Item 1. Business

Overview

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

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

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

A key challenge for the quantum dot industry has been and may continue to be its ability to scale up production volumes sufficiently to meet growing demand for QDs while maintaining product quality and consistency and reducing the overall costs of supply to stimulate new applications. QDs remain an expensive product, however a number of recent research reports are predicting rapid growth of the QD market. For example, a March 2017 publication by Research and Markets titled “ Global Quantum Dots Market, Analysis and Forecast: 2017-2022” forecasts the quantum dots market to grow over $7 billion by 2022 at a CAGR of 46.4% through 2016-2022.

History of the Company

QMC was formed in January 2007, as a Nevada corporation under the name “Hague Corporation” and its shares began trading in the over-the-counter market in the first quarter of 2008. The original business of Hague Corporation was the exploitation of mineral interests. Solterra, a Delaware corporation, was formed in May 2008 by Mr. Stephen Squires, our Chief Executive Officer, and other shareholders to develop quantum dot applications in the solar cell industry. Solterra was acquired by Hague Corporation in November 2008, pursuant to a merger transaction wherein the shareholders of Solterra exchanged their shares of common stock in Solterra for shares of common stock in Hague Corporation, and Solterra became a wholly-owned operating subsidiary of Hague Corporation. Upon the closing of the merger, Hague Corporation changed its business from the exploitation of minerals to the development of QDs, and subsequently changed its name to “Quantum Materials Corp.” in 2010.

Shortly after formation, Solterra began to develop its solar cell business by licensing technology key to its business. In August 2008, Solterra was granted a license, which was later amended, to develop, manufacture and exploit TQDs by William Marsh Rice University (“Rice”) located in Houston, Texas (the “Solterra Rice License”). In September 2011, a new license, which was later amended, was entered into between Rice and QMC (the “QMC Rice License,” and together with the Solterra Rice License, the “Rice Licenses”). The Rice Licenses grant to QMC and Solterra the right to exploit a simplified and cost-effective synthesis process for the production of TQDs of high quality and uniformity, which was invented in the Rice laboratory of Dr. Michael Wong, a current member of the Company’s Scientific Advisory Board. Under the Rice Licenses, Solterra and QMC have been granted exclusive rights to develop, manufacture, market and exploit TQDs for photovoltaic applications (in the case of Solterra) and for electronic and medical applications (in the case of QMC).

In October 2008, Solterra also entered into a license agreement with the University of Arizona, which was later amended, (the “UA License”) pursuant to which Solterra has been granted exclusive rights to use the University of Arizona’s patented screen printing techniques in the production and sale of organic light emitting diodes (“OLEDs”) incorporating QDs in printed electronic displays and other printed electronic components. This technology was developed at University of Arizona by Dr. Ghassan Jabbour, a member of the Company’s Scientific Advisory Board.

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

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

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

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

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

I n 2016 the company’s founder returned as President and CEO and implemented a cost reduction initiative streamlining the G&A overhead and devoting more resources to R&D and commercialization readiness. These efforts have resulted in further optimization of the chemistry and the products. Through this refinement the company has been able to double the through put of its current production equipment from 2000 Kg of QDs per year to 4,000 Kg of QDs per year. Management believes that this and a number of other material performance enhancement discoveries made by the company provide us with the ability to provide industry leading material performance at a very competitive price point. All of the company’s discoveries are developed in a manner that they are compatible with our patented flow manufacturing process.

Business Accomplishments

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

We can provide no assurances that its accomplishments to date will result in the grant of patents for proprietary processes or result in future sales and/or profitable operations. See “Risk Factors” section.

Previously, our principal business emphasis was on the development of TQDs for solar cell applications through Solterra. The solar cell market became increasingly volatile, with prices eroding due to the influx of subsidized products from abroad. Although we intend to complete the development of our QD solar cell technology and attempt to bring a competitive product to market, we have decided not to do so in the current market environment. Our intent is to wait until we can produce solar cells with sufficiently high conversion efficiency that, when combined with its low cost proprietary manufacturing process, will result in a product capable of producing energy at a competitive cost per watt compared to existing solar cell technology and at a scale that will meet growing market demand for distributed, sustainable energ y.

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

Industry Overview

The Product: Quantum Dots and Other Nanomaterials

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

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

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

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

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

How Quantum Dots are Produced

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

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

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

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

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

Market for Quantum Dots

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

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

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

Major Market Segments

TVs, Displays, and Other Optoelectronics. This market is comprised principally of quantum dot LCD displays (“QDLCDs”) for televisions, computers, cell phones, tablets and various other applications. In QDLCDs, QDs are used to downconvert some of the blue light from the LED backlight directly to green and red light allowing for the creation of more vibrant colors and energy savings as compared to a traditional LCD TV/display. Unlike OLEDs which are extremely expensive to produce and require massive manufacturing capital expenditures, QD films are a drop-in solution for LCD manufacturers using existing infrastructure allowing for OLED-like color performance at significantly lower capital investment. LCD TVs make up the vast majority of new TV shipments, and QDLCDs are forecasted to grow to 135 million units by 2020 according to the IHS Quarterly/Technology Q2-2015 research report. Samsung and several other OEMs are currently shipping televisions using QDs to enhance the color quality and power efficiency.

Lighting . In the lighting market, companies began to commercialize quantum dot LEDs in 2013 with significant R&D occurring among manufacturers of solid-state lighting. While companies have launched quantum dot LED lamps, the market for quantum dot LED lamps and the other lighting products is still relatively small. We believe QD-based LED lighting will be the best replacement for currently available compact florescent and LED lighting, as QD technology provides greater power efficiency and the ability to tune the light spectrum to emit light that is the most pleasing and/or appropriate for the application. A July 2017 report by the US Department of Energy titled “Adoption of Light-Emitting Diodes in Common Lighting Applications” forecasts that LED lighting will represent 86% of all lighting sales by 2035, resulting in an annual primary energy savings of 3.7 quadrillion British thermal units 

Solar Energy . QDs are capable of producing energy from a broad spectrum of solar and radiant energy, including the ultraviolet and infrared frequencies conventional silicon solar cells generally do not convert to electricity. QD solar cells have theoretical conversion potentials of approximately twice that of conventional solar cells, and applications are being developed to “print” highly efficient photovoltaic solar cells in mass quantities at low cost. Management believes that QD solar cells and panels will be the next evolutionary development in the field of solar energy. Management also believes that increased conversion efficiencies will be realized with the use of TQDs resulting from their unique shape and that our low cost proprietary continuous production process and printing technology will permit Solterra to offer solar electricity solutions that can compete on a non-subsidized basis with the price of retail electricity in key markets around the world. We believe that global energy consumption trends that include the need for distributed energy generation (non-grid and especially in developing markets) and the desire for non-fossil fuel generated energy even at increased costs will drive market demand for solar. Management believes this will be especially true if existing generation by nuclear and coal is decommissioned due to age-related, safety, or environmental concerns or global governmental policy.

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

Life Sciences . The life sciences industry was one of the early areas of adoption of QD technology, especially for QDs used in fluorescent markers in diagnostic applications. This includes both the in vitro use of QDs for marking (illuminating) particular cell types or metabolic processes for understanding diseases, and in vivo imaging made possible by QD fluorescence in near infrared that can be detected in deep tissues. The fluorescent qualities of QDs provide an attractive alternative to traditional organic dyes in bio-imaging. It is estimated that QDs are 20 times brighter and 100 times more stable than standard fluorescent indicators.

Other applications . Current and future applications of QDs and other nanoparticles may impact a broad range of other industrial markets. These potentially include batteries and energy storage, commercial glass, water purification, improved thermoelectric components, biohazard detection sensors, diode lasers, and others. We intend to monitor these uses as they mature from basic research and plan for specific compositions as market opportunities develop.

Current Position

In January 2017, we reduced overhead costs and fine-tuned our operations. These efforts have enabled us to achieve the highest optical performance for cadmium free quantum dots in the company’s history. In addition, we have expanded the color range to now include blue in addition to red and green. While achieving extraordinary performance is important, management believes that being able to produce these materials repeatedly and at a low price point is the formula for success, and we have made these performance improvements while also doubling throughput and further reducing production. While we have been developing the infrastructure to support volume production, we have also explored the possibility of a licensing model and we believe there are merits to this model and we have begun to explore this as another, and possibly the best, option for the company to rapidly enter the revenue stage.

Widespread, rapid adoption of quantum dots by the display industry or in other markets may cause supply pressure that will need to be met with significant increases in available production capability. While we believe our current manufacturing capacity of approximately 4 metric tons per year is as big, if not bigger, than our largest competitors, we also realize that there are other challenges developing a supply chain and completing vendor qualifications that can be very time consuming. We believe a licensing model with a top tier chemical company could allow us to rapidly expand our market reach and capture substantially more market. We believe our low cost high-volume manufacturing process is ideally positioned to meet these requirements. This is anticipated to be a key advantage to the Company to meet market demand and drive increased revenue.

The advantages and benefits of our automated production process and equipment are:

Sales and Marketing Overview

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

Our discussions with chemical companies, film manufacturers, and OEMs in the display industry confirm that the market opportunity is substantial and that our business plan is aligned with the customers’ product specification needs. While we are pursuing applications in several other markets as well, we believe that the display industry represents the most substantial and most immediate opportunity. We further believe that our advantages in delivery of large volumes of high quality, high performance QDs and other nanomaterials via our patented continuous production process makes us an attractive supplier. While we continue to pursue direct sales opportunities, we are also actively marketing a licensing model to top tier chemical companies. In January 2018 the Company engaged Canaccord Genuity to provide financial advisory and investment banking services as the Company may reasonably request. The Company believes such advisory services will be instrumental as we explore licensing, merger and JV opportunities.

Operational Overview

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

We have recently achieved commercial-scale continuous manufacturing equipment at the San Marcos facility and now have the capacity to produce more than four metric tons (4,000kg) per year of nanomaterials for supply to its customers. Management believes that the production capacity of the San Marcos facility is similar to, or greater than its largest competitors’ factories which are much larger and require significantly larger capital expenditures to build and labor expense to operate. This efficiency is the direct result of our patented continuous flow process and proprietary manufacturing know how and equipment. While we plan to work extensively with its current providers of equipment, we own all rights to the designs and intellectual property resulting from the development projects and could contract with one or more other competent suppliers of equipment or build the manufacturing equipment in-house, if necessary. This also holds true in the event we are successful negotiating a licensing agreement with a significant chemical company, in which case we would likely be responsible for managing their scale up efforts.

We expect to commence generating revenues from licensing agreements and/or the production of materials at the San Marcos facility in early calendar year 2018. In the event we secure a license agreement we anticipate an upfront licensing payment to the company with ongoing royalty payments. Revenues from materials manufactured by the company are expected to be modest at first and will be dependent upon our ability to generate purchase orders from development partners.

Our ongoing research and development functions are considered key to maintaining and enhancing our competitive position in the growing nanomaterials and QD market. Nanomaterials and QD technology continue to evolve, with new discoveries and refinements being made on an ongoing basis. We intend to be at the forefront of technological development and will focus a significant part of our efforts on this, as it has done historically. Continuing R&D activities at the San Marcos facility and our collaboration with Texas State University, Rice, University of Arizona, and the numerous other research centers and departments with which we have relationships will be important aspects of the Company’s strategy. The company intends to increase its development of quantum dot solar cells in 2018 and is currently considering re-establishing its solar cell development in closer proximity to strategically significant solar technology resources.

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

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

O ur business is subject to various types of government regulations, including restrictions on the chemical composition of nanomaterials used in life sciences and other sensitive applications, the manufacture, transportation and export of chemical substances, and the regulation of hazardous materials used in or produced by the manufacture or use of QDs. In fiscal year 2017, we applied for and received a Low Volume Exemption (“LVE”) under the Toxic Substances Control Act (“TSCA”) which allows us to manufacture QD quantities of 10,000 kilograms or less per year in the United States. We also recently gained Chemical Abstract Service (CAS) registration for QDX cadmium-free quantum dots through a division of the American Chemical Society and has also completed the requisite analysis in support of the QDX Safety Data Sheet (SDS). Both CAS and the SDS are required in order to ship high volumes of advanced materials abroad. Management believes that the patented (owned and licensed) processes and proprietary manufacturing equipment employed allow us to comply with current regulations. However, new regulations or requirements may develop that could adversely affect us and our products in the future. See “Risk Factors” section.

Management and Personnel

We have traditionally operated with limited resources and infrastructure. As of the date of this Form 10-K, we have 9 employees, including the management team.

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

As we move into the next stage of our business, we expect that the Board of Directors and management team will continue to be strengthened by the recruitment of additional members. With resignations of Mr. Carlson and Mr. Martin as board members and with Mr. Squires assuming the role of Chairman, President and CEO in December 2016, our Board of Directors no longer had majority of independent directors and does not as of the date of this Form 10-K; however, we intend to return to a majority of independent directors as soon as practicable and are currently in the process of determining the best way to achieve this goal. Also, our board currently does not include a member who meets the requirements of the SEC’s “financial expert” definition which we will take into account when recruiting new board members.

In September 2015, our Board of Directors formed Audit, Compensation, and Nominating and Corporate Governance Committees, and while our Audit Committee currently does not have any independent directors, we continue to maintain the functions of these committees. Until committee vacancies are filled and approved by Board members, the committee roles will be assumed by the entire Board of Directors unless otherwise noted. Additionally, our Board of Directors established a separate Scientific Advisory Board comprised of individuals with strong scientific backgrounds.

Once we commence commercial manufacturing operations, we expect to add additional employees in operating management, sales/marketing, R&D, production, finance and accounting, and business administration from time to time, as necessary, as our business expands and the scale up of production accelerates. In the event a licensing agreement is determined to be the preferred route to first revenues, we will add the requisite personnel necessary to support our obligations under the licensing agreement.

Competition

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

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

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

Licenses and Intellectual Property

In 2010, we entered into an agreement with a third-party provider of industrial process equipment to develop proprietary equipment for continuous production of QDs under which we retained all ownership and rights to the design and any related intellectual property. We have, to date, received two production machines, a 250kg per year capacity unit primarily for internal research and development purposes and sample production, and a larger commercial production unit that process improvements have allowed us to increase from approximately 2,000kg per year when first delivered to 4,000kg per year today. We believe the design of this manufacturing equipment will position us to quickly and efficiently scale up mass production of QDs for commercial sale.

While we plan to work extensively with its current provider of equipment, we own all rights to the designs and intellectual property resulting from the development projects and could contract with one or more other competent suppliers of equipment or build the equipment in-house, if necessary.

Bayer Patents

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

Agreement with Rice University

O n August 20, 2008, Solterra entered into a License Agreement with Rice University, which was amended and restated on September 26, 2011; also, on September 26, 2011, QMC entered into a new License Agreement with Rice (collectively the “Rice License Agreements”). On August 21, 2013, QMC and Solterra each entered into a second amended license agreement with Rice University. QMC and Solterra entered into third amended license agreements with Rice University on March 15 and 24, 2016, respectively.

The Rice License Agreements, as amended, require the payment of certain patent fees to Rice and for QMC and Solterra to meet certain milestones by specific dates. Pursuant to the Solterra Rice License Agreement, as amended, Rice is entitled to receive, during the term, certain royalties of adjusted gross sales (as defined therein) ranging from 2% to 4% for photovoltaic cells and 7.5% of adjusted gross sales for QDs sold in electronic and medical applications.

The Company had verbal agreements with Rice University to modify the minimum royalty due dates that results in the Company being in full compliance with the agreements at March 31, 2017. On June 11, 2017, the Company executed the revised agreements. Per the revised agreements, both Quantum Materials and Solterra shall pay to Rice a non-refundable, non-creditable annual maintenance fee of $10,000 (“Maintenance Fee”) each January 1, beginning on January 1, 2018 and each year thereafter until the first Sale of a Rice Licensed Product. Licensee’s obligation to pay the Maintenance Fee shall terminate upon first Sale of a Rice Licensed Product unless otherwise specified. In addition, Quantum Materials and Solterra shall each pay to Rice an annual minimum royalty payment of $50,000 (“Annual Minimum Royalty”) on January 1 immediately following the first Sale of a Rice Licensed Product and each January 1 of every year thereafter for the term of the revised agreements, regardless of whether sales occur on an ongoing basis. The Annual Minimum Royalty shall be creditable towards royalties due in each respective royalty year, January 1 to December 31, following the due date. As of June 30, 2017, no royalties have been accrued for this obligation.

In February 2018, the Company re-evaluated the Ric Technology and the business case and determined that it was highly unlikely that the Company would be using the cadmium-based Rice technology. The Company’s substantial advancement of cadmium free dots coupled with the high volume, low cost flow technology purchased from Bayer Advanced Materials and further developed by the Company has resulted in the obsolescence of the Rice Technology. The final decision not to continue with the Rice license was driven largely by concerns that the Rice royalties could unduly burden the cost of the Company’s quantum dot products.

Agreement with University of Arizona

Solterra entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On November 22, 2017, Solterra memorialized prior oral agreements and entered into an amended license agreement with UA. Pursuant to UA License Agreement, as amended, Solterra is obligated to pay minimum annual royalties of $50,000 by January 31, 2019, $125,000 by June 30, 2019 and $200,000 on each June 30th thereafter, subject to adjustments for increases in the consumer price index. Such minimum royalty payments shall be credited against royalties due in each respective royalty year, July 1 to June 30, following the due date. Royalties based on net sales are 2% of net sales of licensed products for non-display electronic component applications and 2.5% of net sales of licensed products for printed electronic displays. As of June 30, 2017, no royalties have been accrued for this obligation.

Agreement with Texas State University

The Company entered into a Service Agreement with Texas State University (“TSU”) by which the Company occupies certain office and lab space at TSU’s STAR Park (Science Technology and Advanced Research) Facility. The agreement is month-to-month and can be terminated with 60-days written notice of either party.

Other Intellectual Property

The Company also owns additional intellectual property in the form of proprietary equipment designs, trademarks, trade names, copyrights, scientific and technical know-how, and “trade secrets” that it intends to further develop and apply in its business, seeking to protect same with appropriate governmental filings and/or secrecy agreements. See “Risk Factors” section.

Governmental Approvals

C hemical substances manufactured in the Unites States in quantities of 10,000 kilograms or less per year are exempt from full premanufacture notice (“PMN”) review under section 5 of the Toxic Substances Control Act (“TSCA”). Low Volume Exemption (“LVE”) substances undergo a 30-day review. During fiscal year 2017, we applied for and received a LVE.