10-K 1 form10k.htm QUANTUM MATERIALS CORP. FORM 10-K form10k.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

[X] 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2011
or
[ ]
 TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  ____ to ___
Commission File Number:  0-52956

                  QUANTUM MATERIALS CORP.              
(Exact name of Registrant as specified in its charter)
 
Nevada 
20-8195578 
(State of jurisdiction of
incorporation or organization) 
(I.R.S. Employer 
Identification Number) 
   
4724 E. Foothill Drive, Paradise Valley, AZ 
85253
(Address of principal executive offices) 
(Zip Code) 
   
Registrant’s telephone number, including area code: 
(214) 701-8779  
                                                                                                                                  
7700 S. River Parkway, AZ 
85284
(Former address of principal executive offices, if changed since last report) 
(Zip Code) 

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

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

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

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

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

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

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

As of December 31, 2010, the number of shares of Common Stock held by non-affiliates was approximately 50,000,000 shares with a market value of $6,000,000 based upon a last sale for our Common Stock of $.12 as of the close of business on December 31, 2010.

As of January 31, 2012, the issuer had 115,589,865 shares of common stock, $0.001 par value per share outstanding. 
 
 
 
 
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FORWARD-LOOKING STATEMENTS

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

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

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

Item 1.  Business
 
Corporate Structure

As described below, 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 4724 Foothill Drive, Paradise Valley, AZ 85253 and its phone number is (214) 701-8779. 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.

Recent Developments

The following is an outline of the business accomplishments of the Company since July 2010.

·  
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 next step is now large 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 invitro diagnostic kits and drug delivery technologies using TQD’s.
·  
Established focused R&D effort to develop production process and shelling techniques to produce extremely high quantum yield TQD’s.
·  
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."


 
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Business Overview

Recently Quantum Materials has consumated 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 Tetrapod Quantum Dot 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 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 the 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 tetrapod quantum dot 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.
 

 
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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 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 late 2012 with significant increases 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.
 
 
 
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 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 license’s with Rice University for the manufacture of low cost, high quality tetrapod quantum dots 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.


 
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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.
 
 
 
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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 quantum dot tetrapod, 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.
 
 
 
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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 world wide 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.


 
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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 rapidly. 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.

Further reduce manufacturing cost. 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.
 
 
 
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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 between now and 2014, for example, 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.
 
 
 
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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.  However, the US House of Representatives passed its version of the American Clean Energy and Security Act (ACES) which would mandate significant additional electricity consumption to be supplied by renewable sources, totaling at least 15% of national demand by 2020.  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. 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, 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. First Solar led both categories in 2009. 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.
 
 
 
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Worldwide, solar currently provides less than one percent of electricity demand but is projected to supply 26% of the worlds 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.

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. No assurances can be given that this milestone will be met by the Company on a timely basis.

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. As of December 31, 2010, we have paid ASU $175,000 under our contract with ASU. We are therefore working with Dr. Jabbour to continue his development work at the KAUST facilities and we are negotiating a substantially reduced fee with 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 $25,000 by June 30, 2012, $50,000 by December 31, 2012, $125,000 by June 30, 2013 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 thie 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.
 
 
 
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Employees

As of November 30, 2011, 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 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 affect 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 of $25,000 by June 30, 2012, $50,000 by December 31, 2012, $125,000 by June 30, 2013 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 thie 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.
 
 

 
 
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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.

  
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 next step is now large 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 invitro diagnostic kits and drug delivery technologies using TQD’s.
  
Established focused R&D effort to develop production process and shelling techniques to produce extremely high quantum yield TQD’s.
  
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.
  
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.

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 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 November 4, 2011 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 subjects 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.


 
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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:
     
 
• 
establish our manufacturing operations, initially domestically or potentially internationally at a future date;
     
 
• 
develop our distribution network;
     
 
• 
continue to research and develop our products and manufacturing technologies;
     
 
• 
implement internal systems and infrastructure to support our growth; and
     
 
• 
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:
     
 
• 
We will need to raise significant additional capital in order to finance the costs of constructing and equipping of large scale manufacturing facilities, which we may be unable to do so on reasonable terms or at all, and which could be dilutive to our existing stockholders;
     
 
• 
The build-out of any facilities will be subject to the risks inherent in the development of a manufacturing facility, including risks of delays and cost overruns as a result of a number of factors, many of which may be out of our control, such as delays in government approvals, burdensome permit conditions and delays in the delivery of manufacturing equipment from numerous suppliers; and
     
 
• 
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.
 
 
 
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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:

  
our failure to produce solar power products that compete favorably against other solar power products on the basis of cost, quality and performance;
  
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;
  
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.
 
 
 
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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:

difficult and expensive compliance with the commercial and legal requirements;
encountering trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could affect the competitive pricing of our solar power products and reduce our market share in some countries;
unavailability of government grants from foreign sources, or for government grants that have been approved, risk of forfeiture or repayment in whole or in part:
fluctuations in currency exchange rates relative to the U.S. dollar;
limitations on dividends or restrictions against repatriation of earnings;
difficulty in recruiting and retaining individuals skilled in international business operations; and
increased costs associated with maintaining international marketing efforts.

Problems with product quality or product performance may cause us to incur warranty expenses and may damage our market reputation and prevent us from achieving increased sales and market share.
 
Consistent with standard practice in the 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.


 
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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:

  
cost-effectiveness of solar power technologies as compared with conventional and non-solar alternative energy technologies;

  
performance and reliability of solar power products as compared with conventional and non-solar alternative energy products;

  
success of alternative distributed generation technologies such as fuel cells, wind power and micro turbines;

  
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;

  
capital expenditures by customers that tend to decrease when the United States or global economy slows;

  
continued deregulation of the electric power industry and broader energy industry; and

  
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:
 
•    
possible loss of our exclusive licenses with William Marsh Rice University and the University of Arizona;

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 form developing or using technology similar to ours or in developing, using, manufacturing, marketing or selling products similar to ours;
 
 
 
given the costs of obtaining patent protection, we may choose not to file patent applications for or not to maintain issued patents for certain innovations that later turn out to be important, or we may choose not to obtain foreign patent protection at all or to obtain patent protection in only some of the foreign countries, which later turn out to be important markets for us;
 
 
 
 
 
 
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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;
 
 
 
third parties may design around our licensed technologies, and there is no assurance that any licensed patents and other intellectual property rights will be sufficient to deter infringement or misappropriation of our intellectual property rights by others;
 
 
 
• 
third parties may seek to challenge or invalidate any licensed patents, which can result in a narrowing of or invalidating our patents, or rendering our licensed patents unenforceable;
 
 
 
• 
we may have to participate in proceedings such as interference, cancellation, or opposition, before the United States Patent and Trademark Office, or before foreign patent and trademark offices, with respect to our licensed patents, patent applications, trademarks or trademark applications or those of others, and these actions may result in substantial costs to us as well as a diversion of management attention;
 
 
 
• 
although we are not currently involved in any litigation involving intellectual property rights, we may need to enforce our intellectual property rights against third parties for infringement or misappropriation or defend our intellectual property rights through lawsuits, which can result in significant costs and diversion of management resources, and we may not be successful in those lawsuits;

  • 
we rely on trade secret protections to protect our interests in proprietary know-how and processes for which patents are difficult to obtain or enforce; however, we may not be able to protect our trade secrets adequately; and
 
 • 
the contractual provisions on which we rely to protect our trade secrets and proprietary information, such as our confidentiality and non-disclosure agreements with our employees, consultants and other third parties, may be breached, and our trade secrets and proprietary information may be disclosed to competitors, strategic partners and the public, or others may independently develop technology equivalent to our trade secrets and proprietary information.
 
 
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.
 
 
 
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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:
 
       •       independently develop substantially equivalent proprietary information, products and techniques;
 
       •       otherwise gain access to our proprietary information; or
 
       •       design around our licensed patents (if any) or other intellectual property.
 
We intend to pursue a policy of having our employees, consultants and advisors execute proprietary information and invention agreements when they begin working for us. However, these agreements may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. If we fail to maintain trade secret and patent protection, our potential, future revenues may be decreased.

Licenses for technologies and intellectual property may not be available to us.
 
We have entered into license agreements for technologies and intellectual property rights, including quantum dots. Our license agreements with Rice 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.
  
 
 
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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, 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 Over the Counter Market 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 OTC Electronic Bulletin Board 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.  
 
 
 
 
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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 Pink Sheets. 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:

 
variations in our quarterly operating results;
 
announcements that our revenue or income/loss levels are below analysts' expectations;
 
general economic slowdowns;
 
changes in market valuations of similar companies;
 
announcements by us or our competitors of significant contracts; and/or
 
acquisitions, strategic partnerships, joint ventures or capital commitments.

 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.
 
 
 
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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:
 
 
• 
the size and timing of orders and shipments of our intended products;
 
 
 
• 
the rate and cost at which we are able to expand our manufacturing capacity to meet product demand, including the rate and cost at which we are able to implement advances in our quantum dot, thin film technology;
 
 
 
• 
our ability to establish and expand key distribution partners and supplier relationships;
 
 
 
• 
our ability and the terms upon which we are able to raise capital sufficient to finance the expansion of our manufacturing capacity and our sales and marketing efforts;
 
 
 
• 
our ability to establish strategic relationships with third parties to accelerate our growth plans;
 
 
 
• 
the amount and timing of expenses associated with our research and development programs and our ability to develop enhancements to our manufacturing processes and our products;
 
 
 
• 
delays associated with the supply of specialized materials necessary for the manufacture of our solar power products;
 
 
 
• 
our ability to execute our cost reduction programs;
 
 
 
• 
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;

 
• 
developments in the competitive environment, including the introduction of new products or technological advancements by our competitors; and
 
 
 
•  
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.
 
 
 
24

 
 
 
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 and 2011, the Company has reimbursed Stephen Squires $11,040, $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 2012 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 January 31, 2011 and after that date, to 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.   
Reserved.


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 pink sheets.

The table below sets out the range of high and low sales information for our common stock for each quarterly period from July 1, 2009 through September 30, 2011.

Quarter Ended
High
Low
September 30, 2011
.24
.14
June 30, 2011
.22
.09
March 31, 2011
.20
.11
December 31, 2010
.15
.11
September 30, 2010
.07
.07
June 30, 2010
.10
.10
March 31, 2010
.27
.08
December 31, 2009
.14
.08
September 30, 2009
.15
.08

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

As of June 30, 2011, there were 49 record holders and an estimated 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.


 
25

 



Issuer Repurchases of Equity Securities

During fiscal 2011, there were no repurchases of our equity securities.

Recent Sales of Unregistered Securities

(a)
From July 1, 2010 to June 30, 2011, we had the following sales of unregistered Common Stock.

Date of Sale
 
Title of Security
Number Sold
Consideration Received and Description of Underwriting or Other Discounts to Market Price or Convertible Security, Afforded to Purchasers
Exemption from Registration Claimed
If Option, Warrant or Convertible Security, terms of exercise or conversion
July  
2010
 
 
Common Stock
 
300,000
 
Services rendered
 
Section 4(2); and/or
Rule 506
 
Not applicable.
             
July 2010 -
September,
2010
 
 
Common Stock and
Common Stock
Purchase
Warrants
 
625,000
Shares;
625,000
Warrants
 
$50,000 received;
no commissions paid
 
Section 4(2); and/or
Rule 506
 
Warrants exercisable at $.08 per share.
             
September,
2010
 
 
Common Stock
 
591,797
 
Shares issued in
exchange for $60,000
of interest through
September 1, 2010
 
Section 4(2); and/or
Rule 506
 
Not applicable.
             
September,
2010
 
 
Common Stock
 
700,000
 
Services rendered
 
Section 4(2); and/or
Rule 506
 
Not applicable.
             
October
2010
 
Common Stock
1,700,000
Services rendered
and $30,000 in cash
and expense reimbursement received; no commissions paid
Section 4(2); and/or
Rule 506
Not applicable.
             
November
2010
 
Common
Stock
Purchase
Warrants
10,508,331
Services rendered
(forgiveness of
wages); no
commissions paid
Section 4(2)
Warrants exercisable
at $.075  per share
through November 4,
2015
             
December
2010
 
Common Stock
426,136
Shares issued in
Exchange for $30,000
of interest through
December 1, 2010
Section 4(2); and/or
Rule 506
Not applicable.
             
January
2011
 
 
Common Stock
 
10,000,000
 
Services rendered in
exchange for 8,199,034
shares; 1,800,966 shares
in exchange for $270,145 of cash advances which
were forgiven by CEO;
no commissions paid
 
Section 4(2); and/or
Rule 506
 
 
Not applicable.
 
 
 
 
 
26

 
 
             
March 2011
 
Common Stock
298,805
Shares issued in
exchange for $30,000
of interest through
March 1, 2011
Section 4(2); and/or
Rule 506
Not applicable.
             
March 2011
 
Common Stock
226,667
$20,000 received;
no commissions paid
Section 4(2); and/or
Rule 506
Not applicable.
             
April 2011
 
Common Stock and
Common
Stock
Purchase
Warrants
525,000
Shares;
133,334
Warrants
$50,000 received;
no commissions paid
Section 4(2); and/or
Rule 506
Warrants exercisable
at $.15 per share.
[verify prices]
             
May 2011
 
Common Stock and
Common
Stock
Purchase
Warrants
664,773
Shares;
545,673
Warrants
$60,000 received;
no commissions paid
Section 4(2); and/or
Rule 506
Warrants exercisable
at $.08 per share.
[verify prices]
             
May 2011
 
Common Stock
9,500,000
Services rendered; no commissions paid
Section 4(2); and/or
Rule 506
Not applicable.
             
June 2011
 
Common Stock
312,501
Shares issued in
exchange for $30,000
of interest through
June 1, 2011
Section 4(2); and/or
Rule 506
Not applicable.
             
June 2011
 
Common Stock
1,162,337
$101,500 cash received;
no commissions paid
Section 4(2); and/or
Rule 506
Not applicable.


(b)
Rule 463 of the Securities Act is not applicable to the Company.
(c)
In the year ended June 30, 2011, 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.
 
 
 
27

 

 
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, 2011, which was recently extended to 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."
 
 
 
 
28

 

 
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.

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

Long-lived assets
We review our long-lived assets, which include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as “the asset”) may not be recoverable.  Such circumstances include, but are not limited to:
 
  
a significant decrease in the market price of the asset;
 
  
a significant change in the extent or manner in which the asset is being used;
 
  
a significant change in the business climate that could affect the value of the asset;
 
  
a current period loss combined with projection of continuing loss associated with  use of the asset; and
 
  
a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life.
 
Beneficial conversion
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 $411,420 and $340,473 for the years ended June 30, 2009 and June 30, 2010, 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.
 
 
 
29

 

 
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 late 2012 with significant increases in 2013.

Liquidity and Capital Resources

At June 30, 2011 the Company had a working capital deficit of approximately $3,439,868 with total liabilities of approximately $3,439,966. Approximately $512,000 of these liabilities are owed to our officers, directors and employees for services rendered and accrued through June 30, 2011.  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, 2011, the Company lacks cash or cash equivalent assets and continues to incur losses in its development stage operations.  The Company has been relying on loans from its Chief Executive Officer resulting from private sale transactions in our common stock owned by him.  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; 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."
 
 
 
 
30

 

 
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.

Cash was used in operating activities of $304,219 for fiscal 2010. This is a result of a net loss of $4,423,767 partially offset by stock compensation of $1,231,817, stock issued for services of $804,000, increases in accounts payables and accrued liabilities of $1033,673, change in fair value of warrants and embedded conversion feature of $338,145, consideration of convertible debenture discount of $227,728 and amortization of deferred finance cost of $105,000. Cash flows were used in investing activities of $11,157 in 2010 primarily due to the $15,000 purchase of a license. Cash flows from financing activities during 2010 were $315,395 which consisted of $250,000 from the proceeds of the sale of common stock and $65,395 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, 2010, Mr. Squires has unreimbursed cash advances of $64,372 and accrued payroll and expenses totaling $151,104 owed to him and accrued payroll of $65,000 owed to his wife in her role as a bookkeeper for the Company.

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.  Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying value and classification of assets and liabilities should the Company be unable to continue as a going concern.  At June 30, 2011, the Company had not yet achieved profitable operations, has accumulated losses of $11,331,192 since its inception, at June 30, 2011, has a working capital deficit of $3,439,868 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 2012 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.
 
 
 
31

 

 
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, 2011 versus June 30, 2010

Balance Sheet – June 30, 2011

Cash

At June 30, 2011, the Company’s balance sheet included cash of $98 compared to cash of $19 at June 30, 2010, representing an increase in cash of $79 for the year.   An amount of  $297,500 was raised through the sale of common stock in the current year as compared to $250,000 in the prior year,  however operating costs have consumed the entire amount leaving the current cash balance of $98.

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 $4,331 and $24,750 respectively in the year ended June 30, 2011 and June 30, 2010.

Furniture and equipment

During the year ended June 30, 2011, the company did not have any acquisitions or disposals of office equipment and furniture as compared to June 30, 2010 where the Company acquired $1,500 and disposed of $5,343 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 $4,048 of amortization for this year and $4,808 in the prior year.
 
 
 
32

 

 
Deferred financing costs

Deferred finance cost, net were $36,167 at June 30, 2011.  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, 2010 was $141,167.  

Accounts payable and accrued liabilities
 
The balance at June 30, 2011 was $861,635.  Included in accounts payable is 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.  The balance at June 30, 2010 was $844,398 which included accrued interest of $40,000, development expenses of $556,393, patent maintenance fees of $21,292, legal and audit expenses of $72,234, and other operating expenses of $154,478.

Accounts payable related party

At June 30, 2011 there were $446,027 due to related parties.  This represents unpaid wages to officers and executive directors of the Company.  At June 30, 2010 the balance was $696,100.

Advances related party

At June 30, 2011 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, 2010 the balance was $70,367.

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, 2011 was estimated by management to be $1,223,000 as compared to the estimated fair value at June 30, 2010 of $834,057. The increase of $388,943 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 has a term of three years maturing on November 4, 2011 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 will be amortized over the original three year life of the debenture. Each Debenture is convertible at the option of each Lender into Hague Corp’s Common Stock, at a conversion price of $.2667 per share which was decreased by agreement in fiscal 2010 to $0.12.  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, 2011 was $908,405 and at June 30, 2010 the balance was $ 322,083.  The discount is being amortized resulting in the convertible debenture balance being $1,500,000 at November 4, 2011. Recently, the Debenture holders agreed to a one year extension of the due date of their loan. In partial consideration of such 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 1 – Risk Factors.”

Common Stock

The accounting treatment of the November 4, 2008 plan of merger and reorganization between Quantum Material Corp. and Solterra regarding the common stock is as follows:   During the fiscal year ended June 30, 2009 the Company issued 4,250,000 shares of common stock at $0.01 per share for a total of $42,500. As a result of the plan of merger and reorganization 24,600,000 shares were issued to the existing shareholders of Quantum Material Corp.  In addition 3,525,000 shares were issued with the $1,500,000 convertible debenture.   It was determined the shares issued with the debenture had a value of $1,155,826.  As the par value of the shares is $0.001 common stock increased by $3,525 and additional paid in capital increased by $1,152,301.  On March 1, 2009 according to the provisions of the Convertible Debenture agreement, the Company elected to issue 506,493 shares of the Company’s Common Stock to pay accrued interest on the debentures of $39,000. Common stock increased from 37,000,000 shares at June 30, 2008 to 69,881,493 shares at June 30, 2009.
 
 
 
33

 

 
During the fiscal year ended June 30, 2010 according to the provisions of the Convertible Debenture agreement, the Company elected to issue 1,511,937 shares of the Company’s Common Stock to pay accrued interest on the debentures.  The Company also awarded 2,250,000 shares of common stock with employee contracts.  In addition the Company issued 7,100,000 shares for contracted services.  The Company issued 3,125,000 shares of common stock at $0.08 per share for a total of $250,000. Common stock increased from 69,881,493 shares at June 30, 2009 to 83,868,430 shares at June 30, 2010.

During the fiscal year ended June 30, 2011 according to the provisions of the Convertible Debenture agreement, the Company elected to issue 1,629,239 shares of the Company’s Common Stock to pay accrued interest on the debentures.  The Company also awarded 8,499,034 shares of common stock with employee contracts and the Company issued 11,525,000 shares for contracted services. In addition, the company issued 1,988,466 shares to Stephen Squires for settlement of liabilities.  The Company also issued 3,141,277 shares of common stock at between $0.08 per share and $0.14 per share for a total of $297,500. Common stock increased from 83,868,430 shares at June 30, 2010 to 110,651,446 shares at June 30, 2011.

Statement of operations – June 30, 2011

General and administrative expenses

During the twelve months ended June 30, 2011 the Company incurred $2,420,262 of general and administrative expenses compared to the $3,036,667 recorded for the twelve months ended June 30, 2010.  The decrease of $616,405 can be attributed to two occurrences.  Included in the current years expenses are $16,556 of stock based compensation attributed to services agreements as compared to $804,000 in the previous year ended June 30, 2010 accounting for an decrease of $787,444. Remuneration for the current year increased by $175,855 to $833,355 as compared to $657,500 in the prior year due to employees being paid for a full twelve months in the current year.  In addition, there was an increase of $28,038 in employee stock compensation expense and an increase of $61,573 in travel expenses in the current year as compared to the prior year. There was a decrease in all other general and administrative expenses of $62,137 from the prior year.

Included in the expenses for the current twelve months were stock based compensation of $16,556, other professional fees of $1,246,441, wages of $833,355, license maintenance costs of $4,331, legal and audit of $90,003, corporate expense of $18,647, office expenses of $28,280, travel expense of $165,156 and amortization of furniture and equipment of $4,048.  General and administrative expenses for the twelve months ended June 30, 2010 included stock based compensation of $1,231,817, other professional fees, $836,320, wages of $657,500, license maintenance costs of $24,750, legal and audit of $86,026, corporate expenses of $42,181, office expense of $49,682, travel expense of $103,583 and amortization of furniture and equipment of $4,808.

Research and development expenses.

The Company did not incur any research and development expenses in the twelve months ended June 30, 2011, as compared to $340,473 in the twelve months ended June 30, 2010.  The Company has two development agreements in place with major universities.  One development agreement to optimize the printing process of solar cells and the other development agreement to optimize the manufacturing process for quantum dots. 

Amortization of convertible debenture discount

The convertible debenture discount of $1,500,000 is being amortized over the 36 month term of the debenture using the effective interest method.  The debenture was issued on November 4, 2008.  Amortization recorded for the twelve month period ended June 30, 2011 was $586,322.  The amortized balance of the discount at June 30, 2011 is $591,595 resulting in the convertible debenture value on the balance sheet net of the discount $908,405. At June 30, 2010 the amortization for the twelve months was $227,728.

Amortization of deferred finance cost

This amount relates to the $315,000 of expenses associated with the $1,500,000 convertible debenture financing raised in November 2008.  The deferred financing cost is being amortized using the effective interest method over the thirty-six month life of the debenture.  Amortization expense recorded for the twelve month period ended June 30, 2011 was $105,000.
 
 
 
34

 

 
Interest expense on the convertible debenture

This amount relates to the 8% interest associated with the $1,500,000 convertible debenture issued in November 2008.  Interest expense recorded for the period ended June 30, 2011 was $177,693 compared to $195,841 in the prior year ended June 30, 2010.  

According to the provisions of the Convertible Debenture agreement the Company has elected to issue shares of the Company’s Stock to pay accrued interest on the debentures.   In the year ended June 30, 2011, the Company issued 1,629,239 shares of the Company’s restricted Common Stock to pay $207,693 of accrued interest.   As the provision to pay stock for interest discounts the market price of the stock the Company has attributed this discount to interest expense and additional paid in capital.  The effect of this extra interest expense for the twelve months ended June, 30 2011 is $57,693.  As at June 30, 2010, in aggregate the company issued 2,018,466 shares of the Company’s restricted Common Stock to pay $159,000 of accrued interest. The cumulative effect of the extra interest expense for the year ended June 30, 2010 is $75,841.

Change in fair value of warrants and embedded conversion feature

This amount relates to the change in value of the derivative liabilities.  The change recorded in the year ended June 30, 2011 was $388,943 as compared to the change in value recorded in the year ended June 30, 2010 of $338,145.

Warrant expense

The Company issued 1,777,110  common stock warrants and has attributed $122,808 to the warrant value using the Black Scholes price model during the year ended June 30, 2011. The Company issued 2,000,000 common stock warrants and attributed a value of $179,913 using the Black Scholes price model for the year ended June 30, 2010.

Significant Accounting Pronouncement

The Company follows Accounting Standards Codification 740 (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 amounts used for income tax reporting purposes, and (b) net operating loss carry forwards.  No net provision for refundable Federal income tax has been made in the accompanying statement of loss because no refundable taxes were paid previously.  Similarly, no deferred tax asset attributable to the net operating loss carry forward has been recognized, as it is not likely to be realized. At June 30, 2011, the Company had unused net operating loss carryover approximating $5,045,000 and at June 30, 2010 an amount in aggregate of $5,216,000.
 
 
 
 
35

 

 
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 page 37 of this Annual Report on Form 10-K following this page.

 
 
36

 
 
 
 
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 balance sheets of Quantum Materials Corp. as of June 30, 2011 and the related statement of operations, changes in stockholders’ equity, and cash flows for the year then ended and for the period May 19, 2008 (date of inception) through June 30, 2011.  These financial statements were the responsibility of the Company’s management.  My responsibility was to express an opinion on these financial statements based on my audit.  The financial statements of Quantum Materials Corp. as of June 30, 2010 were audited by other auditors whose report dated January 24, 2011 on those financial statements included an explanatory paragraph describing going concern issues as discussed in Note 2 to the financial statements.

I conducted my audit 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 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 audit provide a reasonable basis for my opinion.

In my opinion, the financial statements, referred to above, present fairly, in all material respects, the financial position of Quantum Materials Corp. as of June 30, 2011, and the results of its operations and its cash flows for the years then ended and for the period May 30, 2006 (date of inception) through June 30, 2011, in conformity with accounting principles generally accepted in the United States of America.

The accompanying 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 accumulated deficit, 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Peter Messineo, CPA
Palm Harbor, Florida
December 22, 2011
 
 
F-1

 
 

 
Report of Independent Registered Public Accounting Firm
 
 
To the Board of Directors of
Quantum Materials Corp.
(A Development Stage Company, formerly Hague Corp.)
 
 
Tempe, Arizona
 
 
We have audited the accompanying consolidated balance sheets of Quantum Materials Corp. (the “Company”) as of June 30, 2010, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the year then ended and for the period from May 19, 2008 (inception) through June 30, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Quantum Materials Corp. as of June 30, 2010, and the results of its operations and its cash flows for the year then ended and for the period from May 19, 2008 (inception) through June 30, 2010 in conformity with accounting principles generally accepted in the United States of America.
 
As discussed in Note 2 to the consolidated financial statements, the Company's absence of significant revenues, recurring losses from operations, and its need for additional financing in order to fund its projected loss in 2011 raise substantial doubt about its ability to continue as a going concern. The 2010 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
LBB & Associates Ltd., LLP
Houston, Texas
January 24, 2011
 
 
 
 
 
 
F-2

 
 
 
Quantum Materials Corp.
(A Development Stage Company)
   
CONSOLIDATED BALANCE SHEETS
   
 
   
June 30
   
June 30
 
   
2011
   
2010
 
             
ASSETS
           
Current
           
Cash
  $ 98     $ 19  
                 
Total current assets     98       19  
                 
Licenses
    55,000       55,000  
Furniture and equipment, net of amortization
    3,821       7,869  
Deferred financing cost, net
    36,167       141,167  
                 
Total other assets     94,988       204,036  
                 
Total assets
  $ 95,086     $ 204,055  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities
               
Accounts payable and accrued Liabilities
  $ 861,635     $ 844,398  
Accrued liabilities - related party
    446,027       696,100  
Advances related party
    -       70,367  
Deferred revenue
    899       -  
Fair value of embedded conversion feature
    1,223,000       834,057  
Convertible debenture, net of discount
    908,405       322,083  
                 
Total current liabilities
    3,439,966       2,767,005  
                 
Total liabilities     3,439,966       2,767,005  
                 
Commitments and Contingencies
               
                 
Stockholders' deficit
               
Common stock, $0.001 par value,
               
Authorized, 200,000,000 shares
               
Issued and outstanding 110,651,446 and 83,868,430 as of
               
June 30, 2011 and June 30, 2010, respectively     110,628       83,868  
Additional paid-in capital
    6,645,829       3,638,491  
Deficit accumulated during the development stage
    (10,101,337 )     (6,285,309 )
                 
Total stockholders' deficit
    (3,344,880 )     (2,562,950 )
                 
Total liabilities and stockholders' deficit
  $ 95,086     $ 204,055  
 
The accompanying notes are an integral part of these consolidated financial statements.
                     
 
 
F-3

 
 
Quantum Materials Corp.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ending June 30, 2011 and June 30, 2010
and period from May 19, 2008 (inception) through June 30, 2011
                       
 
   
Year
   
Year
   
Inception
 
   
ended
   
ended
   
through
 
   
June 30,
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
 
                   
Operating expenses:
                 
General and administrative
  $ 2,420,262     $ 3,036,667     $ 6,691,161  
Research and development
    15,000       340,473       766,893  
                         
Total operating expenses
    2,435,262       3,377,140       7,458,054  
                         
Loss from operations
    (2,435,262 )     (3,377,140 )     (7,458,054 )
                         
Other expenses (revenue):
                       
Amortization of convertible debenture discount
    586,322       227,728       882,107  
Amortization of deferred finance cost
    105,000       105,000       278,833  
Change in fair value of embeded conversion feature
    388,943       338,145       727,088  
Interest expense
    177,693       195,841       452,534  
Warrant expense
    122,808       179,913       302,721  
                         
Total other expenses
    (1,380,766 )     (1,046,627 )     (2,643,283 )
                         
Net loss
  $ (3,816,028 )   $ (4,423,767 )   $ (10,101,337 )
                         
Basic and diluted loss per common share
  $ (0.04 )   $ (0.06 )        
                         
Weighted average number of common
                       
shares outstanding
    93,062,524       76,320,547          
                         
 
The accompanying notes are an integral part of these consolidated financial statements.
                       
 
 
F-4

 
 
Quantum Materials Corp.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
For the period from May 19,2008 (inception) to June 30, 2011
                         
 
                     
Deficit
       
                     
accumulated
       
               
Additional
   
during the
   
Total
 
   
Common Stock
   
paid in
   
development
   
Stockholders
 
   
Shares
   
Amount
   
capital
   
stage
   
Equity
 
                               
Inception, May 19, 2008
    -     $ -     $ -     $ -     $ -  
Issuance of common stock
    37,000,000       37,000       (33,300 )     -       3,700  
Net loss to June 30, 2008
                            (3,700 )     (3,700 )
                                         
Balance June 30, 2008
    37,000,000       37,000       (33,300 )     (3,700 )     -  
                                         
Common stock sold at $0.01 per share
    4,250,000       4,250       38,250       -       42,500  
Issuance of common stock in connection
                                       
     with recapitalization
    24,600,000       24,600       (26,802 )     -       (2,202 )
Common stock issued with debenture
    3,525,000       3,525       574,388       -       577,913  
Beneficial conversion feature of shares
                                       
    issued with debenture
    -       -       577,913       -       577,913  
Common stock issued for debenture interest payable
    506,493       506       38,494       -       39,000  
Warrant issued with standstill agreement
                    34,148       -       34,148  
Net loss year ended June 30, 2009
                            (2,020,485 )     (2,020,485 )
                                         
Balance June 30, 2009
    69,881,493       69,881       1,203,091       (2,024,185 )     (751,213 )
                                         
Cummulative effect of derivative valuation
    -       -       (212,184 )     162,643       (49,541 )
Common stock issued for debenture interest payable
    1,511,937       1,512       194,329       -       195,841  
Stock based compensation
    2,250,000       2,250       1,229,567       -       1,231,817  
Common stock issued for services
    7,100,000       7,100       796,900       -       804,000  
Warrant issued with standstill agreement
    -       -       179,913       -       179,913  
Common stock sold at $0.08 per share
    3,125,000       3,125       246,875       -       250,000  
Net loss year ended June 30, 2010
    -       -       -       (4,423,767 )     (4,423,767 )
                                         
Balance June 30, 2010
    83,868,430       83,868       3,638,491       (6,285,309 )     (2,562,950 )
                                         
Stock based compensation
    8,499,034       8,499       21,501       -       30,000  
Common stock issued for cash
    3,141,277       3,117       294,383       -       297,500  
Stock warrants issued with common stock
    -       -       122,808       -       122,808  
Common stock issued for services
    11,525,000       11,525       1,202,475       -       1,214,000  
Common stock issued for debenture interest payable
    1,629,239       1,630       206,063       -       207,693  
Common stock issued for settlement of liabilities
    1,988,466       1,989       283,156       -       285,145  
Stock warrants issued for forgiveness of accrued wages
    -       -       876,952       -       876,952  
Net loss to June 30, 2011
    -       -       -       (3,816,028 )     (3,816,028 )
                                         
Balance June 30, 2011
    110,651,446     $ 110,628     $ 6,645,829       (10,101,337 )     (3,344,880 )
 
The accompanying notes are an integral part of these consolidated financial statements.
                         
 
 
F-5

 
 
Quantum Materials Corp.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ending June 30, 2011 and June 30, 2010
and period from May 19, 2008 (inception) through June 30, 2011
                     
 
   
Year
   
Year
   
Inception
 
   
ended
   
ended
   
through
 
   
June 30
   
June 30
   
June 30
 
   
2011
   
2010
   
2011
 
                   
CASH FLOWS FROM OPERATING ACTIVITIES
                 
                   
Net loss
  $ (3,816,028 )   $ (4,423,767 )   $ (11,273,714 )
Adjustments to reconcile net loss to net cash
                       
used in operating activities:
                       
Stock-based payments
    1,244,000       2,035,817       4,513,372  
Stock issued for debenture interest
    207,693       195,841       442,534  
Depreciation of furniture and office equipment
    4,048       4,808       11,718  
Amortization of convertible debenture discount
    586,322       227,728       882,108  
Amortization of deferred finance cost
    105,000       105,000       278,833  
Warrant expense
    122,808       179,913       302,721  
Change in fair value of warrants and embeded
                       
   conversion feature
    388,943       338,145       727,088  
Net change in:
                       
Bank overdraft     -       (1,377 )     -  
Deferred revenue     899       -       899  
Accounts payable and accrued liabilities     302,382       495,288       1,087,100  
Accrued liabilities - related party     626,879       538,385       1,322,979  
                         
Cash flows provided (used) by operating activities
    (227,054 )     (304,219 )     (1,704,362 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Purchase of license
    -       (15,000 )     (55,000 )
Proceeds from disposal of furniture and equipment
            5,343       5,343  
Purchase of furniture & equipment
    -       (1,500 )     (20,883 )
                         
Cash flows provided (used) in investing activities
    -       (11,157 )     (70,540 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from issuance of common stock
    297,500       250,000       590,000  
Proceeds from related party advances
    (70,367 )     65,395       -  
Proceeds from convertible debenture issued
    -       -       1,500,000  
Payment of deferred finance cost
    -       -       (315,000 )
                         
Cash flows from financing activities
    227,133       315,395       1,775,000  
                         
NET INCREASE (DECREASE) IN CASH
    79       19       98  
                         
Cash, beginning of the period
    19       -       -  
                         
Cash, end of the period
  $ 98     $ 19     $ 98  
                         
Supplemental disclosure with respect to cash flows:
                       
Cash paid for income taxes   $ -     $ -     $ -  
Cash paid for interest   $ -     $ -     $ -  
Non cash transaction
                       
Issuance of common stock in connection                        
    with recapitalization   $ -     $ -     $ 2,202  
Cumulative effect of change in accounting                        
    principle on convertible notes   $ (49,541 )   $ (49,541 )   $ (49,541 )
 
                     
The accompanying notes are an integral part of these consolidated financial statements.
                     
 
 
F-6

 
 
Quantum Materials Corp.
(A Development Stage Company, formerly Hague Corp.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011

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, 2010 and 2009 and the period from May 19, 2008 (inception) through June 30, 2011 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, 2011, the Company had not yet achieved profitable operations, has accumulated losses of $11,331,192 since its inception, has a working capital deficit of $3,439,868, 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 2012 to maintain its development stage operations. The Company is exploring all 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.
 
 
F-7

 

 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.

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

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

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

 
F-8

 

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 $340,473 for the years ended June 30, 2011 and 2010 and $766,893 from May 19, 2008 (inception) to June 30, 2011.

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 $1,231,817 in the year ended June 30, 2010 and Nil in the year ended June 30, 2009.

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

In September 2009, the FASB issued ASC 820-10 Measuring Liabilities at Fair Value (“ASC 820-10”).  ASC 820-10 provides additional guidance on how companies should measure liabilities at fair value.  Specifically, the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer.

 In January 2010, the FASB issued ASU No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements.  This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers.  Further, this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements.  This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  

 In February 2010, the FASB issued ASU 2010-09, which amends ASC 855 to address certain implementation issues related to an entity's requirement to perform and disclose subsequent events procedures. ASU 2010-09 requires entities that make filings with the Securities and Exchange Commission (SEC) to evaluate subsequent events through the date the financial statements are issued. The new guidance became effective immediately for financial statements that are issued or available to be issued.
 
In March 2010, the FASB issued ASU No. 2010-11, "Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives" (codified within ASC 815 - Derivatives and Hedging). ASU 2010-11 improves disclosures originally required under SFAS No. 161. ASU 2010-11 is effective for interim and annual periods beginning after June 15, 2010.
 
 In April 2010, the FASB issued ASU No. 2010-13, "Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades" ("ASU 2010-13").  ASU 2010-13 provides guidance on the classification of a share-based payment award as either equity or a liability. A share-based payment that contains a condition that is not a market, performance, or service condition is required to be classified as a liability. ASU 2010-13 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2010 and is not expected to have a significant impact on the Company's financial statements.

In April 2010, the FASB issued ASU No. 2010-17, "Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition" (codified within ASC 605 - Revenue Recognition). ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. ASU 2010-17 is effective for interim and annual periods beginning after June 15, 2010.
 
 
F-9

 

Effective July 1, 2009, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, “Generally Accepted Accounting Principles.” ASC 105-10 establishes the FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification supersedes all existing non-SEC accounting and reporting standards. The FASB will now issue new standards in the form of Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the changes in the Codification. References made to FASB guidance have been updated for the Codification throughout this document.
 
 In June 2008, the FASB issued EITF 07-05, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”, which was codified into ASC Topic 815-40-15 effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. This topic addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock. If an instrument (or an embedded feature) that has the characteristics of a derivative instrument under the relative paragraphs of ASC 815-40 is indexed to an entity’s own stock, it is still necessary to evaluate whether it is classified in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument). The guidance in this topic shall be applied to outstanding instruments as of the beginning of the fiscal year in which this Issue is initially applied. The cumulative effect of the change in accounting principle shall be recognized as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year, presented separately. However, in circumstances in which a previously bifurcated embedded conversion option in a convertible debt instrument no longer meets the bifurcation criteria in Statement 133 at initial application of this topic, the carrying amount of the liability for the conversion option (that is, its fair value on the date of adoption) shall be reclassified to shareholders’ equity. Any debt discount that was recognized when the conversion option was initially bifurcated from the convertible debt instrument shall continue to be amortized. The adoption of ASC 815-40-15 affected our consolidated financial position and results of operations as disclosed in Note 7.

Recent accounting pronouncements

The Company has evaluated all the recent accounting pronouncements through the date of issuance of these financial statements and believe that none of them will have a material effect on the company’s financial statements.

Note 4. Furniture and equipment

Components of furniture and equipment consist of the following items as of June 30, 2011:

         
Accumulated
       
   
Cost
   
depreciation
    Net  
                   
Office equipment
  $ 11,448     $ 8,652     $ 2,796  
                         
Office furniture
    1,624       599       1,025  
                         
    $ 13,072     $ 9,251     $ 3,821  

Components of furniture and equipment consist of the following items as of June 30, 2010:
 
         
Accumulated
       
   
Cost
   
depreciation
   
Net
 
                   
Office equipment
  $ 11,448     $ 4,836     $ 6,612  
                         
Office furniture
    1,624       367       1,257  
                         
    $ 13,072     $ 5,203     $ 7,869  
 
 
F-10

 
 
Note 5.  Related party transactions

The Company expensed management fees to the CEO / major shareholder as well as other related party executives of $659,000 and $612,500 respectively in the twelve months ended June 30, 2011 and the year ended June 30, 2010.  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, 2011.

As a result the accrued liabilities related party was $446,027 and $696,100 respectively as of June 30, 2011 and June 30, 2010.

During the twelve months ended June 30, 2011 the Company recorded $11,520 of rent expense for the use of executive office space in the home of the CEO / major shareholder, $5,760 was paid and $5,760 was included in the $270,145 cancelled by Stephen Squires in exchange for the 10,000,000 restricted shares issued on January details below.

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.

On January 20, 2010, the Board recognized that Mr. Stephen Squires has made loans to the Company and may make additional loans to the Company.  The Board approved granting Mr. Squires a two-year option to convert up to $200,000 of cash advances into a maximum of 5% of the outstanding common stock of Solterra currently 100% owned by the Company. As of the filing date of this Form 10-K, Mr. Squires has declined to exercise this option.

On January 20, 2010, the Board of Directors approved a three-year employment contract for Mr. Stephen Squires as Chief Executive Officer.  The Agreement stipulates that he receives a salary of $10,000 per month, that he receives 2,000,000 shares of restricted common stock, and options to purchase 5,000,000 shares of common stock at an exercise price of $.05 per share for a term of ten years, the options are fully vested at the time of the grant.  Mr. Squires' employment contract became effective January 25, 2010.  The 2,000,000 shares were issued with the Company recording a $260,000 expense to stock based compensation.  The Company recorded $502,972 as stock based compensation for the 5,000,000 stock options granted to Mr. Squires using the Black Scholes pricing model.

Note 6.  Convertible debentures
 
   
June 30
   
June 30
 
   
2011
   
2010
 
             
Convertible debenture
  $ 1,500,000     $ 1,500,000  
Debenture discount amortized
    (586,729 )     (1,158,999 )
Debenture warrant value amortized
    (4,866 )     (18,918 )
                 
    $ 908,405     $ 322,083  
 
F-11

 
 
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 has 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 anytime without penalty, subject to the Debenture holders’ conversion rights.  
  
In recognition of the 3,525,000 shares issued, 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.

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 $105,000 and $105,000 respectively for the years ended June 30, 2011 and June 30, 2010.

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.  
 
 
F-12

 
 
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, 2011, 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.  
 
 
As of June 30, 2011
 
 
Fair Value Measuring Using
 
 
Carrying
                         
 
Value
   
Level 1
   
Level 2
 
Level 3
 
Total
 
Derivative Liabilities
  $ 1,223,000       -       -     $ 1,223,000     $ 1,223,000  
                                         
Total Derivative Liabilities
  $ 1,223,000       -       -     $ 1,223,000     $ 1,223,000  
 
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the twelve months of fiscal year 2011:
 
 
Fair Value
       
 
Measurements
       
 
Using Level 3
       
 
Inputs
       
 
Derivative
       
 
Liabilities
 
Totals
 
Beginning Balance as of July 1, 2010
  $ 834,057     $ 834,057  
Total Gains or Losses (realized/unrealized) Included in Net Loss
    388,943       388,943  
Purchases, issuances and Settlements
    -