. Excludes shares issuable upon conversion of outstanding notes, which is convertible into 8,333,333 shares of a Company’s Common Stock. In the event that the note is converted beyond its maximum permitted percentage, which percentage is stated in the contract, MKM would own 19,531,924 shares or 14.6% of the outstanding shares of the Company’s Common Stock,
Securities Authorized for Issuance under Equity Compensation Plans.
The following summary information is as of the Record Date and relates to our 2009 Plan described elsewhere herein pursuant to which we have granted options to purchase our Common Stock:
(1) Options exercisable at prices ranging from $.04 per share to $.12 per share.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence.
Certain Related Party Transactions
For a description of certain transactions between the Company and its affiliated parties, reference is made to Item 13 of the Company’s Form 10-K for the Company’s fiscal year ended June 30, 2011, which information is incorporated herein by reference.
For a description of transactions during fiscal 2012 between the Company and its executive officers and directors, reference is made to Item 11 of this Form 10-K.
For a description of transactions between the Company and its debenture holders, reference is made to Item 7 of this Form 10-K which describes a one year extension of the due date of the debentures through November 4, 2012 and the issuance of warrants to purchase 2,000,000 shares to the debenture holders as additional consideration. For additional information, also see the “Notes to Financial Statements.”
Director Independence
Our Board has determined that Dr. Michael Wong is considered an “Independent Director” but not as a “financial expert” as those terms are defined below. Under the National Association of Securities Dealers Automated Quotations (“NASDAQ”) definition, an independent director means a person other than an officer or employee of the Company or its subsidiaries or any other individuals having a relationship that, in the opinion of the Company’ board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director. The board’s discretion in determining director independence is not completely unfettered. Further, under the NASDAQ definition, an independent director is a person who (1) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years), employed by the company; (2) has not (or whose immediate family members have not) been paid more than $60,000 during the current or past three fiscal years; (3) has not (or whose immediately family has not) been a partner in or controlling shareholder or executive officer of an organization which the company made, or from which the company received, payments in excess of the greater of $200,000 or 5% of that organizations consolidated gross revenues, in any of the most recent three fiscal years; (4) has not (or whose immediate family members have not), over the past three years been employed as an executive officer of a company in which an executive officer of our Company has served on that company’s compensation committee; or (5) is not currently (or whose immediate family members are not currently), and has not been over the past three years (or whose immediate family members have not been over the past three years) a partner of our company’s outside auditor. The term “Financial Expert” is defined as a person who has the following attributes: an understanding of generally accepted accounting principals and financial statements; has the ability to assess the general application of such principals in connection with the accounting for estimates, accruals and reserves; experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements, or experience actively supervising one or more persons engaged in such activities; an understanding of internal controls and procedures for financial reporting; and an understanding of audit committee functions.
Item 14.
Item 14. Principal Accountant Fees and Services.
Services of LBB & Associates Ltd.
Audit Fees
During fiscal 2012 and 2011, the aggregate fees billed for professional services rendered by Peter Messineo, CPA (the “Independent Auditors”) for the annual audits of the Company's consolidated financial statements totaled $10,000 and $10,000, respectively.
Financial Information Systems Design and Implementation Fees
During 2011 and 2010, there were $-0-in fees billed for professional services by rendered by Peter Messineo, CPA rendered in connection with, directly or indirectly, operating or supervising the operation of its information system or managing its local area network.
All Other Fees
During 2012 and 2011, there were $0 and $20,000 in fees billed for professional services rendered by LBB & Associates LTD., LLP (our prior auditor) and $2,500 and $7,500 in fees billed for professional services rendered by Peter Messineo, CPA (our current auditor), respectively, for review of the Company’s quarterly filings and 8-K filings with the Securities and Exchange Commission. The foregoing fees exclude expense reimbursements.
Services of Peter Messineo CPA
Peter Messineo, CPA was hired as the independent registered public accountant on September 29, 2011 to audit the Company’s financial statements commencing for the year ended June 30, 2011 and subsequently the year ended June 30, 2012.
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)
Financial Statements
The following documents are filed under “Item 8. Financial Statements and Supplementary Data” and are included as part of this Form 10-K as the consolidated financial statements of the Company for the years ended June 30, 2012 and 2011:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Deficit
Notes to Consolidated Financial Statements
(b)
Exhibits
The following exhibits are all previously filed in connection with our Form 8-K filed November 10, 2008, unless otherwise noted.
____________
* Filed herewith.
(1)
To be filed by amendment.
(c)
Financial Statement Schedules
We are not filing any financial statement schedules as part of this Form 10-K because such schedules are either not applicable or the required information is included in the financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Stephen Squires
Title: President and Principal Financial Officer
Date: October 10, 2012
Stephen Squires
/s/ Christopher Benjamin
Title: Principal Financial Officer
Date: October 10, 2012
Christopher Benjamin
/s/ Michael S. Wong
Title: Director
Date: October 10, 2012
Michael S. Wong
/s/ Dr. Ghassan E. Jabbour
Title: Director
Date: October 10, 2012
Dr. Ghassan E. Jabbour
/s/ David Doderer
Title: Director
Date: October 10, 2012
David Doderer
/s/ Robert Glass
Title: Director
Date: October 10, 2012
Robert Glass
Stephen Squires, Michael S. Wong, Dr. Ghassan E. Jabbour, David Doderer and Robert Glass represent all the current members of the Board of Directors.