[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ] No [X]

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes [X] No [ ] ~~No [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]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

As of ~~November~~February 14, ~~2018,~~2019, there were ~~458,396,956~~501,011,483 shares of common stock, $0.001 par value per share, outstanding.

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

Quantum Materials Corp., a Nevada corporation, and its wholly owned subsidiary, Solterra Renewable Technologies, Inc. (collectively referred to as the “Company”) are headquartered in San Marcos, Texas. The Company is a nanotechnology company specializing in the design, development, production and supply of quantum dots, including tetrapod quantum dots, a high-performance variant of quantum dots, and highly uniform nanoparticles, using its patented automated continuous flow production process. Quantum dots and other nanoparticles are expected to be increasingly utilized in a range of applications in the life sciences, television and display, solid state lighting, solar energy, battery, security ink, and sensor sectors of the market. Key uncertainties and risks to the Company include, but are not limited to, if and how quickly various industries adopt and fully embrace quantum dot technology and technological changes, including those developed by the Company’s competitors, rendering the Company’s technology uncompetitive or obsolete.

The Company recorded losses from continuing operations in the current period presented and has a history of losses. As of ~~June 30,~~December 31, 2018, the Company had a working capital deficit of ~~$5,385,949~~$5,238,276 and net cash used in operating activities was ~~$(184,090)~~$(530,988) for the ~~three~~six months ended ~~September 30,~~December 31, 2018. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing.

In conjunction with anticipated revenue streams, and cash flows from licensing and development agreements, management is currently negotiating equity and debt financing, the proceeds from which would be used to settle outstanding debts, to finance operations, and for general corporate purposes. However, there can be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern.

The accompanying unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.

Basis of Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiaries. All significant inter-company transactions and account balances have been eliminated upon consolidation.

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

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

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

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

~~Debt Issuance Costs:~~ The costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt. Accumulated amortization was $145,545 and $86,555 at June 30, 2018 and 2017, respectively. Amortization expense for the years ended June 30, 2018 and 2017 was $58,990 and $88,956 respectively.

Earnings per Share: The Company accounts for earnings per share in accordance with ASC 260“Earnings Per Share”. Basic earnings per share amounts are calculated by dividing net income (loss) by the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the periods, including the dilutive effect of stock options and warrants granted. Dilutive stock options and warrants that are issued during a period or that expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported.

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

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

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

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

In July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The Company elected to adopt ASU 2017-11 early, effective July 1, 2017, and implemented the pronouncement retrospectively with a cumulative effect adjustment to outstanding financial instruments. The adoption of this guidance did not have an impact on its financial statements. In the fiscal year 2018, the Company had three triggering events related to a down round feature which resulted in recording a charge for beneficial conversion expense of $1,021,500 during the year ended June 30, 2018.

In March 2016, the FASB issued ASU guidance related to stock-based compensation. The new guidance simplifies the accounting for stock-based compensation transactions, including income tax consequences, statement of cash flows presentation, estimating forfeitures when calculating compensation expense, and classification of awards as either equity or liabilities.

The new standard requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit (expense) in the income statement. The new guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than a financing activity and requires presentation of cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation as a financing activity. The new guidance also provides for an election to account for forfeitures of stock-based compensation.

The Company adopted the guidance effective July 1, 2017. With respect to the forfeiture election, the Company will continue its current practice of estimating forfeitures when calculating compensation expense. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.

In March 2016, the FASB issued ASU 2016-09,Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting.This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the guidance effective July 1, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The Company adopted the guidance effective July 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.

In May 2017, the FASB issued ASU 2017-09,Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting.The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The Company adopted the guidance effective July 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.

Effective July 1, 2018, the Company adopted the Financial Accounting Standards Board’s (“FASB”) provisions of ASC 606,Revenue from Contracts with Customers(ASC 606), using the prospective method for all contracts not completed as of the date of adoption. The Company had no contracts not completed as of the date of adoption, nor had contracts that were modified before the effective date.

In February 2016, the FASB issued ASU 2016-02,Leases,which updates guidance on accounting for leases. The update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases; however, this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The standards update is effective for interim and annual periods after December 15, 2018 with early adoption permitted. Entities are required to use a modified retrospective adoption, with certain relief provisions, for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements when adopted. The Company is in the process of evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.

~~In August 2014, the FASB issued ASU No. 2014-15~~~~Preparation of Financial Statements — Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.~~Under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this update should be followed to determine whether to disclose information about the relevant conditions and events. Early adoption is permitted. The Company will continue to evaluate the going concern considerations in this ASU, however, at this time, the Company has not adopted this standard. The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements.

~~In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,~~~~Revenue from Contracts with Customers~~. The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance under current generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining revenue recognition. In August 2015, the FASB issued ASU 2015-14,~~Revenue from Contracts with Customers: Deferral of the Effective Date,~~which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-10,~~Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.~~ Early adoption of this updated guidance is permitted as of the original effective date of December 31, 2016. The Company does not anticipate or expect adoption of this ASU will have a material effect to the consolidated financial statements upon adoption.

Depreciation expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 was ~~$25,006~~$50,007 and ~~$24,850,~~$49,470, respectively.

Amortization expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 ~~$6,864~~$13,775 and ~~$9,637,~~$19,266, respectively.

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2011-04“Fair Value Measurement” as it relates to financial assets and financial liabilities, which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements.

This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Hierarchical levels, as defined in this guidance and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities are as follows:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Valuations based on unobservable inputs reflecting management’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

As of ~~September 30,~~December 31, 2018, and June 30, 2018, the fair value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximates book value due to the short maturity of these instruments. Based upon borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations approximates fair value. As of ~~September 30,~~December 31, 2018, and June 30, 2018, the Company held no investments. The Company hired an independent resource to value its derivative liability as follows (unaudited):

The Company measured the estimated fair value of the convertible debentures using significant other observable inputs, representative of a Level 2 fair value measurement, including the interest and conversion rates for the instruments. The following table sets forth the fair value of the Company’s convertible debentures as of ~~September 30,~~December 31, 2018, and June 30, 2018:

The Company is not a party to any hedge arrangements or commodity swap agreement.

The following table sets forth activity associated with the convertible debentures:

Between September 16, 2014 and October 28, 2014, the Company entered into Convertible Debenture Agreements to obtain a total of $500,050 in gross proceeds from five non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have terms of five years maturing between September 16, 2019 and October 30, 2019. The Debentures bear interest at the rate of 6% per annum and are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.15 per share at any date and will receive an equal number of warrants having a strike price of $0.30 per share and a term of five years. None of the Debentures were converted into common shares during the ~~year~~six months ended ~~June 30,~~December 31, 2018.

Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 was ~~$384~~$768 and ~~$384,~~$768, respectively

As of ~~September 30,~~December 31, and June 30, 2018, $25,050 of principal was outstanding.

On January 15, 2015, the Company entered into Convertible Debenture Agreements to obtain $500,000 in gross proceeds from two non-affiliated parties (collectively hereinafter referred to as the “Debenture Holders”). The Debentures have a term of two years maturing on January 15, 2017 and bear interest at the rate of 8% per annum. The debentures are pre-payable by the Company at any time without penalty. The Debenture Holders have the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.06 per share at any date. The Debenture Holders received 6,250,000 common stock warrants exercisable at $0.06 per share through January 15, 2017. The debt is secured by a security interest in certain microreactor equipment. The Agreement also provides for the investors to have the right to appoint one member to the Company’s Board of Directors in the event any one of the aforementioned debentures are converted into common stock of the Company. On October 10, 2016, the maturity date of the debentures was extended to January 15, 2018 and the 6,250,000 warrants were converted into common stock for total proceeds of $375,000. On January 12, 2018 the debentures were extended for ten days to January 25, 2018. On January 24, 2018, the debentures were extended to December 15, 2018. As compensation for extending the debentures, the Debenture Holders received 3,500,000 shares of Common Stock, which were valued at $0.06 per share, a total of $210,000 recorded as debt extension expense. On January 14, 2019, partial payment was made of $150,000, and the debentures were extended to March 15, 2019.

In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $348,105, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 was ~~$10,082~~$20,164 and ~~$10,082,~~$20,164, respectively.

As of ~~September 30,~~December 31, and June 30, 2018, $500,000 of principal was outstanding.

During the fourth quarter of the year ended June 30, 2017, the Company sold 1,565 Units for total proceeds of $1,565,000 from three affiliated and fourteen non-affiliated parties. In August 2016 the Company sold 200 additional Units for total proceeds of $200,000 and sold $50,000 in proceeds in October 2016. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. The conversion price was reset to $0.012 per share in June 2018 as a result of a triggering event.

In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $609,595, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. The Company recognized accretion of debt discount expense for the ~~years~~six months ended ~~June 30,~~December 31, 2018, and 2017, of $2,564 and ~~$96,331,~~$167,029, respectively.

The Company recognized a beneficial conversion expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018, and 2017, of $0 and $530,000, respectively.

Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018, and 2017, of ~~$26,067~~$52,133 and ~~$31,444,~~$62,267, respectively.

During the years ended June 30, 2018 and 2017, $455,000 and $285,000 of principal was converted into 3,791,666 and 2,375,000 shares of common stock respectively. As of ~~September~~December 30, and June 30, 2018, $1,275,000 of principal was outstanding. As of the date of this report, maturities totaling $825,000 of principal have been extended for one year until March and April of 2019, and the remaining $250,000 have not been extended, and are past due as of the date of this report.

During the third quarter of the year ended June 30, 2017, the Company sold 2,600 Units for total proceeds of $260,000 from five non-affiliated parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.12 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company. In evaluating the accounting treatment of this anti-dilution feature, the Company believes that is has control over whether the anti-dilution feature will be exercised. The Company is able to decide on which type of financing is raised, and thus the Company can prevent the issuance of shares at a price below the anti-dilution strike price. The number of Warrants and exercise price is proportionately adjustable for events including subdivisions, combinations or consolidations, reclassifications, exchanges, mergers, and reorganizations.

In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $73,250, recorded as debt discount and is amortized using the effective interest rate method over the life of the loans, two years. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$1,547~~$3,125 and ~~$8,864,~~$51,468, respectively.

During the year ended June 30, 2018, $200,000 of these debentures converted into 1,666,667 shares of common stock.

Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$1,210~~$2,420 and ~~$5,243,~~$8,894, respectively.

As of ~~September~~December 30, and June 30, 2018, $60,000 of principal was outstanding.

In March 2017, the Company entered into Convertible Promissory Notes with SBI Investment LLC, 2014-1 (“SBI”) and L2 Capital, LLC (“L2 Capital”) to obtain $285,000 in gross proceeds. In connection with the first funding tranche, SBI and L2 received 253,525 and 760,576 common stock warrants, respectively, exercisable at $0.13 per share through March 28, 2022. At each subsequent funding to the first tranche, the Company will issue to each of SBI and L2 Capital warrants to purchase 50% of the total amount of each tranche funded plus the applicable original issue discount, divided by the lesser of (i) the closing bid of the common stock on March 29, 2017 and (ii) the closing bid price of the common stock on the funding date of each respective tranche. The promissory notes have a term of six months from the issuance date and bear interest at the rate of 6% per annum. The promissory notes are not pre-payable by the Company without penalty. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.

In March 2017, the Company entered into an equity purchase agreement (“Eloc”) with SBI and L2 Capital, allowing them to purchase up to $5,000,000 of the Company’s common stock. As consideration for SBI and L2 Capital, the Company agreed to pay SBI and L2 Capital commitment fees of $63,000 and $147,000, respectively. These commitment fees were issued in the form of promissory notes, which bear interest at 8% per annum and have mature nine months from the date of issuance. The promissory notes are convertible into unregistered and restricted shares of Common Stock only if there is an Event of Default as defined in the notes.

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $86,673, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company also recorded original issue discount (“OID”) of $31,850 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months.

The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 and $43,661, respectively.

Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 and ~~$8,364,~~$116,015, respectively.

As of ~~September 30,~~December 31, 2017, the Company no longer had a derivative liability ~~of $307,301, unamortized discount of $69,333,~~related to these notes, and recognized interest expense of ~~$340,476,~~$418,786, and a change in derivative liability benefit of ~~$65,703.~~$373,004. As of ~~September 30,~~December 31, 2018, the Company no longer had a derivative liability, and recognized a change in derivative liability benefit of $0 for the ~~three~~six months ended ~~September 30,~~December 31, 2018.

As of ~~September 30,~~December 31, and June 30, 2018, and 2017, $222,350 of principal was outstanding, respectively. During the year ended June 30, 2018, the Company paid $319,500 of principal.

In June 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 250,000 common stock warrants exercisable at $0.12 per share through June 15, 2020. The promissory note has a term of six months maturing on December 16, 2017 and stipulates a one-time interest charge of eight percent (8%) shall be applied on the issuance date to the principal. The ~~maturity date of the Note was extended to May 1, 2018 in an extension agreement dated April 6, 2018. The~~ promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $54,340, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. Interest expense was recorded for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0. Beneficial conversion expense was recorded for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 and ~~$27,079,~~$45,434, respectively. As of ~~September 30,~~December 31, and June 30, 2018, and 2017, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.

In July 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $100,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $100,000. The Note Holder received 1,000,000 shares of common stock and 250,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note ~~has~~originally had a term of six months maturing on December 16, 2017 and stipulates aan interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to ~~May24,~~May 24, 2018 in an extension agreement dated April 6, 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,010 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $100,000. The Company recorded a debenture discount of $53,876 and a beneficial conversion expense of $45,544. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 and ~~$21,300,~~$48,398, respectively. As of ~~September 30,~~December 31, and June 30, 2017, $100,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.

As part of the extension agreement, a derivative liability was created, in connection to a “make-whole” provision. The value of this derivative at September 30, 2018 was $49,798, and a change in derivative liability expense of $28,561 for the three months then ended. This derivative liability was settled for 1,591,549 shares during the second quarter of 2018, resulting in additional interest expense of $18,002 during the six months ended December 31, 2018.

Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 and $8,000, respectively.

In September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $150,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $150,000. The Note Holder received 1,650,000 shares of common stock and 375,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note ~~has~~had a term of six months maturing on March 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to February 1, 2019 in an extension agreement dated May 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,420 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized a fair value of the common shares issued at $165,000. The Company recorded a debenture discount of $82,720 and a beneficial conversion expense of $45,219. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 and ~~$8,587,~~$49,708, respectively. As of ~~September 30,~~December 31, and June 30, 2018, $150,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.

As part of the extension agreement, a derivative liability was created, in connection to a “make-whole” provision. The value of this derivative at September 30, 2018 was $22,666, and a change in derivative liability expense of $14,483 for the three months then ended. This derivative liability was settled for 1,781,690 shares during the second quarter of 2018, resulting in additional interest expense of $53,234 during the six months ended December 31, 2018.

Interest expense for the ~~three~~six months ended ~~June 30,~~December 31, 2018 and 2017 of $0 and $12,000, respectively.

In September 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $450,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $495,000. The Note Holder received 10,000,000 shares of common stock and 2,000,000 common stock warrants exercisable at $0.12 per share through September 11, 2000. The promissory note ~~has~~had a term of seven months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to January 26, 2019 in an extension agreement dated April 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $318,337 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, seven months. The Company also recorded original issue discount (“OID”) of $45,000 as debt discount and is amortized using the effective interest rate method over the life of the loan, eight months. The Company recognized a fair value of the common shares issued at $1,000,000. The Company recorded a debenture discount of $318,337 and a beneficial conversion expense of $131,663. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 and ~~$7,429,~~$142,198, respectively. As of ~~September 30,~~December 31, and June 30, 2018, $495,000 of principal was outstanding. In May 2018 the maturity date was extended to February 1, 2019.

As part of the extension agreement, a derivative liability was created, in connection to a “make-whole” provision. The value of this derivative at September 30, 2018 was $43,998, and a change in derivative liability expense of $28,864 for the three months then ended. This derivative liability was settled for 7,432,432 shares during the second quarter of 2018, resulting in additional interest expense of $283,029 during the six months ended December 31, 2018.

Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 and $36,000, respectively.

In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $225,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $247,500. The promissory note has a term of six months maturing on April 26, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to January 26, 2019 in an extension agreement dated April 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

The Company also recorded original issue discount (“OID”) of $22,500 as debt discount and is amortized using the effective interest rate method over the life of the loan, six months.

As of ~~September 30,~~December 31, and June 30, 2018, $247,500 of principal was outstanding.

Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 and $18,000, respectively.

In November 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $27,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $27,000. The Note Holder received 416,600 common stock warrants exercisable at $0.15 per share through November 7, 2022. The promissory note has a term of 24 months maturing on November 13, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the Company allocated the fair value of the warrants to the proceeds received in the amount of $8,310 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 24 months. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$780~~$1,576 and ~~$0,~~$492, respectively. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$552~~$1,104 and ~~$0,~~$294, respectively. As of ~~September 30,~~December 31, and June 30, 2018, $27,000 of principal was outstanding.

In December 2017, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $75,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $75,000. The Note Holder received 1,000,000 shares of common stock and 250,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months maturing on June 30, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 30, 2019 in an extension agreement dated June 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $16,176 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$0.~~$0 and $1,125, respectively. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$0.~~$0 and $6,000, respectively. As of ~~September 30,~~December 31, and June 30, 2018, $75,000 of principal was outstanding.

The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at September 30, 2018 was $10,380, and a change in derivative liability expense of $8,061 for the three months then ended. This derivative liability was settled for 809,160 shares during the second quarter of 2018, resulting in additional interest expense of $21,420 during the six months ended December 31, 2018.

In February 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $45,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $45,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through December 27, 2020. The promissory note has a term of 6 months maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to February 8, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $9,046 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,546 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $6,761 and $0, respectively. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0. As of ~~September 30,~~December 31, and June 30, 2018, $45,000 of principal was outstanding.

The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at September 30, 2018 was $64, and a change in derivative liability expense of $64 for the three months then ended. This derivative liability was settled for 582,955 shares during the second quarter of 2018, resulting in additional interest expense of $25,650 during the six months ended December 31, 2018.

In March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $30,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through March 6, 2021. The promissory note ~~has~~had a term of 6 months maturing on August 8, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 6, 2019 in an extension agreement dated August 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,625 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $23,374 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $8,677 and $0, respectively. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 was recognized. As of ~~September 30,~~December 31, and June 30, 2018, $30,000 of principal was outstanding.

In March 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $35,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $35,000. The Note Holder received 1,500,000 shares of common stock and 500,000 common stock warrants exercisable at $0.12 per share through March 23, 2021. The promissory note has a term of six months maturing on September 23, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to March 23, 2019 in an extension agreement dated September 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,702 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $26,298 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $12,254 and $0, respectively. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0. As of ~~September 30,~~December 31, and June 30, 2018, $35,000 of principal was outstanding.

The debenture agreements above include a “make-whole” provision, creating a potential derivative liability. The value of this derivative at ~~September 30,~~December 31, 2018 was ~~$2,073,~~$20,823, and a change in derivative liability expense of ~~$2,078~~$18,751 for the ~~three~~six months then ended.

In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $60,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $60,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through April 26, 2021. The promissory note has a term of approximately 6 months maturing on November 1, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The maturity date of the Note was extended to May 1, 2019 in an extension agreement dated September 2018. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $6,175 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $41,175 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, six months. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$20,673~~$26,720 and $0, respectively. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 was recognized. As of ~~September 30,~~December 31, and June 30, 2018, $60,000 of principal was outstanding.

The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at ~~September 30,~~December 31, 2018 was ~~$48,~~$2,230, and a change in derivative liability expense of ~~$48~~$2,182 for the ~~three~~six months then ended.

In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $70,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $70,000. The Note Holder received 1,000,000 shares of common stock and 200,000 common stock warrants exercisable at $0.12 per share through April 25, 2021. The promissory note has a term of 2 years maturing on April 25, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $0 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,188 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$3,685~~$7,444 and $0, respectively. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$2,458~~$2,862 and $0 was recognized, respectively. As of ~~September 30,~~December 31, and June 30, 2018, $70,000 of principal was outstanding.

In April 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $20,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $20,000. The Note Holder received 1,166,660 common stock warrants exercisable at $0.15 per share through April 25, 2023. The promissory note has a term of 2 years maturing on April 19, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,384 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $14,384 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 2 years. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$1,709~~$3,452 and $0, respectively. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$724~~$818 and $0 was recognized, respectively. As of ~~September 30,~~December 31, and June 30, 2018, $20,000 of principal was outstanding.

In June 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $40,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $40,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through June 7, 2021. The promissory note has a term of approximately 7 months maturing on December 31, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $8,044 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $31,957 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of ~~$13,583~~$27,440 and $0, respectively. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 of $0 was recognized. As of ~~September 30,~~December 31, and June 30, 2018, $40,000 of principal was outstanding.

The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at ~~September 30,~~December 31, 2018 was $0, and there was no benefit nor expense for change in derivative liability for the ~~three~~six months then ended.

In July 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $45,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $45,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through July 9, 2021. The promissory note has a term of approximately 7 months maturing on January 31, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $7,235 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $33,485 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 of ~~$12,260.~~$26,667. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 of $3,600 was recognized. As of ~~September 30,~~December 31, $45,000 of principal was outstanding.

The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at ~~September 30,~~December 31, 2018 was ~~$0,~~$68, and ~~there was no benefit nor expense for~~a change in derivative liability expense of $68 for the ~~three~~six months then ended.

In August 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $30,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $30,000. The Note Holder received 1,250,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through August 27, 2021. The promissory note has a term of approximately 7 months maturing on March 30, 2019 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $5,160 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $22,659 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 of ~~$4,450.~~$14,122. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 of $2,400 was recognized. As of ~~September 30,~~December 31, 2018, $30,000 of principal was outstanding.

The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at ~~September 30,~~December 31, 2018 was ~~$0,~~$1,338, and ~~there was no benefit nor expense for~~a change in derivative liability expense of $1,338 for the ~~three~~six months then ended.

In September 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $25,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $25,000. The Note Holder received 2,000,000 shares of common stock and 1,000,000 common stock warrants exercisable at $0.12 per share through September 17, 2021. The promissory note has a term of approximately 7 months maturing on April 30, 2018 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.12 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $4,475 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $19,058 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 7 months. The Company recognized accretion of debt discount expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 of ~~$1,067.~~$9,148. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 of $2,000 was recognized. As of ~~September 30,~~December 31, 2018, $25,000 of principal was outstanding.

The debenture agreement includes a “make-whole” provision, creating a potential derivative liability. The value of this derivative at ~~September 30,~~December 31, 2018 was ~~$0,~~$1,435, and ~~there was no benefit nor expense for~~a change in derivative liability expense of $1,435 for the ~~three~~six months then ended.

During the second quarter of the year ended June 30, 2019, the Company sold 52 Units for total proceeds of $52,000 from three affiliated and fourteen non-affiliated parties. Each Unit consists of a $1,000 Unsecured Convertible Promissory Note (each, a “Note”) and a warrant to purchase 4,166 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a purchase price of $0.15 per share (each, a “Warrant”) over a period of five years. An additional 45,826 warrants with identical terms, were granted with this debenture. The Notes which were issued at face value have a maturity of two years from the date of issuance, bear interest at the rate of 8% per annum and are convertible into unregistered and restricted shares of Common Stock at $0.08 per-share, subject to normal and customary adjustments including (a) any subdivisions, combinations and classifications of the Common Stock; or (b) any payment, issuance or distribution by the Company to its stockholders of (i) a stock dividend, (ii) debt securities of the Company, or (iii) assets (other than cash dividends payable out of earnings or surplus in the ordinary course of business). The conversion price also is subject to a full ratchet adjustment upon the Company’s issuance of Common Stock, warrants, or rights to purchase Common Stock or securities convertible into Common Stock for a consideration per share which is less than the then applicable conversion price of the Notes excluding Common Stock and options issued to officers, directors, and employees of the Company, except for the exercise or conversion of existing convertible securities of the Company.

In accounting for the convertible debentures, the Company allocated the fair value of the warrants to the proceeds received in the amount of $6,835, recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, two years. The Company recognized accretion of debt discount expense for the six months ended December 31, 2018, and 2017, of $264 and $0, respectively.

Interest expense for the six months ended December 31, 2018, and 2017, of $300 and $0, respectively.

In December 2018, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note to obtain $350,000 in gross proceeds from a non-affiliated party (collectively hereinafter referred to as the “Note Holder”) in exchange for a convertible promissory note in the principal amount of $350,000. The Note Holder received 3,000,000 shares of common stock and 5,000,000 common stock warrants exercisable at $0.04 per share through December 26, 2021. The promissory note has a term of 20 months maturing on August 14, 2020 and stipulates an interest charge of eight percent (8%) shall be applied to the principal. The promissory note is pre-payable by the Company at any time without penalty. The Note Holder has the right of conversion into unregistered and restricted shares of Common Stock at a conversion price of $0.03 per share at any date. The promissory note includes piggyback registration rights and the Company shall include on the next registration statement it files with the SEC all shares issuable upon conversion of the note.

In accounting for the convertible promissory note, the company recorded a beneficial conversion expense of $126,908 and the Company allocated the fair value of the warrants to the proceeds received in the amount of $126,908 recorded as debt discount and is amortized using the effective interest rate method over the life of the loan, 20 months. The Company recognized accretion of debt discount expense for the six months ended December 31, 2018 and 2017 of $1,191 and $0, respectively. Interest expense for the six months ended December 31, 2018 and 2017 of $385 and $0 was recognized, respectively. As of December 31, and June 30, 2018, $350,000 of principal was outstanding.

The costs related to the issuance of debt are presented on the balance sheet as a direct deduction from the related debt and amortized to interest expense using the effective interest method over the maturity period of the related debt. Amortization expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 was ~~$90,010~~$151,403 and ~~$24,376~~$725,007 respectively.

In September 2018, the Company issued a promissory note secured by the Company’s CEO for $20,000 with interest rate of 6%, maturing on March 9, 2019. The note is convertible into the Company’s common stock, at the lenders discretion, at a rate of ~~$.04~~$0.04 per share, with warrants to purchase an equal amount of stock. Interest expense for the ~~three~~six months ended ~~September 30,~~December 31, 2018 was ~~$69.~~$319. As of ~~September 30,~~December 31, 2018, $20,000 of principal was outstanding.

During the ~~three~~six months ended ~~September 30,~~December 31, 2018, the Company issued ~~3,031,375~~15,048,042 shares for ~~$121,255~~$602,922 in consulting services, $61,255 of which was accrued at June 30, 2018.

During the ~~three~~six months ended ~~September 30,~~December 31, 2018, the Company issued ~~344,055~~757,800 shares of common stock at the fair market value of ~~$21,997~~$43,463 for payment of debenture interest.

During the ~~three~~six months ended ~~September 30,~~December 31, 2018, the Company issued ~~4,516,553~~16,714,339 shares of common stock at the fair market value of ~~$180,663~~$708,840 in connection with debenture derivative liabilities, relieving ~~$51,777~~$126,842 of the derivative ~~liability.~~liability, and resulting in $401,355 of additional interest expense.

~~During the three months ended September 30, 2018, the Company issued 513,333 shares of common stock valued at $30,800, in shares that were recorded as common stock issuable at June 30, 2018.~~

As of ~~September 30,~~December 31, 2018, the company owed a total of ~~31,313,779~~19,653,779 shares of common stock. 3,500,000 shares were in exchange for extinguishment of a $150,000 debenture, with a fair value of $280,000. 991,279 shares were for the settlement of a derivative liability related to price protection in the extinguishment agreement, with a fair value of $39,651. 600,000 shares were in relation to the extension of debt, with a fair value of $36,000. ~~23,750,000~~14,250,000 shares were in relation to a new debenture borrowing of ~~$835,000~~$615,000 in aggregate, valued at ~~$506,096. 1,430,833~~$150,524. 312,500 shares were in relation to the sale of shares for cash, valued at ~~$73,900. 1,041,667 shares were in exchange for services, with a fair value of $43,333.~~$12,500. These subscribed shares also included 702,250 warrants to purchase shares of common stock at $0.04 per share. The shares are included in the weighted average shares outstanding for purposes of calculation earning per share for the three and ~~three~~six months ended ~~September 30,~~December 31, 2018.

~~513,333~~15,173,333 shares with a fair value of ~~$30,800,~~$491,105, were issued, reducing shares issuable, during the ~~three~~six months ended ~~September 30,~~December 31, 2018.

A summary of activity of the Company’s stock warrants for the ~~three~~six months ended ~~September 30,~~December 31, 2018 is presented below (unaudited):

Outstanding warrants at ~~September 30,~~December 31, 2018 expire during the period February 2019 to ~~April~~December 2023 and have exercise prices ranging from $0.03 to $0.30, valued at ~~$4,538,009.~~$4,805,468. These warrants are issued for salary conversions of employees and consultants, and the origination warrants related to debentures.

The Company follows FASB Accounting Standards Codification (“ASC”) 718“Compensation — Stock Compensation”for share-based payments which requires all stock-based payments, including stock options, to be recognized as an operating expense over the vesting period, based on their grant date fair values.

In October 2009 the Board of Directors authorized the approval of a stock option plan covering 7,500,000 shares of common stock, which was increased to 10,000,000 shares in December 2009 and approved by stockholders in January 2010. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of ~~September 30,~~December 31, 2018, 9,200,000 options have been granted, with terms ranging from five to ten years, and 800,000 have been cancelled leaving a balance of 8,400,000 of options outstanding. During the ~~three~~six months ended ~~September 30,~~December 31, 2018, we issued 1,500,000 shares of restricted stock out of the plan, leaving 100,000 options or grants available for grant under the plan.

In March 2012, 3,500,000 stock options, with a term of five years, were granted outside of a stock option plan. In March 2017, the term of these options was extended for an additional five years. In June 2016, and 2017, 6,000,000 and 17,000,000 stock options, with a term of ten years, were granted, respectively, outside of a stock option plan, and 3,000,000 shares were cancelled, leaving a balance of 23,500,000 outstanding outside of a defined option plan.

In January 2013 the Board of Directors authorized the approval of a stock option plan covering 20,000,000 shares of common stock, which was increased to 60,000,000 shares in March 2013 and approved by stockholders in March 2013. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of ~~September 30,~~December 31, 2018, ~~72,653,473~~80,153,473 options have been granted, with terms ranging from five to ten years, 3,325,000 have been exercised and 18,886,559 have been cancelled, and ~~50,441,914~~57,941,914 remain outstanding.

On February 17, 2016, the Shareholders approved the 2015 Employee Benefit and Consulting Services Compensation Plan covering 15,000,000 shares. The Plan provides for the direct issuance of common stock and the grant of incentive and non-incentive stock options. As of ~~September~~December 30, 2018, 4,900,000 options have been granted with a term of five years, and 1,625,000 have been cancelled leaving a balance outstanding of 3,275,000 options.

Incentive Stock Options: The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes-Merton valuation model. The volatility is based on expected volatility over the expected life of thirty-six to sixty months. Compensation cost is not reduced by the Company for estimated forfeitures based on historical forfeiture rates for options granted after July 1, 2018. For grants prior to July 1, 2018, compensation cost was recognized based on awards that are ultimately expected to vest, therefore, the Company has reduced the cost for estimated forfeitures based on historical forfeiture rates, which were between 14% and 17% ~~during the three months ended September 30, 2018.~~. As the Company has not historically declared dividends, the dividend yield used in the calculation is zero. Actual value realized, if any, is dependent on the future performance of the Company’s common stock and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes-Merton model.

The computation of expected volatility during the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 was based on the historical volatility. Historical volatility was calculated from historical data for the time approximately equal to the expected term of the option award starting from the grant date. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve in effect at the time of grant for the period corresponding with the expected life of the option. ~~As no options were granted during the three months ended September 30, 2018, no corresponding assumptions were calculated.~~

A summary of the activity of the Company’s stock options for the ~~three~~six months ended ~~September 30,~~December 31, 2018 is presented below (unaudited):

Outstanding options at ~~September 30,~~December 31, 2018, expire during the period February 2019 to June 2026 and have exercise prices ranging from ~~$0.05~~$0.03 to $0.17.

Compensation expense associated with stock options for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 was ~~$207,452~~$535,155 and ~~$207,451~~$511,728 respectively and was included in general and administrative expenses in the consolidated statements of operations.

At ~~September 30,~~December 31, 2018, the Company had ~~6,982,167~~10,732,167 shares of nonvested stock option awards. The total cost of nonvested stock option awards which the Company had not yet recognized was ~~$487,582~~$463,807 at ~~September 30,~~December 31, 2018. Such amounts are expected to be recognized over a period of 1.0 years.

Restricted Stock: To encourage retention and performance, the Company granted certain employees restricted shares of common stock with a fair value per share determined in accordance with conventional valuation techniques, including but not limited to, arm’s length transactions, net book value or multiples of comparable company earnings before interest, taxes, depreciation and amortization, as applicable. Generally, the stock vests over a 3-year period. A summary of the activity of the Company’s restricted stock awards for the ~~three~~six months ended ~~September 30,~~December 31, 2018, and year ended June 30, 2018 is presented below (unaudited):

Compensation expense associated with restricted stock awards for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 was $0 and ~~$50,222,~~$99,046, respectively, and was included in general and administrative expenses in the consolidated statements of operations.

The total cost of nonvested stock awards which the Company had not yet recognized was $0 at ~~September 30,~~December 31, 2018.

The Company follows ASC 260,“Earnings Per Share”, for share-based payments that are considered to be participating securities within the definition provided by the standard. All share-based payment awards that contained non-forfeitable rights to dividends, whether paid or unpaid, were designated as participating securities and included in the computation of earnings per share (“EPS”).

The following table sets forth the computation of basic and diluted loss per share:

Solterra entered into an exclusive Patent License Agreement with the University of Arizona (“UA”) in July 2009. On March 3, 2017, Solterra 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 June 30, 2017, $125,000 by September 15, 2017 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. The UA License Agreements and subsequent amendments have been filed on Form 8-K and are incorporated by reference herein. The Company is in the process of renegotiating the minimum royalty commitments and while oral modifications have been agreed to a final amendment has not been finalized. As of ~~September 30, 2017,~~December 31, 2018, no royalties have been accrued for this obligation.

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.

The Company leases certain office and lab space under a month-to-month operating lease agreement.

Rental expense for the operating lease for the ~~three~~six months ended ~~September 30,~~December 31, 2018 and 2017 was ~~$18,864~~$63,572 and ~~$29,952,~~$108,812, respectively.

The Company was served in Hays County, Texas in a complaint for breach of contract in February 2017. In April 2017, the Company settled this complaint for $129,000 payable over a four-month period. As of the filing date of this Form 10-Q, the balance in arrears is $95,000 plus interest and other charges which has been accrued at September 30, 2018. The Company repaid $237,300 in principal plus interest to L2 Capital LLC and $101,700 plus interest to SBI Investments LLC on September 30, 2017, and $149,555 plus interest to L2 Capital LLC and $64,095 plus interest to SBI Investments LLC on November 3, 2017, respectively.

Two lenders, SBI Investments LLC, 2014-1, and L2 Capital, LLC, asked Quantum Materials’ transfer agent, Empire Stock Transfer, Inc., to set aside fifty-million (50,000,000) shares of stock as collateral for four loan agreements Quantum Materials had entered into in late March 2017. This joint request occurred despite the fact that or about September 30, 2017 Quantum had repaid $339,000 (plus accrued interest of $10,170) on two of the loans. Subsequently, in November 2017, the Company also repaid $213,650 and $8,636 of accrued interest on two of the remaining loans on their due dates.

Quantum filed suit for an injunction to stop the release of the stock. The two lenders, SBI Investments LLC, 2014-1 (SBI), and L2 Capital, LLC (L2), hired the national law firm of K&L Gates to stop the injunction; problematically, this same firm had previously represented Quantum Materials. Quantum filed a motion to disqualify the law firm for that conflict, and they subsequently withdrew.

New counsel for SBI and L2, Cleveland Terrazas PLLC, brought suit against Quantum for $1.5 million on the four notes that had been repaid and were not in actual default, though SBI Investments LLC, 2014-1, and L2 Capital, LLC claimed technical defaults. The court in Hays County granted Quantum’s temporary injunction and set the full case for trial. The next day, SBI Investments LLC, 2014-1, and L2 Capital, LLC dismissed their suit against Quantum and refiled similar actions in Kansas and Florida on the notes claiming that one note was paid on a Monday when it was due on a Sunday, demanding late payment in stock (they refused cash), and another was paid on a Friday when it was due Saturday, claiming a pre-payment penalty. All three suits are related to the same transactions. The lenders claim 140% interest, attorney’s fees, 20 million shares of stock, and damages. Quantum maintains all loans have been paid timely.

The Company denies all the above-mentioned allegations and will vigorously defend all claims.

The Kansas lawsuit is based on the same nucleus of facts. The putative default is the failure to properly and timely file a Form S-1 with the SEC. Three causes of action are alleged: the first is breach of contracts regarding the Registration Rights Agreement against Quantum; the second claim is for breach of contract of the first L2 promissory note against Quantum; the final claim is for breach of contract regarding the second L2 promissory note against both Quantum and Squires, individually.

The Company denies all the above-mentioned allegations and will vigorously defend all claims.

The Florida lawsuit largely mirrors the suit in Kansas; defaults are alleged as follows:

On July 6, 2017, Quantum filed a revised Form 10-Q/A report (the Report) with the SEC, restating its financial statements. In comparison to the unrestated financial statement previously filed by Quantum, the Revised Report materially and adversely affects SBI’s rights with respect to the notes. This restatement of financial statements constituted a breach of each of the notes. Furthermore, because each note contains a cross-default clause, each of Quantum’s breaches of a specific note also constituted a breach of every other note.

On July 27, 2017, Quantum’s auditor resigned, and replaced its auditor without seeking or obtaining the consent of SBI. This replacement of Quantum’s auditor constituted an alleged breach of the SBI notes. Because each note contains a cross-default clause, each of Quantum’s breaches of a specific note also constituted a breach of every other note.

The Company denies all of the above-mentioned allegations and will vigorously defend all claims.

The case was reheard in late March 2018 and a 45-day continuance was decided resulting in an April 30, 2018 rehearing. After a day of litigation in San Marcos, QTMM’s motion to enjoin L2 and SBI and prevent them from obtaining stock before a full trial on the merits was granted on October 27, 2017, by Judge Gary Steel. L2 and SBI objected to the injunction and appealed to the Third Court of Appeals in Austin, TX. On March 8, 2018, in a unanimous opinion, the Third Court of Appeals denied the appeal, sustained the injunction in favor of QTMM and awarded costs of court.

On March 29, 2018, at a discovery hearing, wherein QTMM asked the court to order L2 and SBI to produce evidence to support their positions, L2 and SBI requested and received a stay of litigation, postponing the trial date of April 2018, which they had previously requested, and also postponing discovery until rulings in Florida and Kansas, or until further order of the court. The court also announced that when Florida and Kansas have spoken, discovery will be expedited. A jurisdiction hearing for the Florida case on August 15, 2018 resulted in the lawsuit being dismissed and a hearing is scheduled in Kansas in April 2019.

The Company expects to successful in the L2 and SBI litigation. The ultimate outcome is not determinable and as such, no liability has been recorded for this contingent liability at ~~March~~December 31, 2018.

In September 2017, Quantum filed an injunction suit against two of its lenders, SBI Investments, LLC, 2014-1 and L2 Capital LLC, in Hays County, Texas (428th Judicial District; Cause No. 17-2033). On October 2017, these two lenders intervened in the proceeding, asserted affirmative claims for monetary damages against Quantum, and opposed Quantum’s request for temporary injunctive relief. The lenders’ law firm was K&L Gates. In 2016, the Board of Directors for Quantum retained the law firm of K&L Gates. In this professional capacity, K&L Gates attended confidential board meetings and reviewed, inter alia, corporate secrets. K&L Gates billed approximately $100,000 per month. The Company has accrued $319,000 in relation to this action. Quantum moved to disqualify K&L Gates. The day before Quantum’s motion to disqualify was ruled on, K&L Gates withdrew in lieu of the Austin law firm Cleveland & Terrazas. On September 21, 2018, the “Deputy General Counsel of K&L Gates,” Mr. Charles Tea, sent a demand for payment of over $300,000 to Quantum’s CEO. On October 16, 2018, Quantum filed suit against K&L Gates alleging Breach of Fiduciary Duty, Deceptive Trade Practices, and Legal Malpractice.

The following is supplemental disclosure of non-cash investing and financing activities:

At ~~September~~December 31, 2018 and June 30, 2018, ~~and 2017,~~ the Company had accrued salaries payable to executives in the amount of ~~$593,075~~$536,825 and ~~$284,275,~~$568,575, respectively.

During the year ended June 30, 2017, the Company issued a convertible debenture to a family member of a former key executive for proceeds of $200,000. This transaction is described in more detail in Note 5 under the debenture reference C) April – June, August, October and November 2016 Convertible Debentures.

~~In September 2016, the Company’s former Chief Financial Officer loaned the Company $100,000 to provide short-term bridge financing. The Company repaid the loan on October 11, 2016.~~

~~Quantum v. K&L Gates, Inc., 18-2393, pending in Hays County, Texas.~~January 2015 Convertible Debenture — On January 14, 2019, partial payment was made of $150,000, and the debentures were extended to March 1, 2019. The payment was allocated first to interest, the remainder was allocated to outstanding principal. $7,890 was allocated to interest, and $143,110 was principal payment.

In September 2017, Quantum filed an injunction suit against two of its lenders, SBI Investments, LLC, 2014-1 and L2 Capital LLC, in Hays County, Texas (428th Judicial District; Cause No. 17-2033). On October 2017, these two lenders intervened in the proceeding, asserted affirmative claims for monetary damages against Quantum, and opposed Quantum’s request for temporary injunctive relief. The lenders’ law firm was K&L Gates. Quantum moved to disqualify K&L Gates. In this professional capacity, K&L Gates attended confidential board meetings and reviewed, inter alia, corporate secrets. K&L Gates billed approximately $100,000 per month. The Company has accrued legal expenses of $319,000 in relation to this action. The day before Quantum’s motion to disqualify was ruled on, K&L Gates withdrew in lieu of the Austin law firm Cleveland & Terrazas. On September 21, 2018, the “Deputy General Counsel of K&L Gates,” Mr. Charles Tea, sent a demand for payment of over $300,000 to Quantum’s CEO. On October 16, 2018, Quantum filed suit against K&L Gates alleging Breach of Fiduciary Duty, Deceptive Trade Practices, and Legal Malpractice.

During the period ~~October~~January 1, ~~2018~~2019 through the date of this report, the Company issued ~~2,041,667~~5,500,000 for ~~services, which were issuable at September 30, 2018.~~services.

During the period ~~October~~January 1, ~~2018~~2019 through the date of this report, the Company issued ~~1,118,333 in issuable shares sold in the quarter ended September 30, 2018.~~

~~During the period October 1, 2018 through the date of this report, the Company issued 4,182,399~~1,664,894 shares in connection with the settlement of the recorded derivative liability, which was ~~$129,030~~$9,835 as of ~~September 30,~~December 31, 2018.

During the period ~~October~~January 1, ~~2018~~2019 through the date of this report, the Company issued ~~51,576~~1,500,000 shares ~~for the payment~~which were issuable at December 31, 2018, in connection with a debenture entered into March of ~~interest.~~2018.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Form 10-Q contains “forward-looking statements” relating to us which represent our current expectations or beliefs, including statements concerning our operations, performance, financial condition and growth. For this purpose, any statements contained in this report that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “anticipation”, “intend”, “could”, “estimate”, or “continue” or the negative or other comparable terminology are intended to identify forward-looking statements.

Statements contained herein that are not historical facts are forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, the forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and those actual results may differ materially from those in the forward-looking statements. Such risks and uncertainties include, without limitation: well-established competitors who have substantially greater financial resources and longer operating histories, regulatory delays or denials, ability to compete as a start-up company in a highly competitive market, and access to sources of capital.

The following discussion should be read in conjunction with the Company’s risk factors, consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Form 10-K filed October 15, 2018 for the fiscal year ended June 30, 2018. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear herein. The Company’s actual results could differ materially from those discussed here.

The financial information furnished herein has not been audited by an independent accountant; however, in the opinion of management, all adjustments (only consisting of normal recurring accruals) necessary for a fair presentation of the results of operations for the ~~three-month period~~three and six-month periods ended ~~September 30,~~December 31, 2018 and 2017 have been included.

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. 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.

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 substantially higher 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 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, but we anticipate rapid growth of the QD market.

We were formed in January 2007 as a Nevada corporation in the business of the exploitation of mineral interests. We acquired Solterra in November 2008 and changed our business to the development of QDs.

In October 2008, Solterra 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 Board of Directors.

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”).

The Bayer Patents, the UA License, organically developed technologies and our proprietary continuous flow manufacturing process comprise our fundamental asset platform. We believe 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.

In 2016, Mr. Squires 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, we have been able to continually refine and increase the throughput of our production equipment to the metric ton range of QDs per year. All our discoveries are purposely developed to be compatible with our patented flow manufacturing process. Management believes that this and a number of other material performance enhancement discoveries made by us provide us with the ability to provide industry leading material performance at a very competitive price point.

In November 2018, the Company entered into a license and development agreement with Amtronics India LLC related to the volume production of quantum dots in Assam, India. The agreement is part of a larger project for the design, training, research and development of a quantum dot manufacturing facility in Assam. This project has been under discussion for nearly three years. A ground-breaking ceremony took place in Assam on January 16, 2019, and the Company anticipates operations being established and operational prior to year-end 2019. In addition to an upfront fee and royalty, the agreement provides for the Company to sell equipment and training services, which the Company expects will provide additional revenues.

The Company believes that the terms of the licensing agreement will enable the Company to begin to leverage its intellectual property portfolio and to begin generating revenues without overburdening the Company’s scientific staff in a manner that would disrupt new discovery. The other participants in the Assam project have the responsibility of, among other things, developing the site, constructing the facilities and hiring staff. The Company has agreed to construct and supply the proprietary equipment, assisting in the development and scale up of the 3^rd generation solar, display and SSL products, training and providing a broad range of consulting services at additional cost, representing a potential ongoing revenue opportunity for the Company.

On or about December 23, 2018, Assam Electronics Development Corporation LTD (an Indian government enterprise involved in the development of the manufacturing facility in India) paid the first investment of $1M USD into the overall project fund. Amtronics then transferred a $500K USD commitment fee to the group that has secured the $20M investment funding. In terms of direct funding to the Company, on December 29, 2018 the Company received a letter from the managing director of the Assam Electronics Development Corporation LTD confirming that the $1M USD upfront license fee would be paid to the Company on or before January 31, 2019. The Company has recently been provided additional validation that the governmental transfer approval was complete and that funds should be received by the Company on or before February 20, 2019.

In addition to Company’s efforts to commercialize its QD-LED remote phosphor technology for displays, the Company plans for its core focus in the first half of 2019 to be research and development for the optimization of its 3^rd generation perovskite QD based solar technology in preparation of scaling up to commercial production levels in Assam, India.

We have continued to maintain aggressive cost control measures, never forgetting this is a marathon and not a sprint. We are continuing to focus more resources on R&D and with our continuous flow technology we have been able to leverage every dollar spent. To further streamline our operations, we have continued to analyze our operating costs and make reductions whenever and wherever possible. To that end we have recently changed transfer agents in order to further reduce overhead cost and we have made additional cost cutting measures in our compliance operations to reduce audit fees.

The Company recorded losses from continuing operations in the current period presented and has a history of losses. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing.

In conjunction with anticipated revenue streams, management is currently negotiating equity and debt financing, the proceeds from which would be used to settle outstanding debts, to finance operations, and for general corporate purposes. However, there can be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern, if at all.

The Company has continued to maintain aggressive cost control measures, although we plan on increasingly to focus more resources on research and development during the last half of fiscal year 2019, and fiscal year 2020. To further streamline operations, the Company has continued to analyze its operating costs and to make reductions where management believes prudent. To that end, the Company has recently changed transfer agents in order to further reduce overhead cost and has made additional cost cutting measures.

The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.

As of ~~September 30,~~December 31, 2018, we had a working capital deficit of ~~$5,385,949,~~$5,238,276, with total current assets and liabilities of ~~$1,230,813~~$1,154,037 and ~~$6,616,762~~$6,392,014 respectively. Included in the liabilities are ~~$1,372,450~~$779,125 owed to our officers, directors and employees for services rendered and accrued through ~~September 30,~~December 31, 2018, ~~$3,472,214~~$3,403,402 of convertible debentures, net of unamortized discount and ~~$119,447~~$191,979 of notes payable that are due within one year. As a result, we have relied on financing through the issuance of common stock and convertible debentures.

As of ~~September 30,~~December 31, 2018, we have cash and cash equivalent assets of ~~$21,835.~~$325,437. We continue to incur losses in operations. Over the past five years we have primarily relied on sales of common stock and debt instruments to support operations as well as employees and consultants agreeing to defer payment of wages and fees owed to them and/or converting such wages and fees into securities of the Company. Management believes it may be necessary for the Company to rely on external financing to supplement working capital to meet the Company’s liquidity needs in the fiscal years ended 2019 and 2020; the success of securing such financing on terms acceptable to the Company, if at all, cannot be assured. If we are unable to achieve the financing necessary to continue our plan of operations, our stockholders may lose their entire investment in the Company.

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

Operating Activities. Net cash used in operating activities was ~~$184,090~~$530,988 for the ~~three~~six months ended ~~September 30,~~December 31, 2018 compared to ~~$345,128~~$608,231 for the same period of 2017, a decrease in cash used of ~~$161,038.~~$77,243. The decrease was primarily driven by decreased in net loss for the quarter, and decreased payments on accounts ~~payable, and decreased payments for prepaid expenses.~~payable.

Investing Activities. Net cash used in investing activities was primarily related to purchases of equipment. No purchases of capital equipment occurred in the ~~three~~six months ended ~~September 30,~~December 31, 2018 or 2017.

Financing Activities. Net cash provided by financing activities was ~~$203,900~~$854,400 for the ~~three~~six months ended ~~September 30,~~December 31, 2018 compared to ~~$452,644~~$614,612 for the same period of 2017, ~~a decrease~~an increase of ~~$248,744.~~$239,788. The ~~decrease~~increase is primarily due to ~~fewer issuances~~an increase of ~~convertible debentures, and lower~~ proceeds ~~from notes payable and~~for the sale of common stock, fewer principal payments on debentures and notes payable due to maturities, ~~and an increase~~partially offset by fewer issuances of ~~proceeds for the sale of common stock~~convertible debentures during the ~~three~~six months ended ~~September 30,~~December 31, 2018.

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes we will be able to meet our obligations and continue our operations for the next fiscal year. Realization values may be substantially different from carrying values as shown and these consolidated financial statements do not give effect to adjustments that would be necessary to reflect the carrying value and classification of assets and liabilities should we be unable to continue as a going concern.

Issuance Date	Outstanding Principal Amount ($) (1)		Interest Rate			Conversion Price ($)		Maturity Term	No. of Shares Exercisable Under Related Warrant		Warrants Strike Price ($)		Warrant Exercise Period
Sep-14		25,050		6	%		0.15	September 2019 - October 2019		3,333,667		0.3		Sep-19
January 2015(2)		356,890		8	%		0.06	Mar-19		-		-		-
April - June 2016 (3)		1,075,000		8	%		0.01	March 2018 - April 2019		5,686,590		0.15		Aug-21
August 2016 (4)		200,000		8	%		0.01	Aug-18		833,200		0.15		Aug-21
January - March 2017		60,000		8	%		0.12	January - March 2019		10,831,600		0.15		January 2022 – March 2022
Jun-17		100,000		8	%		0.12	Feb-19		250,000		0.12		Jun-20
Jul-17		100,000		8	%		0.12	Feb-19		250,000		0.12		Jul-20
Sep-17		150,000		8	%		0.12	Feb-19		375,000		0.12		Sep-20
Sep-17		495,000		8	%		0.12	Jan-19		2,000,000		0.12		Sep-20
Nov-17		247,500		8	%		0.12	Jan-19		-		-		-
Nov-17		27,000		8	%		0.12	Nov-19		416,600		0.15		Nov-22
Dec-17		75,000		8	%		0.12	Mar-19		250,000		0.12		Dec-20
Feb-18		45,000		8	%		0.12	Feb-19		500,000		0.12		Dec-20
Mar-18		65,000		8	%		0.12	Mar-19		500,000		0.12		Mar-21
Apr-18		60,000		8	%		0.12	Mar-19		500,000		0.12		Mar-21
Apr-18		70,000		8	%		0.12	Apr-21		200,000		0.12		Apr-21
Apr-18		20,000		8	%		0.12	Apr-20		1,166,660		0.15		Apr-23
Jun-18		40,000		8	%		0.12	Dec-18		1,000,000		0.12		Jun-21
Jul-18		45,000		8	%		0.12	Jan-19		1,000,000		0.12		Jun-21
Aug-18		30,000		8	%		0.12	Mar-19		1,000,000		0.12		Aug-21
Sep-18		25,000		8	%		0.12	Apr-19		1,000,000		0.12		Sep-21
Dec-18		52,000		8	%		0.12	Dec-20		262,458		0.15		Dec-23
Dec-18		350,000		8	%		0.03	Aug-20		5,000,000		0.04		Dec-21

(1)	This table does not include $222,350 of promissory notes held by SBI Investments LLC, 2014-1, and L2 Capital, LLC issued as consideration for an equity line of credit that did not close in the form of promissory notes, which bear interest at 8% per annum, matured on December 29, 2017 and are considered past due at the time of this report. The promissory notes are convertible into unregistered and restricted shares of shares of the Company’s common stock only if there is an Event of Default, as defined in the notes. These amounts are subject to ongoing litigation, and the Company does not intend to pay the balances or honor a conversion until the litigation has concluded. See Note 11 to the Notes to Condensed Consolidated Financial Statements.
(2)	Secured by a security interest in certain microreactor equipment.
(3)	$250,000 is past due as of the date of this report.
(4)	$200,000 is past due as of the date of this report.

Results of Operations

Three Months Ended ~~September 30,~~December 31, 2018, Compared to Three Months Ended ~~September 30,~~December 31, 2017.

Revenue

Revenue for the three months ended December 31, 2017 and 2018 was $0. No revenue was recorded for the license and development agreement in Assam, India for the three months ended December 31, 2018, as our performance obligation has not been fulfilled as of December 31, 2018.

General and administrative expenses

During the three months ended ~~September~~December 31, 2018, the Company incurred ~~$1,361,732~~$1,261,793 of general and administrative expenses compared with ~~$1,267,453~~$1,626,390 incurred in the three-month period ended ~~September 30,~~December 31, 2017, ~~an increase~~a decrease of ~~$94,279,~~$364,597, or ~~7.4%~~22.4%. The ~~increase~~decrease in general and administrative expenses was primarily due to ~~increases~~decreases in ~~professional fees,~~ legal and audit, compensation, and general corporate expenses, partially offset by stock-based compensation expense, ~~including stock-based compensation.~~and other professional fees.

Included in general and administrative expenses for the three months ended ~~September 30,~~December 31, 2018 and 2017 are the following:

											Three Months Ended
	Three Months Ended										December 31,
	September 30,				Increase/						2018		2017
	2018		2017		(Decrease)			%
Compensation	$	155,533	$	265,557	$	(110,024	)		-41.4	%	$	122,600	$	240,011	$	(117,411	)	-48.9	%
Stock-based compensation		207,452		257,673		(50,221	)		-19.5	%		327,703		254,055		73,648		29.0	%
Legal and audit expenses		137,748		51,197		86,551			169.1	%		9,961		347,712		(337,751	)	-97.1	%
Corporate expenses		188,757		143,539		45,218			31.5	%		144,045		158,259		(14,214	)	-9.0	%
Other professional fees		640,372		515,000		125,372			24.3	%		625,572		592,104		33,468		5.7	%
Depreciation		25,006		24,850		156			0.6	%		25,001		24,660		341		1.4	%
Amortization		6,864		9,637		(2,773	)		-28.8	%		6,911		9,589		(2,678	)	-27.9	%

Total General and Administrative Expenses	$	1,361,732	$	1,267,453	$	94,279			7.4	%	$	1,261,793	$	1,626,390	$	(364,597	)	-22.4	%

Research and development expenses

During the three months ended ~~September 30,~~December 31, 2018, the Company incurred ~~$23,087~~$15,449 of research and development expenses, a decrease of ~~$54,855,~~$38,114, or ~~70.4%~~71.2% from the ~~$77,942~~$53,563 recorded for the three months ended ~~September 30,~~December 31, 2017. The decrease is primarily due to decreased expenditures for lab equipment, repairs and maintenance, and chemicals and consumables in the San Marcos facility.

Beneficial conversion feature on convertible debenture

During the three months ended ~~September 30,~~December 31, 2018 the Company incurred ~~$16,870~~$126,908 of beneficial conversion expense compared to ~~$752,426~~$16,176 recorded for the three months ended ~~September 30,~~December 31, 2017. The ~~decrease~~increase in beneficial conversion expenses of ~~$735,556,~~$110,732, or ~~97.8%~~684.5% was due ~~primarily~~ to ~~a triggering event, creating a down-round~~beneficial conversion feature inof a certain debentures ~~to be recognized~~entered into during the three months ending ~~September 30, 2017.~~December 31, 2018, resulting in $126,908 of expense.

Interest expense, net

Interest expense recorded for the three months ended ~~September 30,~~December 31, 2018 was ~~$51,085~~$441,196 compared to ~~$700,693~~$154,847 in the three months ended ~~September 30,~~December 31, 2017, ~~a decrease~~an increase of ~~$649,608,~~$286,349, or ~~92.7%~~184.9%. The ~~decreased~~increased interest expense recorded in the three months ending ~~September 30, 2017~~December 31, 2018 was primarily related ~~a $436,000 charge~~to amounts charged to interest expense related to a derivative liability ~~that has subsequently no longer exists, a decrease~~settlements, of ~~principal of the 8% interest rate on the debentures of outstanding convertible debentures, and interest recorded due to debenture extensions.~~approximately $400,000.

Change in value of derivative liability

During the three months ended ~~September 30,~~December 31, 2017 the Company recorded a benefit of ~~$90,709~~$424,260 related to the change in value of derivative liability. The benefit is related to the change in value of the convertible debentures feature issued in March and May of 2017. During the three months ended ~~September 30,~~December 31, 2018 the Company recorded an expense of ~~$82,162~~$23,706 related to the change in value of derivative liability. The expense is related to the change in value of the “make-whole” provision issued in relation to debenture extensions during the ~~fourth quarter of 2018.~~quarter.

Accretion of debt discount

During the three months ended ~~September 30,~~December 31, 2018 the Company recorded ~~$90,010~~$61,393 of accretion of debt discount expense, a decrease of ~~$241,152,~~$332,452, or ~~72.8%~~84.4% from the ~~$331,162~~$393,845 recorded for the three months ended ~~March~~December 31, 2017. The decrease in accretion of debt discount expense is primarily related to the issuance of the debt discount on convertible debentures ~~during the quarter.~~outstanding being fully recognized.

	Three Months Ended
	December 31,					Increase/
	2018		2017			(Decrease)			%
Statement of Operations Information:

Revenues	$	-	$	-		$	-			-%
General and administrative		1,261,793		1,626,390			(364,597	)		-22.4	%
Research and development		15,449		53,563			(38,114	)		-71.2	%
Change in fair value of derivative liabilities		23,706		(424,260	)		447,966			-105.6	%
Beneficial conversion expense		126,908		16,176			110,732			684.5	%
Interest expense, net		441,196		154,847			286,349			184.9	%
Accretion of debt discount		61,393		393,845			(332,452	)		-84.4	%

Six Months Ended December 31, 2018, Compared to Six Months Ended December 31, 2017.

Revenue

Three Months Ended
September 30, Increase/
2018 2017 (Decrease) %
Statement of Operations Information:
Revenues $ - $ 11,870 $ (11,870 ) -100.0 %
General and administrative 1,361,732 1,267,453 94,279 7.4 %
Research and development 23,087 77,942 (54,855 ) -70.4 %
Beneficial conversion expense 16,870 752,426 (735,556 ) -97.8 %
Interest expense, net 51,085 700,693 (649,608 ) -92.7 %
Change in value of derivative liability 82,162 (90,709 ) 172,871 -190.6 %
Accretion of debt discount 90,010 331,162 (241,152 ) -72.8 %

Revenue for the six months ended December 31, 2017 was $11,870. This revenue is from the sale of sale of samples to potential customers, for testing and evaluation of licensed product. No corresponding revenue was recorded for the six months ended December 31, 2018. No revenue was recorded for the license and development agreement covering Assam, India for the six months ended December 31, 2018, as our performance obligation has not been fulfilled as of December 31, 2018.

General and administrative expenses

During the six months ended December 31, 2018, the Company incurred $2,623,525 of general and administrative expenses compared with $2,893,843 incurred in the six-month period ended December 31, 2017, a decrease of $270,318, or 9.3%. The decrease in general and administrative expenses was primarily due to decreases in legal and audit, and compensation expenses, partially offset by other professional fees and corporate expenses.

Included in general and administrative expenses for the six months ended December 31, 2018 and 2017 are the following:

	Six Months Ended
	December 31,				Increase/
	2018		2017		(Decrease)			%

Compensation	$	278,133	$	505,568	$	(227,435	)		-45.0	%
Stock-based compensation		535,155		511,728		23,427			4.6	%
Legal and audit expenses		147,709		398,909		(251,200	)		-63.0	%
Corporate expenses		332,802		301,798		31,004			10.3	%
Other professional fees		1,265,944		1,107,104		158,840			14.3	%
Depreciation		50,007		49,510		497			1.0	%
Amortization		13,775		19,226		(5,451	)		-28.4	%

Total General and Administrative Expenses	$	2,623,525	$	2,893,843	$	(270,318	)		-9.3	%

Research and development expenses

During the six months ended December 31, 2018, the Company incurred $38,536 of research and development expenses, a decrease of $92,969, or 70.7% from the $131,505 recorded for the six months ended December 31, 2017. The decrease is primarily due to decreased expenditures for lab equipment, repairs and maintenance, and chemicals and consumables in the San Marcos facility.

Beneficial conversion feature on convertible debenture

During the six months ended December 31, 2018 the Company incurred $143,778 of beneficial conversion expense compared to $768,602 recorded for the six months ended December 31, 2017. The decrease in beneficial conversion expenses of $624,824, or 81.3% was due primarily to issuance of new convertible debentures, and the adoption of ASU 2017-11 during the six months ending December 31, 2017.

Interest expense, net

Interest expense recorded for the six months ended December 31, 2018 was $492,281 compared to $855,540 in the six months ended December 31, 2017, a decrease of $363,259, or 42.5%. The decreased interest expense recorded in the six months ending December 31, 2018 was primarily related to deemed interest expense on debenture extinguishment, recorded in the six months ending December 31, 2017, which did not occur in the current six months ended December 31, 2018. This was partially offset by amounts charged to interest expense related to derivative liability settlements of approximately $400,000 during the current six-month period.

Change in value of derivative liability

During the six months ended December 31, 2017 the Company recorded a benefit of $514,969 related to the change in value of derivative liability. The benefit is related to the change in value of the convertible debentures feature issued in March and May of 2017. During the six months ended December 31, 2018 the Company recorded an expense of $105,868 related to the change in value of derivative liability. The expense is related to the change in value of the “make-whole” provision issued in relation to debenture extensions during the six-month period.

Accretion of debt discount

During the six months ended December 31, 2018 the Company recorded $151,403 of accretion of debt discount expense, a decrease of $572,604, or 79.1% from the $725,007 recorded for the six months ended December 31, 2017. The decrease in accretion of debt discount expense is primarily related to the issuance of the debt discount on convertible debentures outstanding being fully recognized.

	Six Months Ended
	December 31,					Increase/
	2018		2017			(Decrease)			%
Statement of Operations Information:

Revenues	$	-	$	11,870		$	(11,870	)		-100.0	%
General and administrative		2,623,525		2,893,843			(270,318	)		-9.3	%
Research and development		38,536		131,505			(92,969	)		-70.7	%
Beneficial conversion expense		143,778		768,602			(624,824	)		-81.3	%
Interest expense, net		492,281		855,540			(363,259	)		-42.5	%
Change in value of derivative liability		105,868		(514,969	)		620,837			-120.6	%
Accretion of debt discount		151,403		725,007			(573,604	)		-79.1	%

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is accumulated and communicated to our management including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitation of controls systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(f) under the Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of ~~September 30,~~December 31, 2018, because of material weaknesses in our internal control over financial reporting.

In connection with the preparation of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018, management concluded that, as of June 30, 2018, our internal control over financial reporting was not effective, as a result of material weaknesses in our control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weaknesses identified in our internal control over financial reporting related tothe lack of timely and effective review of the Company’s period-end closing process and adequate personnel and resources.

Remediation Plan

Management is committed to remediating the material weaknesses discussed above. The Company has recruited experienced US GAAP/financial reporting professional to augment and upgrade its finance and accounting staff to address issues of accuracy, completeness, adequate segregation of duties, and timeliness in financial statement preparation and reporting. However, the Company may be unable to remediate this weakness until it has received additional funding that may be necessary to hire additional personnel. Until the Company has sufficient internal finance and accounting staff, it plans to work closely with external financial advisors to review and monitor its accounting procedures, perform internal audit procedures, and to prepare its consolidated financial statements and reports. In addition, The Company does not believe it has sufficient documentation with its existing financial processes, risk assessment and internal controls. Until it has sufficient internal finance and accounting staff, it plans to work closely with external financial advisors to document the existing financial processes, risk assessment, and internal controls systematically. The Company believes its recently hired personnel, or through professional engagement of consultants, will improve its documentation and internal control processes and procedures.

Changes in Internal Control over Financial Reporting

During the last fiscal quarter, there were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as set forth above.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

You should carefully consider the following risks. These risks could materially affect our business, results of operations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by us or on our behalf.

~~Risks Related to Our Business~~

~~Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the notes. A portion of this indebtedness is past due.~~

We currently have a substantial amount of outstanding indebtedness. As of September 30, 2018, we had a working capital deficit of $5,385,949, with total current assets and liabilities of $1,230,813 and $6,616,762 respectively. Included in the liabilities are $3,472,214 of convertible debentures, net of unamortized discount, and $119,447 of notes payable that are due within one year. In addition to disputed amounts already in litigation, an aggregate principal amount of $250,000 of our outstanding convertible debentures is past due as of the date of this report. There can be no assurance that the holders of these debentures will not declare an event of default and demand immediate payment of the amounts owed.Not applicable.

We have relied on financing through the issuance of common stock and convertible debentures. As of September 30, 2018, we have cash and cash equivalent assets of $21,835. If we are unable to generate sufficient cash flow in the future to service our debt, we may be required to refinance all or a portion of our existing debt or to obtain additional financing. There can be no assurance that any refinancings will be possible or that any additional financing could be obtained on terms acceptable to us. The inability to obtain additional financing could have a material adverse effect on our financial position, liquidity and results of operations. Our substantial indebtedness subjects us to various risks, including:

●

~~we may be unable to satisfy our obligations under our outstanding indebtedness;~~

●

~~we may be more vulnerable to adverse general economic and industry conditions;~~

●

~~we may find it more difficult to fund future working capital, capital expenditures, acquisitions, general corporate purposes or other purposes; and~~

●

we may have to dedicate a substantial portion of our cash resources to the payments on our outstanding indebtedness, thereby reducing the funds available for operations and future business opportunities.

~~Our auditors have expressed substantial doubt about our ability to continue as a going concern~~.

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. As discussed in Note 1 to the consolidated financial statements in our Form 10-K for the fiscal year ended June 30, 2018 and Note 1 to the consolidated financial statements included in this report, we have recorded losses from continuing operations in the current period presented and have a history of losses. Our ability of to continue as a going concern is dependent upon our ability to reverse negative operating trends, obtain revenues from operations, raise additional capital, and/or obtain debt financing. In conjunction with anticipated revenue streams, management is currently negotiating equity and debt financing, the proceeds from which would be used to settle outstanding debts, to finance operations and for general corporate purposes. However, there can be no assurance that we will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern, if at all. The unaudited consolidated financial statements included in this report do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.

~~We have a history of losses and we may not be able to sustain profitability in the future.~~

We continue to be a development stage company and face risks associated with introducing new products based on new technologies. We continue to incur losses in operations. Over the past five years we have primarily relied on sales of common stock and debt instruments to support operations as well as employees and consultants agreeing to defer payment of wages and fees owed to them and/or converting such wages and fees into our securities. Management believes it may be necessary for us to rely on external financing to supplement working capital to meet the Company’s liquidity needs in the fiscal years ended 2019 and 2020. The success of securing such financing on terms acceptable to us, if at all, cannot be assured. If we are unable to achieve the financing necessary to continue our plan of operations, our stockholders may lose their entire investment in the Company.

None of our products has commenced commercial production, and if we continue to experience significant operating losses, we may need additional financing to fund our operations, which may not be available to us.

None of our properties has commenced commercial production, and we have a limited history of earnings or cash flow from our operations. We believe that additional financing will be required in the future to fund our operations. While we may attempt to generate additional working capital through the operation, development, sale or possible joint venture development of our assets, there is no assurance that any such activity will generate funds that will be available for operations. We do not know whether additional financing will be available when needed or on acceptable terms, if at all. If we are unable to raise additional financing when necessary, we may have to delay our development and sales efforts or be forced to cease operations.

~~If the market for QDs develops slower than we expect or declines, it could have a material adverse effect on our business, financial condition, and results of operations.~~

The QD market is not as mature as the commercial applications of the technology are still being developed. It is uncertain whether QDs will achieve and sustain high levels of customer demand and market acceptance. Our success will depend to a substantial extent on the widespread adoption of QDs. Many enterprises have invested substantial personnel and financial resources to traditional electronic components in their businesses and therefore may be reluctant or unwilling to migrate to QDs. It is difficult to predict customer adoption rates and demand for our products, the future growth rate and size of the QD market, or the entry of competitive technologies. The development and expansion of the QD market depends on a number of factors, including the cost, performance, and perceived value associated with QDs. If we or other QD manufacturers experience disruptions in delivery or technical performance problems, the market for QDs as a whole, including our products, may be negatively affected. If QDs do not achieve widespread adoption or there is a reduction in demand for QDs caused by a lack of customer acceptance, technological challenges, weakening economic conditions, competing technologies and products, reductions in corporate spending, or otherwise, it could have a material adverse effect on our business, financial condition, and results of operations.

~~Our future success depends upon our ability to compete in the market place.~~

The commercial QD industry is relatively young and undeveloped, with a number of small competitors attempting to establish themselves in different segments employing one or more competitive strategies. Competition among these companies is based on product quality and performance characteristics, volume, price and continuing research development and product improvements. We are subject to other competitive risks of early stage and commercial businesses generally, and of advanced technology businesses in particular, including competing in an environment where other companies may be better financed or have more experience than us.

~~Our license agreement with the University of Arizona requires minimum annual royalties, which we have been unable to pay.~~

Solterra’s Exclusive Patent License Agreement with the University of Arizona requires Solterra to pay minimum annual royalties, which we have been unable to pay to date. While the licensor has in the past waived certain milestone dates and extended certain payment dates, there is no assurance that we will meet the new milestones or payment requirements or that UA will agree to waive any future requirements. Termination of the license agreement could materially and adversely affect our business.

We have entered into a number of non-disclosures agreements (“NDAs”) and material transfer agreements with several product manufacturers as well as others. No assurances can be given that sales, joint venture agreements and/or license agreements will result from these agreements.

In the past several years, we have entered into a number of NDAs and material transfer agreements with several product manufacturers in different industries, as well as universities and independent research laboratories. In most cases, the NDAs with manufacturers are for exploring joint development of specific products or applications. No assurances can be given that the non-disclosure agreements and sample supply agreements entered into by us as described above will result in sales of our products.

~~Our ongoing research and development functions present significant challenges.~~

Quantum dot technology continues to evolve, with new discoveries and refinements being made on an ongoing basis. We have concentrated our research and development efforts on the design, development, production and supply of nanomaterials, including QDs, TQDs and other nanoparticles. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, we may not be able to produce or sell our products, which would have a material adverse effect on our business, prospects, financial condition and operating results.

~~Our proprietary rights may be difficult to enforce.~~

We generally rely on patents, copyrights, trademarks, and trade secret laws to establish and maintain proprietary rights in our technology and products. Although we hold several patents and other patent applications are currently pending, there can be no assurance that any of these patents or other proprietary rights will not be challenged, invalidated, or circumvented or that our rights will, in fact, provide competitive advantages to us. In addition, there can be no assurance that patents will be issued from pending applications or that claims allowed on any patents will be sufficiently broad to protect our technology. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. The outcome of any actions taken in these foreign countries may be different than if such actions were determined under the laws of the United States. If we are unable to protect our proprietary rights to the totality of the features (including aspects of products protected other than by patent rights) in a market, we may find ourselves at a competitive disadvantage to others who need not incur the substantial expense, time and effort required to create innovative products that have enabled us to be successful.

~~We may be found to infringe on intellectual property rights of others.~~

Third parties may assert claims or initiate litigation related to exclusive patent, copyright, trademark, and other intellectual property rights to technologies and related standards that are relevant to us. The asserted claims and/or initiated litigation can include claims against us or our manufacturers, suppliers, or customers, alleging infringement of their proprietary rights with respect to our existing or future products or components of those products. Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop a non-infringing technology or enter into license agreements. Where claims are made by customers, resistance even to unmeritorious claims could damage customer relationships. There can be no assurance that licenses will be available on acceptable terms and conditions, if at all, or that any arrangements with our suppliers will be available or adequate to cover our costs if a claim were brought directly against us or our customers. Furthermore, because of the potential for high court awards that are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims settled for significant amounts. If any infringement or other intellectual property claim made against us by any third party is successful, if we are required to indemnify a customer with respect to a claim against the customer, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.

~~We rely on the availability of third-party licenses~~.

Much of our technology includes intellectual property licensed from third parties, including our license with the University of Arizona. It may be necessary in the future to seek or renew licenses relating to various aspects of these items. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results, and financial condition. Moreover, the inclusion in our products of intellectual property licensed from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our products.

~~Our business is subject to environmental and other regulations.~~

Our business is subject to various types of government regulations, including regulation of hazardous materials used in or produced by the manufacture or use of nanomaterials, the manufacture, transportation and export of chemical substances, and the restrictions on the chemical composition of QDs used in the various applications. These laws, regulations and standards impose numerous obligations that are applicable to our operations. Failure to comply with environmental laws, regulations, standards, permits and orders may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, and the issuance of injunctions limiting or preventing some or all of our operations. Certain environmental laws impose strict liability for the remediation of spills and releases of oil and hazardous substances that could subject us to liability without regard to whether we were negligent or at fault. In addition, changes in environmental laws and regulations occur frequently, and any such changes that result in more stringent and costly requirements with respect to our operations could materially and adversely affect our operations and financial results.

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

We have traditionally operated with limited resources and infrastructure. As of the date of this report, we have a total of nine employees, including our management team. We believe our success will depend in large part on our ability to attract and retain highly skilled administrative, technical, managerial, sales, and marketing personnel. Competition for these personnel is intense, especially in Austin, Texas. Our financial condition or volatility or lack of positive performance in our stock price or equity incentive awards may also adversely affect our ability to hire and retain key employees. As a result of one or more of these factors, we may increase our hiring or otherwise enter into arrangements in geographic areas outside the United States, which could subject us to additional geopolitical and exchange rate risk. The loss of services of any of our key personnel; the inability to retain and attract qualified personnel in the future; or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet key objectives, such as timely and effective product development, manufacturing and sales.

Our future success depends on our ability to develop our manufacturing capacity. If we are unable to achieve our capacity expansion goals, it would limit our growth potential and impair our operating results and financial condition.

In the future, we may seek to establish large scale production facilities. Our ability to complete the planning, construction and equipping of large scale manufacturing facilities is subject to significant risk and uncertainty, including:

●

we will need to raise additional capital in order to finance the costs of constructing and equipping of large scale manufacturing facilities, which we may be unable to do so on reasonable terms or at all, and which could be dilutive to our existing stockholders;

●

the build-out of any facilities will be subject to the risks inherent in the development of a manufacturing facility, including risks of delays and cost overruns as a result of a number of factors, many of which may be out of our control, such as delays in government approvals, burdensome permit conditions and delays in the delivery of manufacturing equipment from numerous suppliers;

●

we may be required to depend on third parties or strategic partnerships that we establish in the development and operation of additional production capacity, which may subject us to risks that such third parties do not fulfill their obligations to us under our arrangements with them; and

●

we may be required to obtain licenses, permits or authorizations from regulatory authorities, the failure of which to obtain, could delay or prevent the construction or opening of large-scale manufacturing facilities.

If we are unable to develop and successfully operate manufacturing facilities, or if we encounter any of the risks described above, we may be unable to scale our business to the extent necessary to improve results of operations and achieve profitability. Moreover, there can be no assurance that if we do expand our manufacturing capacity that we will be able to generate customer demand for our QD products at these production levels or that we will increase our revenues or achieve profitability.

~~We may be unable to effectively manage the expansion of our operations.~~

We expect to expand our business in order to satisfy anticipated demand for our QDs and obtain market share. To manage the development and expansion of our operations, we will be required to improve our operational and financial systems, procedures and controls and to expand, train and manage a larger employee base. Our management will also be required to maintain and expand our relationships with customers, distribution partners, suppliers and other third parties and to attract new customers, distribution partners and suppliers. In addition, our current and planned operations, personnel, systems and internal procedures and controls might be inadequate to support our future growth. If we cannot manage our growth effectively, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures, and our business and results of operations could be materially and adversely affected.

~~Technological changes in the QDs and end-user industries could render our products uncompetitive or obsolete.~~

The nanotechnology market is rapidly evolving and competitive, characterized by continually changing technology requiring improved features. We will need to invest significant financial resources in research and development to keep pace with technological advances in the industry and to effectively compete in the future. A variety of competing technologies are under development by other companies that could result in lower manufacturing costs or higher product performance than those expected for our products. Our failure to further refine our technology and develop and introduce new products could have a material adverse effect on our business, prospects, financial condition and operating results.

~~Our success will depend 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 enter into commercial production of our products, our business plan will depend substantially on our ability to establish and expand our distribution channels by identifying, developing and maintaining relationships with product manufacturers and resellers. We may be unable to enter into these relationships in the markets we target or on terms and conditions favorable to us, if at all.If we are unable to sell our products into new markets or to further penetrate existing markets for QDs, it could have a material adverse effect on our business, financial condition, and results of operations.

~~Our sales, marketing and distribution plans may substantially rely on the efforts and abilities of third parties and such plans may not be successful.~~

We intend to sell our products to product manufacturers, domestic and international distributors, and other resellers. We expect to collaborate closely with a number of manufacturers and distributors, both domestically and internationally. These resellers are expected to range from large, multinational corporations to small, development-stage companies to private-public partnerships with governmental entities. Our sales, marketing and distribution plans may substantially rely on the efforts and abilities of these third parties and such plans may not be successful. Our failure to successfully choose, collaborate with and monitor our resellers could have a material adverse effect on our business, prospects, liquidity and results of operations.

We anticipate facing risks associated with the international marketing, distribution and sale of our products, and if we are unable to effectively manage these risks, it could impair our ability to develop and expand our business.

We expect that significant resources will be required to develop successfully our international sales channels. In addition, the manufacturing, marketing, distribution and sale of our products outside the United States expose us to a number of markets in which we have limited experience. If we are unable to manage effectively these risks, it could impair our ability to grow our business abroad. These risks include:

●

~~difficulty in recruiting and retaining individuals skilled in international business operations;~~

●

~~the difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;~~

●

~~our executive officers’ lack of proximity to the international activities being managed and the inherent limitations of cross-border information flow;~~

●

~~the management of our relationships with distributors outside the United States, whose sales and lead generation activities are very important to our international operations;~~

●

~~difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;~~

●

~~tariffs and trade barriers and other regulatory limitations on our ability to sell our products in certain foreign markets;~~

●

~~increased exposure to foreign currency exchange rate risk;~~

●

~~potential exposure to adverse tax consequences;~~

●

~~shortages in component parts and raw materials;~~

●

~~import and export and trade regulation changes that could erode our profit margins or restrict our ability to transport our products;~~

●

~~the burden and cost of complying with foreign and U.S. laws governing corporate conduct outside the U.S.;~~

●

~~potential restrictions on the transfer of funds between countries;~~

●

~~import and export duties and value-added taxes;~~

●

~~natural disasters, including earthquakes, typhoons and tsunamis;~~

●

increased exposure to possible violations of U.S. laws regulating the export of our products, and to other U.S. and foreign laws affecting the conduct of business globally such as product certification, environmental and waste management and data privacy laws;

●

~~reduced protection for intellectual property rights in some countries; and~~

●

~~political and economic instability.~~

International operations may also result in greater shipping costs and additional expenses to conform our products to the requirements of local laws or local product specifications. As we develop our international business, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations, reduce or delay our international sales, result in fines and penalties and have a material adverse effect on our business, prospects, liquidity and results of operations.

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 strategic relationships successfully. In addition, strategic alliances that we may establish, will subject us to a number of risks, including risks associated with sharing proprietary information and loss of control of operations that are material to our business and profit-sharing arrangements. Moreover, strategic alliances may be expensive to implement, require us to issue additional shares of our common stock and subject us to the risk that the third party will not perform its obligations pursuant to the arrangement, which may subject us to losses over which we have no control or expensive termination arrangements.

Due to financial and experience constraints, we expect to rely on strategic relationships to develop our business, including those relating to product development, manufacturing, marketing and sales. Identifying and developing strategic alliance candidates is expensive and time-consuming. In addition, these arrangements may leave us vulnerable to capacity constraints and reduced component availability, and our control over customer relationships, product delivery schedules, manufacturing and costs would be limited. In addition, we may have limited control over quality systems and controls, and therefore must rely on our relationships to manufacture our products to our quality and performance standards and specifications. Delays, component shortages, including custom components that are manufactured for us at our direction, and other manufacturing and supply problems, could impair the manufacture and distribution of our products and ultimately our company’s reputation. Furthermore, any adverse change in the financial or business condition of our strategic alliance counterparts could disrupt our ability to develop, manufacture, market and sell our products. If we are required to change our strategic alliance counterparts or bring those functions in-house, we may lose revenue, incur increased costs, and damage our relationships with other customers and strategic alliances.

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.

We expect our manufacturing operations and research and development activities to involve the use of mechanical equipment which involves a risk of potential injury to our employees. These operations are subject to regulation under the Occupational Safety and Health Act (“OSHA”). If we fail to comply with OSHA requirements, or if an employee injury occurs, we may be required to pay substantial penalties, incur significant capital expenditures, suspend or limit production or cease operations. Also, any such violations, employee injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our reputation and competitive position and/or adversely affect sales of our products.

~~Our business and financial results may be adversely affected by various legal and regulatory proceedings.~~

We are, and in the future may become, subject to lawsuits, claims and regulatory proceedings in the normal course of our business, such as our ongoing litigation with SBI Investments LLC, 2014-1, and L2 Capital, LLC. Some of these legal and regulatory proceeds could be material. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict.As a result, future adverse rulings, settlements, or unfavorable developments could result in charges that could have a material adverse effect on our business, results of operations or financial condition in any particular period. ~~For additional information regarding certain of the matters in which we are involved, see Note 11 to the consolidated financial statements, entitled “Litigation.”~~

~~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 will face the risk of exposure to product liability claims in the event that the use of our products we sell results in injury. Since some of our products may be used in electricity producing devices, it is possible that consumers could be injured by our products, whether by product malfunctions, defects, improper installation or other causes. In addition, since the products we are developing incorporate new technologies and use new installation methods, we cannot predict whether or not product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. We intend to rely on our general liability insurance to cover product liability claims and currently do not expect to obtain separate product liability insurance. The successful assertion of product liability claims against us could result in potentially significant monetary damages and if our insurance protection is inadequate to cover these claims, such claims could require us to make significant payments. Also, any product liability claims and any adverse outcomes with respect thereto may subject us to adverse publicity, damage our reputation and competitive position and/or adversely affect sales of our products.

We have significant deferred tax assets, and any impairments of or valuation allowances against these deferred tax assets in the future could materially adversely affect our results of operations and financial condition.

We intend to use significant deferred tax assets to offset income. The extent to which we can use deferred tax assets may be limited for various reasons, including but not limited to changes in tax rules or regulations and if projected future taxable income becomes insufficient to recognize the full benefit of our net operating loss (“NOL”) carryforwards prior to their expiration. Additionally, our ability to fully use these tax assets will also be adversely affected if we have an “ownership change” within the meaning of Section 382 of the U.S. Internal Revenue Code of 1986, as amended. An ownership change is generally defined as a greater than 50% increase in equity ownership by “5% stockholders” (as that term is defined for purposes of Section 382) in any three-year period. Future changes in our stock ownership, depending on the magnitude, including the purchase or sale of our common stock by 5% stockholders, and issuances or redemptions of common stock by us, could result in an ownership change that would trigger the imposition of limitations under Section 382. Accordingly, there can be no assurance that in the future we will not experience limitations with respect to recognizing the benefits of our NOL carryforwards and other tax attributes for which limitations could have a material adverse effect on our results of operations, cash flows or financial condition.

~~Risks Related to Our Common Stock~~

~~The material weakness in our internal control over financial reporting may adversely impact our company.~~

As discussed in Part II, Item 9A, entitled “Controls and Procedures,” of our Form 10-K for the fiscal year ended June 30, 2018, and Part II, Item 4, entitled “Controls Procedures” in this report, we have concluded that our internal control over financial reporting was not effective. The material weaknesses identified in our internal control over financial reporting related to the lack of timely and effective review of our period-end closing process and adequate personnel and resources.

We are currently working to remediate the material weakness. We cannot be sure when we will successfully remediate the material weakness or whether compensating controls will be effective in preventing or detecting material errors. The remediation may require substantial time and resources to successfully implement. We may be unable to remediate this weakness until we have received additional funding that may be necessary to hire additional personnel. In addition, we do not believe we have sufficient documentation with our existing financial processes, risk assessment and internal controls. Until we have sufficient internal finance and accounting staff, we plan to work closely with external financial advisors to document the existing financial processes, risk assessment, and internal controls systematically. This material weakness could cause creditors, customers, investors, regulators, strategic alliances and others to lose confidence in the effectiveness of our internal controls and the accuracy of our financial statements and other information, all of which could have a material adverse impact on our business, results of operations and financial condition.

~~We are subject to the reporting requirements of the federal securities laws, which can be expensive~~.

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

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.

Our board of directors has the authority to issue up to 750,000,000 shares of our common stock. Any issuance of equity or securities convertible into or exchangeable for our equity securities, including for the purposes of expansion of our business, may have a dilutive effect on our existing stockholders.

The perceived risk associated with the possible issuance of a large number of shares of common stock or securities convertible into or exchange for a large number of shares of our common stock could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline. Subsequent sales of our common stock in the open market or the private placement of our common stock or securities convertible into or exchangeable for 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.

Over the course of meeting our capital needs, we have entered into various debentures and debt instruments, which generally have short maturity terms, typically 6 to 18 months. Many of these instruments were accompanied by shares of our common stock and warrants to purchase shares of our common stock. We may conduct further equity offerings in the future. If common stock is issued in return for additional funds, property or services, the price per share could be lower than that paid by our current stockholders. Also, any stock we sell in the future may be valued on an arbitrary basis by us and the issuance of shares of common stock for future services, acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our existing stockholders.

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.

~~We may experience volatility in our stock price, which could negatively affect your investment, and you may not be able to resell your shares at or above the offering price.~~

Our common stock has traded in the over-the-counter marketplace on the OTCQB under the symbol “QTMM” since October 2018. Previously, our common stock was quoted on the OTC Pink marketplace from November 2017 to October 2018 and on the OTCQB previous to November 2017. There can be no assurance that our common stock will continue to be, or be admitted to, trade on any established trading market or exchange. Additionally, there can be no assurance that we will maintain the requirements for continued listing or trading on an established trading market or exchange.

Our common stock may not be traded actively. An illiquid market for shares of our common stock may result in lower trading prices and increased volatility, which could negatively affect the value of your investment or your ability to sell your shares. If an active trading market does develop, it may not last and the trading price of the shares may fluctuate widely as a result of a number of factors, many of which are outside our control. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including:

●

~~our ability to commercialize our products and technologies;~~

●

~~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;~~

●

~~additions or departures of key scientific or management personnel;~~

●

~~our ability to effectively manage our growth;~~

●

~~the cost of raw materials;~~

●

~~our ability and the terms upon which we are able to raise capital sufficient to continue our operations;~~

●

~~our cash position;~~

●

~~sales of our common stock by us or our stockholders in the future;~~

●

~~trading volume of our common stock;~~

●

~~changes in accounting practices;~~

●

~~ineffectiveness of our internal controls;~~

●

~~disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;~~

●

~~significant lawsuits, including creditor, patent or stockholder litigation;~~

●

~~industry adoption of QD technology or other new competing technologies;~~

●

the rate and cost at which we are able to expand our manufacturing capacity to meet anticipated product demand, including the rate and cost at which we are able to implement advances in our QD technologies;

●

~~our ability to establish and expand key distribution partners;~~

●

~~our ability to establish strategic relationships with third parties to accelerate our growth plans;~~

●

~~announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;~~

●

~~developments in the competitive environment, including the introduction of improved products or technological advancements by our competitors;~~

●

~~overall performance of the equity markets;~~

●

~~publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;~~

●

~~our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;~~

●

~~changes in the market valuations of similar companies;~~

●

~~general political and economic conditions; and~~

●

~~other events or factors, many of which are beyond our control.~~

We anticipate that our operating expenses will continue to increase significantly, particularly as we begin production and develop our internal infrastructure to support our anticipated growth. If our product revenues in any quarter do not increase correspondingly, our net losses for that period will increase. Moreover, given that a significant portion of our operating expenses cannot be quickly reduced, if we cannot obtain revenues from operations or our product revenues are delayed or below expectations, our operating results are likely to be adversely and disproportionately affected.

The stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies.This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating results or financial condition.

~~We do not presently intend to pay any cash dividends on or repurchase any shares of our common stock.~~

We do not presently intend to pay any cash dividends on our common stock. Any payment of future dividends will be at the discretion of the board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. Cash dividend payments in the future may only be made out of legally available funds and, if we experience substantial losses, such funds may not be available. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment and there is no guarantee that the price of our common stock that will prevail in the market after this offering may never exceed the price paid by you in this offering.

~~Because our shares are deemed “penny stock,” you may have difficulty selling them in the secondary trading market.~~

The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share. Additionally, if the equity security is not registered or authorized on a national securities exchange, the equity security also would constitute a “penny stock.” As our common stock falls within the definition of penny stock, these regulations require the delivery, prior to any transaction involving our common stock, of a risk disclosure schedule explaining the penny stock market and the risks associated with it. Disclosure is also required to be made regarding compensation payable to both the broker-dealer and the registered representative and current quotations for the securities. In addition, monthly statements are required to be sent disclosing recent price information for the penny stocks. The ability of broker-dealers to sell our common stock and the ability of stockholders to sell our common stock in the secondary market would be limited. As a result, the market liquidity for our common stock would be severely and adversely affected. We can provide no assurance that trading in our common stock will not be subject to these or other regulations in the future, which would negatively affect the market for our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

From ~~July~~October 1, 2018 to ~~September 30,~~December 31, 2018, we had the following sales and issuances of unregistered equity securities:

Date of Sale

Title of Security

Number
Sold

Consideration Received and Description of Underwriting or
Other Discounts to Market Price or Convertible Security Afforded to Purchases

Exemption from Registration Claimed

If Option, Warrant or Convertible Security, Terms of Exercise or Conversion

Security Holder

~~July 2018~~

December 2018

Common Stock

~~166,210~~3,000,000

Shares issued ~~in exchange~~ for ~~$9,973 of interest;~~debenture; no commissions paid

Section 4(2); and/or Rule 506

Not applicable

~~Carson Diversified Investments~~Amtronics, LLC

~~July~~December 2018

~~Common Stock~~

~~166,210~~

~~Shares issued in exchange for $9,973 of interest; no commissions paid~~

~~Section 4(2); and/or Rule 506~~

~~Not applicable~~

~~Carson Haysco Holdings, LP~~

~~July 2018~~

~~Common Stock~~

~~513,333~~

~~Shares issued for salary conversion; no commissions paid~~

~~Section 4(2); and/or Rule 506~~

~~Not applicable~~

~~Edward James Schloss~~

~~July 2018~~

Common Stock Warrants

~~1,000,000~~

~~Issuance of stock warrants~~

~~Section 4(2); and/or Rule 506~~

~~Warrants exercisable at $0.12 per share through July 9, 2021~~

~~Lucas Hoppel~~

~~August 2018~~

~~Common Stock~~

~~1,531,375~~

~~Shares issued for services; no commissions paid~~

~~Section 4(2); and/or Rule 506~~

~~Not applicable~~

~~Steven Morse~~

~~August 2018~~

~~Common Stock~~

~~11,635~~

~~Shares issued in exchange for $1,396 of interest; no commissions paid~~

~~Section 4(2); and/or Rule 506~~

~~Not applicable~~

~~Radha Jayaram~~

~~August 2018~~

~~Common Stock Warrants~~

~~1,000,000~~

~~Issuance of stock warrants~~

~~Section 4(2); and/or Rule 506~~

~~Warrants exercisable at $0.12 per share through August 27, 2021~~

~~Lucas Hoppel~~

~~August 2018~~

~~Common Stock Warrants~~

~~300,000~~5,000,000

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at $0.04 per share through ~~August 7, 2020~~December 26, 2021

~~Mathew McKnight~~Amtronics, LLC

~~August~~December 2018

Common Stock Warrants

~~246,000~~262,458

Issuance of stock warrants

Section 4(2); and/or Rule 506

Warrants exercisable at ~~$0.04~~$0.15 per share through ~~August 29, 2020~~December 5, 2023

~~Mathew McKnight~~

~~August 2018~~

~~Common Stock Warrants~~

~~62,500~~

~~Issuance of stock warrants~~

~~Section 4(2); and/or Rule 506~~

~~Warrants exercisable at $0.04 per share through August 7, 2020~~

~~Brian Fogarty~~

~~August 2018~~

~~Common Stock Warrants~~

~~93,750~~

~~Issuance of stock warrants~~

~~Section 4(2); and/or Rule 506~~

~~Warrants exercisable at $0.04 per share through August 7, 2020~~

~~Allen Columbus~~

~~September 2018~~

~~Common Stock~~

~~1,500,000~~

~~Shares issued for services; no commissions paid~~

~~Section 4(2); and/or Rule 506~~

~~Not applicable~~

~~Steven Morse~~

~~September 2018~~

~~Common Stock~~

~~4,516,553~~

~~Shares issued for debenture; no commissions paid~~

~~Section 4(2); and/or Rule 506~~

~~Not applicable~~

~~Lucas Hoppel~~

~~September 2018~~

~~Common Stock Warrants~~

~~1,000,000~~

~~Issuance of stock warrants~~

~~Section 4(2); and/or Rule 506~~

~~Warrants exercisable at $0.12 per share through September 27, 2021~~

~~Lucas Hoppel~~Risk Grid Technologies, Inc.

These transactions were conducted in reliance on the exemptions from the registration requirements of the Securities Act of 1933, as amended, based on the private sale of the securities and the Company’s relationships with the security holders.

Item 3. Defaults Upon Senior Securities

We issued $1,275,000 of convertible debentures between April 2016 and August 2016. The maturities range from March 29, 2018 to May 6, 2019, and $250,000 in principal amount of these debentures is past due at the date of this report. We are currently in discussions with the holders regarding these matters, although we have not obtained a written waiver or entered into an amendment revising these terms.

The convertible debentures issued in January 2015 in the aggregate original principal amount of $500,000 were past due as of December 15, 2018. On January 14, 2019, the Company entered into a Partial Payment and Temporary Stand Still Agreement that, among other things, provided for a partial payment of accrued and unpaid interest and outstanding principal in the amount of 150,000 and extended the maturity date of the debentures to March 1, 2019. The holders agreed not to exercise any remedy under their respective debentures with respect to any event of default or other breach, default or violation under the debentures to demand any payment under the debentures prior to the maturity date.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Arrangements” and “Other Information – Partial Payment and Temporary Stand Still Agreement.”.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~Not applicable.~~(a)License and Development Agreement

On November 19, 2018, the Company entered into a License and Development Agreement with Amtronics India LLC relating to the production of quantum dots. Pursuant to the agreement, the Company licensed its patents related to its quantum dots (nanoscale semiconductor crystals) for solar cells and LED lighting. The license is limited to the manufacture of quantum dots, thin film quantum dot solar cells, and light emitting diodes for lighting and display applications and the territory of the State of Assam, Republic of India.

In consideration of the license, Amtronics agreed to pay the Company an upfront fee of $500,000 within thirty days of the agreement and an additional $500,000 within sixty days of the date of the agreement. During the term of the agreement, Amtronics will purchase equipment necessary for the production of the licensed products in an aggregate amount of $3,250,000, subject to payment terms related to delivery and setup.

The Company has also agreed to provide consulting services for additional fees related to the design of the manufacturing facility and training and consulting services for manufacturing and for the implementation and operation of the equipment purchased under the agreement.

The agreement provides that Amtronics is required to devote commercially reasonable efforts to commercialize, develop and manufacture products described in the agreement and will be deemed to have satisfied this requirement upon meeting certain milestones described in the agreement. The Company is required to continue to improve and optimize its technology under milestone requirements in the agreement.

Amtronics will pay to the Company a royalty on gross sales under the license, including annual minimum royalties beginning in 2021.

Partial Payment and Temporary Stand Still Agreement

The Company entered into a Partial Payment and Temporary Stand Still Agreement, dated January 14, 2019 with Carson Diversified Investments, LP (“Diversified”) and Carson Haysco Holdings, LP (“Haysco”), each of which holds convertible debentures in the outstanding principal amounts of $250,000 secured by certain microreactor equipment of the Company. Under the agreement, the Company made payments of $75,000 to each of Diversified and Haysco for accrued interest and outstanding principal, and the remaining outstanding principal amounts on the debentures and agreed to pay the remaining outstanding principal and accrued and unpaid interest on the debentures on March 1, 2019. Interest will accrue at the default rate, or 18% per annum, until repayment. Prior to March 1, 2019, each of Diversified and Haysco agreed not to exercise any remedy under their respective debentures with respect to any event of default or other breach, default or violation under the debentures to demand any payment under the debentures.

Item 6. Exhibits

10.1*#		License and Development Agreement, dated November 19, 2018, by and between Quantum Materials Corporation and Amtronics CC

10.2*		Partial Payment and Temporary Stand Still Agreement, dated January 14, 2019 by and among Quantum Materials Corp., Carson Diversified Investments, LP and Carson Haysco Holdings, LP

31(a)		Rule 13a-14(a) Certification — Principal Executive Officer Officer

31(b)		Rule 13a-14(a) Certification — Principal Financial Officer Officer

32(a)		Section 1350 Certification — Principal Executive Officer *

32(b)		Section 1350 Certification — Principal Financial Officer *

101.INS		XBRL Instance Document *

101.SCH		Document, XBRL Taxonomy Extension *

101.CAL		Calculation Linkbase, XBRL Taxonomy Extension Definition *

101.DEF		Linkbase, XBRL Taxonomy Extension Labels *

101.LAB		Linkbase, XBRL Taxonomy Extension *

101.PRE		Presentation Linkbase *

*Filed herewith.

#Pursuant to 17 C.F.R. 240.246-2, portions of this exhibit have been omitted and have been filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	QUANTUM MATERIALS CORP.

Date: ~~November~~February 14, ~~2018~~2019	/s/ Stephen Squires
	Stephen Squires
	Principal Executive Officer

Date: ~~November~~February 14, ~~2018~~2019	/s/ Robert A. Phillips
	Robert A. Phillips
	Principal Financial Officer

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

Large accelerated filer [ ]	Accelerated filer [ ]
Non-accelerated filer [ ]	Smaller reporting company [X]
	Emerging growth company [ ]

	Page

PART I – FINANCIAL INFORMATION	3

Item 1. Financial Statements	3

Consolidated Balance Sheets	3

Consolidated Statements of Operations	4

Consolidated Statements of Cash Flows	5

Notes to Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3031

Item 3. Quantitative and Qualitative Disclosures about Market Risk	3538

Item 4. Controls and Procedures	3539

PART II – OTHER INFORMATION	3640

Item 1. Legal Proceedings	3640

Item 1A. Risk Factors	3640

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4640

Item 3. Defaults upon Senior Securities	4640

Item 4. Mine Safety Disclosures	4640

Item 5. Other Information	4640

Item 6. Exhibits	4641

Signatures	4742

	September 30, 2018			June 30, 2018			December 31, 2018			June 30, 2018
	(unaudited)							(unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	21,835		$	2,025		$	325,437		$	2,025
Subscription receivable		-			10,000			-			10,000
Prepaid expenses and other current assets		1,208,978			1,746,181			828,600			1,746,181
TOTAL CURRENT ASSETS		1,230,813			1,758,206			1,154,037			1,758,206

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $371,086 and $346,080		600,518			625,524
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $396,093 and $346,080								575,511			625,524

LICENSES AND PATENTS, net of accumulated amortization of $153,716 and $146,852		39,027			45,891
LICENSES AND PATENTS, net of accumulated amortization of $160,627 and $146,852								32,116			45,891

LONG TERM PORTION OF PREPAID EXPENSES		147,886			184,660			369,811			184,660

TOTAL ASSETS	$	2,018,244		$	2,614,281		$	2,131,475		$	2,614,281
												��
LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES
Accounts payable	$	1,586,314		$	1,511,691		$	1,580,378		$	1,511,691
Accrued expenses		556,186			548,667			546,615			548,667
Accrued salaries		853,018			682,575			816,023			682,575
Notes payable, net of unamortized discount		20,000			-			20,000			-
Short term derivative liability		129,030			-			25,895			-
Current portion of convertible debentures, net of unamortized discount		3,472,214			3,402,421			3,403,402			3,402,421
TOTAL CURRENT LIABILITIES		6,616,762			6,145,354			6,392,313			6,145,354

CONVERTIBLE DEBENTURES, net of current portion, unamortized discount and debt issuance costs		85,239			40,224			483,701			40,224

TOTAL LIABILITIES		6,702,001			6,185,578			6,876,014			6,185,578

COMMITMENTS AND CONTINGENCIES (See Note 10)		-			-			-			-

STOCKHOLDERS’ DEFICIT
Common stock, $.001 par value, authorized 750,000,000 shares, 450,969,648 and 442,564,332 issued and outstanding at September 30, 2018 and June 30, 2018, respectively		450,970			442,564
Common stock, $.001 par value, authorized 750,000,000 shares, 492,313,256 and 442,564,332 issued and outstanding at December 31, 2018 and June 30, 2018, respectively								492,325			442,564
Common stock issuable		978,981			800,131			576,042			800,131
Additional paid-in capital		42,355,411			42,030,181			44,586,658			42,030,181
Accumulated deficit		(48,469,119	)		(46,844,173	)		(50,399,564	)		(46,844,173	)
TOTAL STOCKHOLDERS’ DEFICIT		(4,683,757	)		(3,571,297	)		(4,744,539	)		(3,571,297	)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	2,018,244		$	2,614,281		$	2,131,475		$	2,614,281

	Three Months Ended						Six Months Ended
	September 30,						December 31,
	2018			2017			2018			2017
	(unaudited)						(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,624,946	)	$	(3,027,097	)	$	(3,555,391	)	$	(4,847,658	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		31,870			34,487			63,788			68,736
Amortization of debt issuance costs, and debt discount		-			460,457			401,335			556,479
Stock-based compensation		207,452			257,673			535,155			511,728
Stock issued for services		670,370			504,648			1,311,192			1,365,455
Stock issued for interest		-			18,608
Beneficial conversion feature		16,870			752,426			143,778			768,602
Deemed interest on extinguishment of debenture		-			118,000			-			118,000
Change in fair value of derivative liability		82,162			(90,709	)		105,868			(514,969	)
Accretion of debt discount and warrant expense		90,010			331,162			151,403			725,007
Effects of changes in operating assets and liabilities:
Prepaid expenses and other current assets		(6,939	)		146,729			6,238			2,799
Accounts payable and accrued expenses		335,182			148,488			305,646			637,590
Deferred revenue		-			-
NET CASH USED IN OPERATING ACTIVITIES		(184,090	)		(345,128	)		(530,988	)		(608,231	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock		83,900			40,000			333,900			93,000
Proceeds from issuance of convertible debentures / promissory note		100,000			700,000			500,500			1,127,000
Proceeds from issuance of note payable		20,000			-			20,000			-
Principal payments on long-term debt		-			(237,300	)		-			(552,650	)
Principal payments on note payable		-			(50,056	)		-			(52,738	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		203,900			452,644			854,400			614,612

NET DECREASE IN CASH		19,810			107,516			323,412			6,381

CASH AND CASH EQUIVALENTS, beginning of period		2,025			52,611			2,025			52,611

CASH AND CASH EQUIVALENTS, end of period	$	21,835		$	160,127		$	325,437		$	58,992

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

Fair Value Table	Balance at September 30, 2018		Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2018		Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Derivative Liability	$	129,030	$	-	$	-	$	129,030	$	25,895	$	-	$	-	$	25,895
Note Payable	$	20,000		-		20,000		-		20,000		-		20,000		-
Convertible debentures		3,557,453		-		3,557,453		-		3,887,103		-		3,887,103		-
	$	3,706,483	$	-	$	3,577,453	$	129,030
									$	3,932,998	$	-	$	3,907,103	$	25,895

Level Three Roll-forward	Derivative Liability			Total			Derivative Liability			Total

Balance June 30, 2018	$	-		$	-		$	-		$	-
Fair value of derivative liability reclassified from equity		98,645			98,645			98,645			98,645
Settlement of derivative liabilities		(51,777	)		(51,777	)		(178,618	)		(178,618	)
Change in fair value		82,162			82,162			105,868			105,868
Balance September 30, 2018	$	129,030		$	129,030
Balance December 31, 2018							$	25,895		$	25,895

	September 30,		June 30,		Debenture		December 31,		June 30,		Debenture
	2018		2018		Reference		2018		2018		Reference
		(unaudited)						(unaudited)
Convertible debentures issued in September 2014	$	25,050	$	25,050		A	$	25,050	$	25,050	A
Convertible debentures issued in January 2015		500,000		500,000		B		500,000		500,000	B
Convertible debentures issued in April - June 2016		1,075,000		1,075,000		C		1,075,000		1,075,000	C
Convertible debenture issued in August 2016		200,000		200,000		C		200,000		200,000	C
Convertible debentures issued in January - March 2017		60,000		60,000		D		60,000		60,000	D
Convertible promissory notes issued in March 2017		222,350		222,350		G		222,350		222,350	G
Convertible debenture issued in June 2017		100,000		100,000		I		100,000		100,000	I
Convertible debenture issued in July 2017		100,000		100,000		J		100,000		100,000	J
Convertible debenture issued in September 2017		645,000		645,000		K		645,000		645,000	K
Convertible debenture issued in November 2017		247,500		247,500		K		247,500		247,500	K
Convertible debenture issued in November 2017		27,000		27,000		L		27,000		27,000	L
Convertible debenture issued in December 2017		75,000		75,000		N		75,000		75,000	N
Convertible debenture issued in February 2018		45,000		45,000		O		45,000		45,000	O
Convertible debentures issued in March 2018		65,000		65,000		P		65,000		65,000	P
Convertible debentures issued in April 2018		60,000		60,000		Q		60,000		60,000	Q
Convertible debentures issued in April 2018		70,000		70,000		R		70,000		70,000	R
Convertible debentures issued in April 2018		20,000		20,000		S		20,000		20,000	S
Convertible debentures issued in June 2018		40,000		40,000		T		40,000		40,000	T
Convertible debentures issued in July 2018		45,000		-		U		45,000		-	U
Convertible debentures issued in August 2018		30,000		-		V		30,000		-	V
Convertible debentures issued in September 2018		25,000		-		W		25,000		-	W
Convertible debentures issued in December 2018								52,000		-	X
Convertible promissory notes issued in December 2018								350,000		-	Y

		3,676,900		3,576,900				4,078,900		3,576,900
Less: unamortized discount		119,447		134,255				191,797		134,255

		3,557,453		3,442,645				3,887,103		3,442,645
Less: current portion		3,472,214		3,402,421				3,403,402		3,402,421

Total convertible debentures, net of current portion	$	85,239	$	40,224			$	483,701	$	40,224

					Weighted								Weighted
	Weighted				Average		Weighted		Weighted				Average		Weighted
	Average				Remaining		Average		Average				Remaining		Average
	Exercise		Number of		Contractual		Grant Date		Exercise		Number of		Contractual		Grant Date
	Price		Warrants		Term in Years		Fair Value		Price		Warrants		Term in Years		Fair Value

Balance as of June 30, 2018	$	0.11		36,781,726		2.80	$	0.09	$	0.11		36,781,726		2.80	$	0.09
Expired		-		-				-		-		-				-
Granted		0.10		3,702,250				0.04		0.10		8,964,708				0.04
Exercised		-		-				-		-		-				-
Cancelled		-		-				-		-		-				-
		-								-
Balance as of September 30, 2018	$	0.11		40,483,976		2.49	$	0.09
Balance as of December 31, 2018									$	0.11		45,746,434		2.29	$	0.08

Vested and exercisable as of September 30, 2018	$	0.11		40,483,976		2.49	$	0.09
Vested and exercisable as of December 31, 2018									$	0.11		45,746,434		2.29	$	0.08

						Number of
						Nonvested,			Weighted
						Unissued			Average
						Restricted			Grant Date
	Number of Nonvested, Unissued Restricted Share Awards			Weighted Average Grant Date Fair Value		Share Awards			Fair Value

Nonvested, unissued restricted shares outstanding at June 30, 2017		1,500,000			0.21		1,500,000			0.21
Granted		5,500,000			0.06		5,500,000			0.06
Vested		(7,000,000	)		0.09		(7,000,000	)		0.09
Forfeited		-			-		-			-

Nonvested, unissued restricted shares outstanding at June 30, 2018		-		$	-		-		$	-
Granted		-			-		-			-
Vested		-			-		-			-
Forfeited		-			-		-			-

Nonvested, unissued restricted shares outstanding at September 30, 2018		-		$	-
Nonvested, unissued restricted shares outstanding at December 31, 2018							-		$	-

	Three Months Ended September 30,
	2018			2017
	(unaudited)

Net loss	$	(1,624,946	)	$	(3,027,097	)

Weighted average common shares outstanding:
Basic and diluted		471,961,937			375,593,837

Basic and diluted loss per share	$	(0.00	)	$	(0.01	)

Issuance Date	Outstanding Principal Amount ($) (1)		Interest Rate			Conversion Price ($)		Maturity Term	No. of Shares Exercisable Under Related Warrants		Warrants Strike Price ($)		Warrant Exercise Period
September 2014		25,050		6	%		0.15	September 2019 - October 2019		3,333,667		0.30	September 2019
January 2015(2)		500,000		8	%		0.06	December 2018		-		-	-
April - June 2016 (3)		1,075,000		8	%		0.012	March 2018 - April 2019		5,686,590		0.15	August 2021
August 2016 (4)		200,000		8	%		0.012	August 2018		833,200		0.15	August 2021
January - March 2017		60,000		8	%		0.12	January - March 2019		10,831,600		0.15	January 2022 – March 2022
June 2017		100,000		8	%		0.12	February 2019		250,000		0.12	June 2020
July 2017		100,000		8	%		0.12	February 2019		250,000		0.12	July 2020
September 2017		150,000		8	%		0.12	February 2019		375,000		0.12	September 2020
September 2017		495,000		8	%		0.12	January 2019		2,000,000		0.12	September 2020
November 2017		247,500		8	%		0.12	January 2019		-		-	-
November 2017		27,000		8	%		0.12	November 2019		416,600		0.15	November 2022
December 2017		75,000		8	%		0.12	March 2019		250,000		0.12	December 2020
February 2018		45,000		8	%		0.12	February 2019		500,000		0.12	December 2020
March 2018		65,000		8	%		0.12	March 2019		500,000		0.12	March 2021
April 2018		60,000		8	%		0.12	March 2019		500,000		0.12	March 2021
April 2018		70,000		8	%		0.12	April 2021		200,000		0.12	April 2021
April 2018		20,000		8	%		0.12	April 2020		1,166,660		0.15	April 2023
June 2018		40,000		8	%		0.12	December 2018		1,000,000		0.12	June 2021
July 2018		45,000		8	%		0.12	January 2019		1,000,000		0.12	June 2021
August 2018		30,000		8	%		0.12	March 2019		1,000,000		0.12	August 2021
September 2018		25,000		8	%		0.12	April 2019		1,000,000		0.12	September 2021