See notes to the condensed consolidated financial statements.

Q2EARTH INC. (F/K/A Q2POWER TECHNOLOGIES, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See notes to the condensed consolidated financial statements.

Q2EARTH INC.(F/K/A Q2POWER TECHNOLOGIES, INC.)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Q2Earth, Inc. (hereinafter the “Company”), incorporated in Delaware on August 26, 2004, is currently engaged in the business of managing compost and soil manufacturing facilities, and ishas been pursuing a plan of strategic acquisitions and investments in this sector.sector through an unconsolidated investee called Earth Property Holdings LLC, a Delaware limited liability company (“EPH”). Through EPH, the Company completed one acquisition in November 2018 and a second in January 2019. The Company previouslyowns a 18.5% equity interest in EPH and manages all of its operations pursuant to an eight-year management contract.

In April 2020, the Company established QSAM Therapeutics Inc. (“QSAM”) as a wholly-owned subsidiary incorporated in the state of Texas, and through QSAM, executed a Patent and Technology License Agreement and Trademark Assignment (the “License Agreement”) with IGL Pharma, Inc. (“IGL”). The License Agreement provides QSAM with exclusive, worldwide and sub-licensable rights to all of IGL’s patents, product data and knowhow with respect to Samaium-153 DOTMP (the “Technology”), a clinical stage novel radiopharmaceutical meant to treat different types of bone cancer and related diseases. The establishment of QSAM and execution of the License Agreement is part of the Company’s strategic plan to expand its business into other technologies in the broader biosciences sector.

Prior to 2017, the Company owned and licensed technology that converts waste fuels and heat to power, technologywhich it sold to a licensee in August 2017.of that year. Much of these operations were conducted through a wholly-owned subsidiary of the Company called Q2Power Corp. (“Q2P”), which still exists but has no current operations. Q2P and QSAM are sometimes referred to herein as the “Subsidiaries”. Formerly, the Company’s name was Q2Power Technologies, Inc., and before that, Anpath Group, Inc. (“Anpath”).

Q2Power Corp. (the “Subsidiary” or “Q2P”) operated asIn March 2020, the World Health Organization declared COVID-19 a renewable power R&D company focusedglobal pandemic and recommended containment and mitigation measures worldwide. The Company is monitoring this closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity of the outbreak and its impact on the conversion of waste to energyeconomic environment and other valuable “reuse” products since July 2014. Thebusiness is uncertain. Accordingly, while the Company does not anticipate an impact on its operations, the Company cannot estimate the duration of the Company have frompandemic and potential impact on its business. In addition, a severe or prolonged economic downturn could result in a variety of risks to the time ofbusiness, including a possible delay in the Merger (described below) until recently been essentially those of the Subsidiary. In 2017,Company’s ability to raise money. At this time, the Company shiftedis unable to estimate the impact of this event on its focus from technology R&D to the acquisition and operation of facilities that manufacture compost and sustainable soils from waste resources.operations.

In May 2016, the Company began exploring other synergistic business lines such as compost and soil manufacturing from waste water biosolids. The Company began to phase out its R&D activities in mid 2016, and in August 2017, sold its waste-to-power technology to a licensee. The Company’s current focus is entirely on the business of compost and engineered soils manufacturing and sales.

On August 28, 2017, the Company signed a definitive Membership Purchase Agreement (the “Purchase Agreement”) with Environmental Turnkey Solutions LLC (“ETS”) of Naples, Florida, and its three members to acquire 100% of the membership interests of ETS, and all subsidiaries wholly-owned by ETS. Consideration under the Purchase Agreement includes $2.5 million cash subject to adjustment based on net accounts receivable at closing, $3.5 million in sellers’ notes which are payable to the sellers within nine months of closing, and $4.5 million in Company common stock valued at $0.15 per share. ETS also has a $1.5 million earnout payable in common stock if ETS achieves greater than $2.5 million in annual run rate adjusted EBITDA over a six-month period within 12 months after closing. The Company will assume approximately $2.5 million in commercial equipment loans and $1.5 million in a real property loan. Closing is conditioned on several factors including the Company securing financing required to close the transaction. The Company has paid ETS $150,000 to secure exclusivity under the Purchase Agreement, which is reflected as transaction costs in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017, and loaned to ETS an additional $100,000 in the third quarter of 2017 which the Company forgave in the fourth quarter to extend the exclusivity term until January 15, 2018.

NOTE 2 – BASIS OF PRESENTATION AND GOING CONCERN

The unaudited condensed consolidated financial statements include all accounts of the Company. The accompanying unaudited condensed consolidated financial statements have beenare prepared in accordance with Rule 8-01 of Regulation S-X of the Securities Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles applicable to interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures included in these unaudited condensed financial statements are adequate to make the information presented not misleading. The unaudited condensed financial statements included in this document have been prepared on the same basis as the annual financial statements, and in our opinion reflect all adjustments, which include normal recurring adjustments necessary for completea fair presentation in accordance with US GAAP and SEC regulations for interim financial statements. InterimThe results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that the Company will have for a full year. Inany subsequent period or for the opinion of management, all adjustments considered necessary for a fair presentation ofcalendar year ended December 31, 2020. These unaudited condensed financial statements should be read in conjunction with the audited financial positionstatements and the results of operations and cash flowsnotes to those statements for the interim periods have been included. Theyear ended December 31, 2016 condensed consolidated balance sheet information contained herein2019 which was derived fromfiled with the audited consolidated financial statements as of that date included in the Annual ReportSEC on Form 10-K filed on May 25, 2017.April 14, 2020.

The Company has incurred a net loss of $1,437,777 forFor the ninesix months ended SeptemberJune 30, 2017 and2020, the Company used cash in operating activities of $884,290.$346,492 and incurred a loss of $1,310,046. The accumulated deficit as of June 30, 2020 since inception is $8,689,549,$12,359,257, which iswas comprised of operating losses and other expenses. Additionally, certain of the Company’s debentures totaling $165,000 and redeemable convertible preferred stock matured on July 1, 2019 and are currently in default. Management is in discussions with the holders to either extend the maturity dates or find an alternate settlement solution.

As of June 30, 2020, $2,771,908 of convertible bridge notes plus accrued and capitalized interest of $1,322,262, began to mature through October 2020, with an additional $35,251 in principal and accrued interest maturing in 2021. Several of these convertible bridge notes are in default and the Company is in discussions with the lead investors of that group to reach a settlement, which may include an extension of the notes conversion into equity, or some other combination of these options.

As of June 30, 2020, the Company had a working capital deficit of $5,029,367.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. There is no guarantee whether the Company will be able to generate sufficient revenue and/or raise capital sufficient to support its operations. The ability of the Company to continue as a going concern is dependent on management’s plans which include implementation of its business model to acquirefacilitate the acquisition of and investment in cash-flowing businesses, grow revenue and earnings of those companies which may result in added management fees for the Company, and continue to raise funds for the Company through debt or equity offerings.

On March 31, 2017, As demonstrated with the establishment of QSAM and the signing of the License Agreement, the Company completed the first $1,050,000 trancheis seeking strategic alternatives in other lines of a $1,500,000 convertible bridge note offering (the “Bridge Offering”). As of September 30, 2017, the Company closed an additional $600,000 of follow-on investments in the Bridge Offering. The proceeds from this offering are expected to provide working capital for the Company through at least the first quarter of 2018.

business since its current activities cannot support ongoing operations.

The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Company has concluded that EPH is an equity method investment. The primary investor, and not the Company, has ultimate control over major decisions affecting EPH and the greatest economic risk.

U.S. Generally Accepted Accounting Principles (“GAAP”) requiresOn March 31, 2017, the Company to make judgments, estimatescompleted the first $1,050,000 tranche of a convertible bridge note offering (the “Bridge Offering”). Through the end of 2017, the Company closed an additional $600,000 of follow-on investments in the Bridge Offering. In 2018 and assumptions that affect2019, the reported amountsCompany raised an additional $980,000 and $30,000, respectively, in convertible notes on substantially same terms as the Bridge Offering with three accredited investors and one institutional investor (the “Follow-On Bridge Offering”). As of assetsJune 30, 2020, a total principal amount of $2,801,908 and liabilitiesapproximately $1,329,000 of accrued interest remains due on the Bridge Offering notes, and disclosurea significant portion of contingent assets and liabilities atthese notes are currently in default.

In July 2018, the dateCompany signed a Stock Purchase Agreement for the purchase of all of the outstanding capital stock of George B. Wittmer Associates Inc. (“GBWA”) of Callahan, Florida, from its sole shareholder. On November 9, 2018, the Company transferred the agreement to acquire GBWA to EPH, and through EPH, consummated the GBWA acquisition. Concurrently with the GBWA closing: (i) the Company signed an eight-year Management Agreement (the “Management Agreement”) with EPH to oversee all of the operations of EPH and its acquired subsidiaries for an initial annual fee of $200,000 (which was subsequently increased by amendment to $700,000, $300,000 of which is provided for the management of GBWA); (ii) appointed the Company’s CEO and President to serve as President and Secretary, respectively, of EPH; and (iii) pursuant to the terms of EPH’s Limited Liability Company Agreement (the “LLC Agreement”) acquired 124,999 Class B Membership Units of EPH, equal to 19.9% of the voting interests of EPH, for $50,000. To complete the GBWA acquisition, EPH raised $4.4 million from one institutional investor for 500,000 Class A Membership Units, equal to 80.1% of the voting interest of EPH.

On January 18, 2019, EPH completed its second acquisition of Employee Owned Nursery Enterprises Ltd., a Texas limited partnership d/b/a Organics “by Gosh” (“OBG”). Concurrently with the OBG acquisition, the Company: (i) acquired an additional 53,970 Class B Membership Units in EPH for $21,588 through a subscription payable which is included in accounts payable and accrued expenses on the consolidated financial statements,balance sheets; and (ii) received an additional annual management fee of $500,000 plus expenses in connection with the reported amountstransaction.

In May 2019, the Company signed a services agreement with Community Eco Power, LLC (“CECO”) to assist that company complete an acquisition of revenuestwo waste-to-power facilities in New England, and expenses, cash flowsto assist management transition operations over the following six months. The acquisition closed on May 15, 2019. Two of the Company’s officers and directors each own minority equity stakes in CECO. The fee for the Company’s services was $250,000, all of which was recognized as revenue in 2019.

In the second quarter of 2019, the Company licensed soil technology called ABS from Agrarian Technologies, Inc., for which the Company is currently pursuing sales and distributorship agreements but has not yet been able to generate any material revenue from these activities. The Company pays a minimum royalty under this license agreement to the licensor of $7,500 per quarter, $30,000 of which has been accrued but not paid as of June 30, 2020; and then pays royalties on the sales of the ABS product based on volume sold to the extent such volume royalties exceed the minimum royalties. Management may also seek to raise additional capital through equity and debt offerings.

On April 20, 2020, the Company established QSAM and, through that wholly-owned subsidiary, executed a the License Agreement IGL. The License Agreement provides QSAM with exclusive, worldwide and sub-licensable rights to all of IGL’s patents, product data and knowhow with respect to Samaium-153 DOTMP (the “Technology”), a clinical stage novel radiopharmaceutical meant to treat different types of bone cancer and related footnote disclosures duringdiseases. The Technology was developed by ISO Therapeutics Group, LLC (“ISO”) and previously transferred to IGL, a company majority owned by the period. Onfounders of ISO. The License Agreement also transfers to QSAM the rights to the product name CycloSam for the Technology, and provides QSAM a first right of refusal to license other IGL/ISO technologies in the future.

The License Agreement is for 20 years or until the expiration of the multiple patents covered under the license, and requires multiple milestone based payments including: $60,000 and other expense reimbursements within 60 days of signing, up to $150,000 as the Technology advances through multiple stages of clinical trials, and $1.5 million upon commercialization. IGL will also receive equity in QSAM equal to 5% of the company to be issued within 60 days of signing. Upon commercialization, IGL will receive an on-going basis,royalty equal to 4.5% of Net Sales, as defined in the License Agreement, and up to 50% of any Sublicense Consideration received by QSAM, as defined in the License Agreement. QSAM will also pay for ongoing patent filing and maintenance fees, and has certain requirements to defend the patents against infringement claims. The parties have agreed to mutual indemnification.

Either party may terminate the License Agreement 30 days after notice in the event of an uncured breach, or immediately in the case of bankruptcy or insolvency of the other party. QSAM may terminate for any reason upon 30 days’ notice. In the case IGL terminates due to an uncured QSAM breach, IGL will repay to QSAM 25% of its direct clinical costs to assume ownership of data and other information gained in that process.

In connection with the License Agreement, QSAM signed a two-year Consulting and Confidentiality Agreement (the “Consulting Agreement”) with IGL, which provides IGL with payments of $8,500 per month starting 60 days after signing. The Consulting Agreement is to provide QSAM with additional consulting and advisory services from the Technology’s founders to assist in the clinical development of the Technology.

Management is aware of the Company’s liquidity and going concern issues and is taking steps to improve its negative cashflow. Such steps include negotiations with EPH to eliminate debt the Company reviews and evaluates its estimates and assumptions, including, but not limitedowes to those that relate toaffiliated entity which may include a termination of the realizable valueManagement Agreement; restructuring of identifiable intangible assets and other long-lived assets, derivative liabilities,the convertible bridge notes income taxes and contingencies. Actual results could differ fromother convertible debt and preferred stock of the Company with the holders thereof; and sale of certain IP to EPH for cash payments or further debt reduction. Further, management is pursuing strategic alternatives to the Company’s compost management business, of which QSAM and the License Agreement presents a potential opportunity to raise new capital and possibly retire or convert aged debt. There are no guarantees that the Company will be successful in these estimates.efforts.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its Subsidiary.Subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. References herein to the Company include the Company and its Subsidiary,Subsidiaries unless the context otherwise requires.

Cash

The Company considers all unrestricted cash, short-term deposits, and other investments with original maturities of no more than ninety days when acquired to be cash and cash equivalents for the purposes of the statement of cash flows. The Company maintains cash balances at two financial institutions and has experienced no losses with respect to amounts on deposit. The Company held no cash equivalents as of June 30, 2020 and 2019.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers (“ASC 606”) and all the related amendments.

The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than previously required under U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

Revenue for services from the Company’s compostin 2020 and soil business includes2019 included contracts where the Company iswas paid to do feasibility studies, site assessment studies and other similar services in connectionfor management of related entities. In its review, management identifies that a contract exists with a third party soil or compost manufacturing business. Revenue from such services is recognized atcustomer, identifies the date of delivery of deliverablesperformance obligations in the contract, determines the transaction price, allocates the transaction price to customersthe performance obligations in the contract, and then recognizes revenue when a formal arrangement exists, the price is fixed or determinable, the delivery or milestone deliverable is completed, no other significant obligations of the Company exist and collectability is reasonably assured.satisfies a specific performance obligation. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue.contract liabilities.

Revenue fromThe management services to be provided to the Company’s prior waste-to-power operations wasrelated parties are performance obligations satisfied evenly over a period of time. Therefore, revenue from these management service agreements are recognized aton a straight-line basis over the date of shipment of engines and systems, engine prototypes, engine designs or other deliverables to customers when a formal arrangement exists,service period.

During the price is fixed or determinable, the delivery or milestone deliverable is completed, no other significant obligations ofsix months ended June 30, 2020, revenues generated by the Company exist and collectabilitywere from one customer which is reasonably assured. Payments received before all ofrelated to the relevant criteria for revenue recognition are satisfied was recorded as deferred revenue. The Company did not allow its customers to return prototype products.

Research and Development

Research and development activities for product development are expensed as incurred and are primarily comprised of salaries. Costs forCompany. During the threesix months ended SeptemberJune 30, 2017 and 20162019, revenues generated by the Company were $0 and $43,154, respectively. Costs forfrom two customers, both of which are related to the nine months ended September 30, 2017 and 2016 were $0 and $355,884, respectively.Company.

Stock Based Compensation

The Company applies the fair value method of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Share Based Payment”, in accounting for its stock basedstock-based compensation. This standard states that compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The Company values stock basedstock-based compensation at the market price for the Company’s common stock and other pertinent factors at the grant date.

The Black-Scholes option pricing valuation method is used to determine fair value of stock options consistent with ASC 718, “Share Based Payment”. Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields, expected term of the awards and risk-free interest rates.

The Company accounts for transactions in which services are received from non-employees in exchange for equity instruments based on the fair value of the equity instruments exchanged, in accordance with ASC 505-50, “Equity Based payments to Non-employees”. The Company measures the fair value of the equity instruments issued based on the market pricefair value of the Company’s stock at the time services or goods are provided.on contract execution.

Common Stock Options

The Black-Scholes option pricing valuation method is used to determine fair value of these options consistent with ASC 718, “Share Based Payment”. Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields, expected term of the awards and risk-free interest rates.

Derivatives

Derivatives are recognized initially at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes are therein generally recognized in profit or loss.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed on the straight-line method, based on the estimated useful lives of the assets as follows:

Expenditures for maintenance and repairs are charged to operations as incurred.

Impairment of Long Lived AssetsFair Value Measurement

The Company continually evaluatesmeasures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The Company’s convertible Bridge Notes are valued by using Monte Carlo Simulation methods and discounted future cash flow models. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. These convertible Bridge Notes do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy.

Equity Method Investment

Investments in partnerships, joint ventures and less-than majority-owned subsidiaries in which the Company has significant influence are accounted for under the equity method. The Company’s consolidated net loss includes the Company’s proportionate share of the net income or loss of the Company’s equity method investee. The Company’s proportionate share of net income from its equity method investee, increases income (loss) — net in the consolidated statements of operations and the carrying value in that investment. Conversely, the Company’s proportionate share of intangible assets and other long lived assets to determine whether there are any impairment losses. If indicators of impairment are present and future cash flows are not expected to be sufficient to recover the assets’ carrying amount, an impairmenta net loss would be charged to expensefrom its equity method investee, decreases income (loss) — net in the consolidated statements of income and the carrying value in that investment. The Company’s proportionate share of the net income or loss of any equity method investees includes significant operating and nonoperating items recorded by the Company’s equity method investee. These items can have a significant impact on the amount of income (loss) — net in the consolidated statements of operations and the carrying value in those investments.

Research and Development

Research and development costs are expensed as incurred. Research and development costs were $110,000 for the six month period identified. To date,ended June 30, 2020, and are a result of a license agreement executed during the six month period (see Notes 2 and 10). The Company hasdid not recognizedincur any impairment charges.research and development costs during the six month period ended June 30, 2019.

Income Taxes

Income taxes are accounted for under the asset and liability method as stipulated by FASB ASC 740, “Income Taxes”“Income Taxes” (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts to be realized by the use of a valuation allowance. A valuation allowance is applied when in management’s view it is more likely than not (50%) that such deferred tax will not be utilized.

In the event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether there is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. Reserves for uncertain tax positions would be recorded if the Company determined it is probable that a position would not be sustained upon examination or if payment would have to be made to a taxing authority and the amount is reasonably estimated. As of September 30, 2017,March 31, 2020, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability to the taxing authorities.authorities; however, federal returns have not been filed since the Company’s inception in 2014. Such delinquencies are being resolved by management and a retained tax expert. Interest and penalties related to any unrecognized tax benefits is recognized in the condensed consolidated financial statements as a component of income taxes.

Basic and Diluted (Loss)Loss Per Share

Net loss per share is computed by dividing the net loss less preferred dividendsattributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss less preferred dividendsattributable to common stockholders by the weighted average number of common shares outstanding during the period plus any potentially dilutive shares related to the issuance of stock options, shares from the issuance of stock warrants, shares issued from the conversion of redeemable convertible preferred stock and shares issued for the conversion of convertible debt. There were no potentially dilutive shares as of September 30, 2017 and 2016.

At SeptemberAt June 30, 2017,2020, there were the following potentially dilutive securities that were excluded from diluted net loss per share because their effect would be anti-dilutive: 6,915,48011,715,480 shares from common stock options, 3,568,8451,153,845 shares from common stock warrants, 1,100,0001,650,000 shares from the conversion of debentures, (not inclusive of52,180,859 shares that may be converted from the Bridge Round, as the valuation and corresponding shareNotes (based upon an assumed conversion price will not be determined until the closingat June 30, 2020 of the next financing by the Company in an amount of at least $5,000,000 or December 31, 2017, whichever is sooner)$0.079 per share), and 4,000,0007,569,210 shares from the conversion of redeemable convertible preferred stock.stock (not inclusive of cumulative dividends which may be converted to shares of common stock under certain conditions). At SeptemberJune 30, 2016,2019, there were the following potentially dilutive securities that were excluded from diluted net loss per share because their effect would be anti-dilutive: 5,315,4808,515,480 shares from common stock options, 1,568,8455,337,345 shares from common stock warrants, 785,7141,650,000 shares fromfrom the conversion of debentures, 41,984,478 shares that may be converted from Bridge Notes (based upon an assumed conversion price at June 30, 2019 of $0.082 per share), and 2,857,1426,000,000 shares from the conversion of redeemable convertible preferred stock.

stock (not inclusive of cumulative dividends which may be converted to shares of common stock under certain conditions).

Effective January 1, 2016,Significant Estimates

U.S. Generally Accepted Accounting Principles (“GAAP”) requires the numberCompany to make judgments, estimates and assumptions that affect the reported amounts of shares issuedassets and outstanding was adjusted by 32,760 shares to alignliabilities and disclosure of contingent assets and liabilities at the Company’s records with its independent transfer agent. The shares previously reported indate of the consolidated balance sheet at December 31, 2016 were 29,651,431 and are now reported at 29,684,191. The impact to the condensed consolidated financial statements, the reported amounts of this adjustment wasrevenues and expenses, cash flows and the related footnote disclosures during the period. On an on-going basis, the Company reviews and evaluates its estimates and assumptions, including, but not material.limited to, those that relate to the fair value of stock based compensation, the fair value of convertible bridge notes, and the assessment and recognition of income taxes and contingencies. Actual results could differ from these estimates.

Recent Accounting Pronouncements

In May 2014,August 2018, the FASB issued Accounting Standards Update (“ASU”), No. 2014-09, “Revenue from Contracts with Customers”,guidance that amends fair value disclosure requirements. The guidance removes disclosure requirements on the transfers between Level 1 and Level 2 of the fair value hierarchy in addition to replace the existing revenue recognition criteria for contracts with customers and to establish the disclosure requirements on the policy for revenue from contracts with customers.timing of transfers between levels and the valuation process for Level 3 fair value measurements. The ASU is effectiveguidance clarifies the measurement uncertainty disclosure and adds disclosure requirements for interimLevel 3 unrealized gains and annual periods beginning after December 15, 2017. Adoption of the ASU is either retrospectivelosses and significant unobservable inputs used to each prior period presented or retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date.develop Level 3 fair value measurements. The Company has completed a preliminary assessment of the historical and future impact of the ASU on its consolidated financial statements, and at this time does not believe adoption of ASC 606 will have a material effect on either past or currently anticipated future operations. However, the Company has retained an expert to asset management in assessing the impact of ASC 606 and prepare for implementation as of January 1, 2018, which will include the method of adoption and evaluation of additional disclosure that will be required in 2018.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, requiring management to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASUguidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.2019. Entities are permitted to early adopt any removed or modified disclosures upon issuance and delay adoption of the additional disclosures until the effective date. The Company is currently assessingadopted this guidance effective January 1, 2020 and the adoption did not have a material impact of the ASU on its financial position, results of operations and cash flows, and has retained an expert to assist in this regard, including implementation if management determines that such action is required.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842) (the Update)”, requiring management to recognize any right-to-use-asset and lease liability on the statement ofcondensed consolidated financial position for those leases previously classified as operating leases. The criteria used to determine such classification is essentially the same as under the previous guidance, but it is more subjective. The lessee would classify the lease as a finance lease if certain criteria at lease commencement are met. This ASU is effective for fiscal years beginning after December 15, 2018. The Company is currently assessing the impact of the ASU on its financial position, results of operationsstatements and cash flows.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require adoption on a retrospective basis unless impracticable. If impracticable the Company would be required to apply the amendments prospectively as of the earliest date possible. The Company is currently evaluating the impact that ASU 2016-15 will have on its financial position, results of operations and cash flows, and has retained an expert to assist in this regard, including implementation if management determines that such action is required.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The adoption of ASU 2017-09 will become effective for annual periods beginning after December 15, 2017; andthe Company is currently evaluating the impact that it will have on its financial position, results of operations and cash flows and has retained an expert to assist in this regard, including implementation if management determines that such action is required.

In July 2017, the FASB issued ASU 2017-11,Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815). The amendment changes the classification of certain equity-linked financial instruments (or embedded features) with down round features. The amendments also clarify existing disclosure requirements for equity-classified instruments.When determining whether certain financial instruments (or embedded features) should be classified as liabilities or equity instruments, under ASU 2017-11, a down round feature no longer precludes equity classification when assessing whether the instrument (or embedded feature) is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value solely as a result of the existence of a down round feature. The adoption of ASU 2017-11 is effective for annual periods beginning after December 15, 2018. The Company has early adopted this standard for this interim period, applying the standard retrospectively by means of a cumulative-effect adjustment to the opening balance of accumulated deficit in the amount of $388,667 as of January 1, 2017 (see Note 8).disclosures.

Concentration of Risk

The Company does not have any off-balance sheet concentrations of credit risk. The Company expects cash and accounts receivable to be the two assetsasset most likely to subject the Company to concentrations of credit risk. The Company’s bank deposits may at times exceed federally insured limits. The Company’s policy is to maintain its cash with high credit quality financial institutions to limit its risk of loss exposure.

The Company historically purchased muchMost of the Company’s revenue for the six months ended June 30, 2020 and 2019 was from fees earned from its machined parts through Precision CNC,equity method investment, EPH, under a related party companymanagement agreement. This is currently the Company’s primary source of on-going revenue, and that sublet office space to Q2P through June 27, 2016, and owns a non-controlling interest in the Company.agreement is terminable at will by EPH. See Note 6.4.

NOTE 4 –PROPERTY AND EQUIPMENT, NET– EQUITY METHOD INVESTMENT

PropertyDuring November 2018, the Company invested $50,000 for a 19.9% Class B limited liability membership interest in EPH and equipment, net consistsrecorded this transaction as an equity method investment due to the Company’s ability to exercise significant influence over EPH. The carrying value of the following:

Depreciation expenseinvestment in EPH was reduced to zero after recording the proportionate share of the investee’s net loss for the three months ended September2018 fiscal year. In January 2019, the Company committed an additional $21,588 through a subscription payable to maintain its 19.9% Class B limited liability interests in EPH, after additional Class A units were sold to investors. The Class B units only receive value after all Class A unit holders receive a full return on their investment plus an 8% annual PIK dividend. The $21,588 remains due at June 30, 20172020 and 2016 was $209December 31, 2019 and $493, respectively,is included in accounts payable and foraccrued expenses on the nine months ended September 30, 2017 and 2016 was $1,196 and $27,026, respectively.

condensed consolidated balance sheets. The Company disposed of $4,927 of net property and equipment as partcarrying value of the transfer of its licensing rights with Cyclone duringinvestment remains at zero at June 30, 2020 and December 31, 2019 due to continued losses incurred by EPH. There were no distributions received from the nine months ended September 30, 2017 (see Note 5).equity method investment in 2020 or 2019.

NOTE 5 – CYCLONE SEPARATION, LICENSE RIGHTS AND DEFERRED REVENUEIn 2019, EPH issued an additional 70,057 Class A Units in consideration for $616,500 additional investments. The Company did not purchase additional Class B Units during this time, and as a result, its equity stake in EPH was diluted to 18.5%. Management expects this equity percentage to be significantly diluted in the following reporting periods as EPH raises additional capital to further its acquisition strategy. While the Company can invest alongside these new investments, management does not anticipate the Company will have the funds to do so.

In 2014, Q2P purchased for $175,000 certain licensing rights to use Cyclone Power Technologies’ (“Cyclone”) patented technology on a worldwide, exclusive basis for 20 years with two 10-year renewal terms for Q2P’s waste heat and waste-to-power business. This agreement contained a royalty provision equal to 5% of gross sales payable to Cyclone on sales of engines derived from technology licensed from Cyclone. Also, as part of a separation agreement with Cyclone, Q2P assumed a license agreement between Cyclone and Phoenix Power Group (“Phoenix”), which included deferredFor the six months ended June 30, 2020, EPH generated unaudited revenue of $250,000 from payments previously made to Cyclone for undelivered products. The$5,237,638 and recorded an unaudited net balances asloss of September 30, 2017 and December 31, 2016 for the Cyclone licensing rights were $0 and $69,271, respectively; and the net balances as of September 30, 2017 and December 31, 2016 for the Phoenix deferred revenue were $0 and $250,000, respectively, which are included as a component of deferred revenue on the condensed consolidated balance sheets. The licensing rights were amortized over its estimated useful life of 4 years. Amortization expense for the three months ended September 30, 2017 and 2016 was $0 and $10,938, respectively, and for the nine months ended September 30, 2017 and 2016 was $21,875 and $32,813 respectively.

$995,518.

On January 9, 2017,See Note 5 for transactions with our equity method investment during the Company transferredsix-months ended June 30, 2020 and assigned to Phoenix its Technology Sales Agreement with MagneGas Corporation (the “MagneGas Agreement”) to deliver a waste-to-power system to this customer. Under the MagneGas Agreement, the Company had been paid $90,000 as of the date of transfer, and $68,000 was still due from the customer based on milestones set forth in the MagneGas Agreement. Phoenix assumed the MagneGas Agreement with all rights to receive the future payments thereunder, and responsibility to perform the services and provide the products to the customer. The Company has no further responsibility under the MagneGas Agreement. In consideration for this transfer, Phoenix agreed that the Company had completed and satisfied all financial obligations associated with all past agreements between Phoenix and the Company, specifically: (1) $150,000 previously paid by Phoenix for durability testing of the Q2P engine, and (2) delivery by the Company of the first ten (10) Q2P engines at the rate of $10,000 per delivered Engine for $100,000 in total. This deferred revenue in the total amount of $250,000 was recorded as gain from the extinguishment of liabilities in the condensed consolidated statement of operations for the nine months ended September 30, 2017.2019.

On August 14, 2017, the Company closed a Technology Transfer and Assignment Agreement (the “Transfer Agreement”) with Phoenix to transfer to Phoenix all of the Company’s technology and materials associated with Q2P’s external combustion engine, controls and auxiliary systems (the “Q2P Technology”), developed both in conjunction with its license agreement with Cyclone and such other Q2P Technology developed independently from the license agreement. Pursuant to a consent from Cyclone, the Company also transferred and assigned the license agreement to Phoenix. In consideration for the transfer and assignment, which included net property and equipment of $4,927, unamortized license fees to Cyclone of $47,396 and a payment to Cyclone of $15,000 to consent to the license transfer, Phoenix satisfied and provided releases for $162,500 in past liabilities of Q2P associated with the development of the Q2P Technology, made certain other payments to the Company’s prior engine manufacturer, and provided full releases from liability from both Phoenix and Cyclone. The Company recorded a net gain from the extinguishment of liabilities of $95,178 in the condensed consolidated statement of operations for the three and nine months ended September 30, 2017.

In connection with the separation agreement with Cyclone, the Company also assumed a contract with Clean Carbon of Australia and a corresponding $10,064 prepayment for services or other value to be provided in the future. This deposit has been presented as deferred revenue on the September 30, 2017 and December 31, 2016 condensed consolidated balance sheets.

NOTE 65 – RELATED PARTY TRANSACTIONS

Through June 2016, the Company sublet approximately 2,500 square feet of assembly, warehouse and office space within the Precision CNC facility located at 1858 Cedar Hill Road in Lancaster, Ohio. The sublease provided for the Company to pay rent monthly in the amount of $2,500, which covered space and some utilities. Occupancy costs for the three months ended September 30, 2017 and 2016 were $0 and $0, respectively, and for the nine months ended September 30, 2017 and 2016 were $0 and $15,000, respectively. The sublease was terminated as of June 27, 2016.

The Company also purchased much of its machined parts through Precision CNC up until June 2016. Precision CNC owns a non-controlling interest in the Company. For the three months ended September 30, 2017 and 2016, the amounts invoiced from Precision CNC totaled $0 and $0, respectively, and for the nine months ended September 30, 2017 and 2016, the amounts invoiced totaled $0 and $17,119, respectively, and consisted of rent and research and development expenses for machined parts.

On June 27, 2016, the Company and Precision CNC entered into an agreement to eliminate $49,299 in payables owed to Precision CNC in return for the transfer of certain net assets of the Company with a remaining book value of $70,495, which included office furniture, software and computer systems, and 50,000 shares of restricted common stock valued at $10,500. The Company recorded a loss on this transaction in the amount of $31,696. There were no accounts payable and accrued expenses at September 30, 2017 and December 31, 2016 to Precision CNC.

The Company alsocurrently maintains an executive office in Florida, which is leased by GreenBlock Capital LLC, an investment firm thatin which the Company’s President servespreviously served as a Managing Director,an officer but holds nonever held any equity or voting rights. The Company has no formal agreement for this space and pays no rent.

In March 2017, all outstanding Director accountsDuring the six months ended June 30, 2020 and 2019, the Company recognized $350,000 and $426,692 as revenues based on management services provided to the Company’s equity method investee (see Note 4) and, for the 2019 period, also for service fees under its agreement with Community Eco Power (CECO), which have been presented as revenues – related parties on the condensed consolidated statement of operations.

On April 7, 2020, the Company received $15,000 under multiple demand notes with interest payable accrued expensesat 10% annually from three Directors of the Company. These notes matured on June 30, 2020 and are in default; however, the Directors have indicated they will extend the terms.

During the year ended December 31, 2019, the Company received $788,500 from EPH under multiple demand notes payable with interest payable at 6% annually. This has been presented as note payable – related parties on the condensed consolidated balance sheets. During the six months ended June 30, 2020, the Company received an additional $147,673 from EPH as a note payable with an aggregate amountinterest payable at 6% annually. As of $156,368 were converted intoJune 30, 2020 and December 31, 2019, accrued interest on these notes payable was $42,896 and $15,426 as presented on the condensed consolidated balance sheets. As of June 30, 2020 and December 31, 2019, the balance due on these demand notes payable was $936,173 and $788,500, respectively.

During the six months ended June 30, 2020 and 2019, the Company incurred approximately $32,676 and $6,168, in legal fees with a law firm in which the Company’s Bridge Offering (see Note 7).audit committee chair is an employee. As of June 30, 2020 and December 31, 2019, accounts payable and accrued expenses include $43,251 and $10,575, respectively, for legal fees due to the law firm for services.

In April 2017,May 2019, the Company signed a worldwide, exclusive license agreement with Agrarian Technologies LLC and its affiliates (“Agrarian”) to sell Agrarian’s proprietary bio-stimulant. The license also provides the Company with the exclusive rights to market soil and mulch products under the Wild Earth® and Mulch Masters® federally registered trademarks. As part of the transaction, the Company hired the principal owner of Agrarian and inventor of its technology to serve as the Company’s President forgave $112,797vice president of deferred salary. This amount was reclassified fromproduct development (“VP”). The license agreement provides the Company exclusivity for the Agrarian technology for the longer of two years or the term of the VP with the Company plus an additional two years; provided however, if VP is terminated without cause, such exclusivity would concurrently terminate. The license agreement requires quarterly licensing fees based on a percentage of sales and a minimum fee of $30,000 per year paid quarterly. As of June 30, 2020 and December 31, 2019, $30,000 and $15,000 of license fees have been accrued and included in accounts payable and accrued expenses to additional paid in capital duringon the nine months ended September 30, 2017.condensed consolidated balance sheets.

NOTE 76 – DEBENTURES, CONVERTIBLE BRIDGE NOTES, AND NOTES PAYABLE AND DEBENTURES

Debentures

In March 2017, the

The Company entered into a Modification and Extension Agreement with two holders of itshas Original Issue Discount Senior Secured Convertible Debentures (the “Debentures”) to extend the maturity date to July 31, 2017, reset the conversion price from $0.21 to $0.15, and waive any defaults under the Debentures from the expiration of the maturity date or otherwise. The exercise price of the Warrants that were issued with the Debentures’ exercise price, which had been reset to $0.50 per verbal agreement of the partiestwo holders in the third quarteraggregate amount of 2016, was formally documented under this March 2017 modification agreement.The Debentures do not bear interest, but contained an Original Issue Discount$165,000 as of $20,750.June 30, 2020 and December 31, 2019, and which currently are convertible at $0.10 per share and were due July 1, 2019. All assets of the Company are secured under the Debentures, including our SubsidiaryQ2P and its assets. The Debentures and warrants contain certain anti-dilutive protection provisions in the instance that the Company issues stock at a price below the stated conversion price of the Debentures, as well as other standard protections for the holder. As of September 30, 2017 and December 31, 2016, the aggregate outstanding principal amount of the two The Debentures was $165,000. As of the date of this Quarterly Report, the Debentures wereare currently in default based onand the July 31, 2017 maturity date. The Company has beenis in discussionsnegotiations with the holders to extendreach a new modification agreement or other resolution. If a resolution cannot be reached, the maturity date or amend the terms of the Debentures.

On March 15, 2016, the Company entered into a 120-day term loan agreement with one accredited investor in the principal amount of $150,000. The loan bears 20% interest with interestholder can accelerate all payments due, monthly. The Company incurred loan issuance costs of 100,000 shares of common stock valued at $26,000, $3,000 cash and provided a second securitydemand default interest, inforeclose on the assets of the Company, or pursue other legal remedies available to the holders. The issuance costs were fully expensed in 2016. As of September 30, 2017, the loan balance was $150,000, and accrued interest related to the loan was $2,500. This loan matured on July 15, 2016, and a 10% late penalty was assessed on July 15, 2016.it.

On March 22, 2017, the Company and the term loan holder entered into an Addendum to the loan agreement which extended the maturity date to December 31, 2017, allowed for conversion of the principal amount and accrued interest at the discretion of the holder to common stock at a price of $0.15 per share, and waived all defaults in return for payment of $30,000 which included a $15,000 late penalty and $15,000 of accrued but unpaid interest. This payment was made in April 2017 and the loan is now current. The Company determined that the new conversion feature has no intrinsic value and that the amended terms did not result in a significantly different instrument, and, accordingly, accounted for the addendum as a modification of debt.Convertible Bridge Notes

On March 31, 2017, the Company closed the initial $1,050,000 tranche in a Convertible Promissory Noteconvertible promissory note (the Bridge Offering)“Bridge Notes”) offering (collectively, the “Bridge Offering”). In addition, as part of that initial closing, three of the Company’s directors converted $156,368 and one shareholder converted $168,152$11,784 of prior notes and cash advances, including interest thereon, into the Bridge Offering. As of September 30,the end of 2017, an additional $600,000 was raised under the Bridge Offering and $23,756 of additional prior notes were converted into this round. In 2018, the Company raised an additional $980,000 in Follow-On Bridge Offering notes on substantially same terms as the Bridge Offering (but with a two-year maturity) with three accredited investors, one being our Chief Executive Officer and another a Director who each entered into a $12,500 Bridge Note, and one institutional investor. In 2019, one of these investors provided an additional $30,000 in Bridge Notes. In June 2018, one of the original Bridge Notes for $50,000 plus $7,664 accrued interest was converted by its holder into 613,451 shares of common stock.

The Convertible PromissoryBridge Notes (the “Notes”) from the Bridge Offering and the Follow-On Bridge Offering conducted in 2018 and 2019 convert at a 50% discount to the post-funding valuation of the Company at the closing of its next offering in the minimum amount of $5,000,000 (the “Equity Offering”). The conversion valuation has a ceiling of $12,000,000, and a “floor” company value of $6,000,000 in the event there is no Equity Offering before the Bridge Notes are able to be converted. As of the date of filing, the Company has not completed an Equity Offering defined in the Bridge Notes.

Pursuant to ASC 825-10-25-1, Fair Value Option, the Company made an irrevocable election at the time of issuance to report thethe Bridge Notes at fair value, with changes in fair value recorded through the Company’s condensed consolidated statements of operations as other income (expense) in each reporting period. The estimated fair value recordedof the Bridge Notes as of SeptemberJune 30, 20172020 and December 31, 2019 was $2,360,000$3,074,000 and $2,473,000 (see Note 8)7), and the principal amount due was $1,841,908.$2,801,908. The change in fair value resulted in income and a (charge) to earnings inloss for the three and ninesix months ended SeptemberJune 30, 20172020 and 2019 of $205,793$323,185 and ($419,484), respectively.

$245,726, respectively, which is presented as change in fair value of convertible bridge notes on the condensed consolidated statements of operations.

The Bridge Notes convertare currently convertible into common stock, or preferred stock if received by investors in the Equity Offering, commencing on the earliest of the Equity Offering closing or December 31, 2017, at the discretion of each holder.holder based on the conversion formula provided in the Bridge Notes. Maturity is 36 months from issuance (24 for the subsequently issued Follow-On Bridge Notes) with 15% annual interest which will be capitalized each year into the principal of the Bridge Notes and paid in kind. There

As of June 30, 2020, multiple Bridge Notes with an aggregate principal balance of $2,801,908 and accrued interest of $1,116,914 are no warrants issued in connectiondefault. The Company is in discussions with the Offering.lead investors of this group to reach a settlement, which may include an extenuation of the term, conversion into equity, or some other combination of these potential options.

Notes Payable

On April 14, 2020, the Company received $142,942 under the Paycheck Protection Program (PPP) overseen by the U.S. Small Business Administration. The loan has an annual interest rate of 1% with loan payments being deferred six months from the date of the loan with a maturity date of April 14, 2022. The Company used these funds for payroll costs only and will apply for forgiveness of the loan under the program once the U.S. Small Business Administration starts accepting the forgiveness applications. As of June 30, 2020, this loan has been presented in current liabilities in the accompanying unaudited condensed balance sheet.

On June 8 and 19, 2020, the Company received a total of $60,000 under a promissory note with an unrelated third party with multiple tranches with interest payable at 8% annually. All outstanding principal and interest accrued and unpaid on the note shall be due and payable twelve (12) months after the respective tranche date. The principal and accrued interest is convertible into the Company’s equity on the same terms, conditions and other rights provided to investors in the next equity offering in an amount of at least $1 million. As of June 30, 2020, $60,000 remains due under this promissory note and has been presented as convertible notes payable on the accompanying unaudited condensed balance sheet.

See Note 5 for notes payable outstanding with the Company’s related parties.

NOTE 87 – FAIR VALUE MEASUREMENT AND DERIVATIVES

The Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

All derivatives recognized byAs disclosed in Note 6, the CompanyBridge Notes are reported as derivative liabilities onat fair value, with changes in fair value recorded through the Company’s condensed consolidated balance sheets and are adjusted to their fair value atstatements of operations as a component of other income (expense) in each reporting date. Unrealized gains and losses on derivative instruments are included in change in value of derivative liabilities on the condensed consolidated statement of operations.period.

The following tables set forth the Company’s condensed consolidated financial assets and liabilities measured at fair value by level within the fair value hierarchy at SeptemberJune 30, 20172020 and December 31, 2016.2019. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

There were no transfers between levels during the nine months ended September 30, 2017. However, in accordance with ASU 2017-11Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815),the financial instruments previously classified and fair valued as derivative liabilities due to down round features, have been retrospectively adjusted by means of a cumulative-effect to the condensed consolidated balance sheet as January 1, 2017. The cumulative change effect of $388,667 is recognized as an adjustment of the opening balance of accumulated deficit for the year.

On March 31, 2017, the Company issued $1,218,152 of Convertible Promissory Notes (the “Notes”), closed an additional $423,756 of Notes by May 31, 2017, and closed another $200,000 in follow-on Notes as of August 28, 2017. The Notes convert at a 50% discount to the post-funding valuation of the Company at the closing of its next offering in the minimum amount of $5,000,000 (the “Equity Offering”). The conversion valuation has a ceiling of $12,000,000, and a “floor” company value of $6,000,000 in the event there is no Equity Offering before the Notes are able to be converted. The fair value of the Bridge Notes was determined using various Monte Carlo simulations.

The following table presentstables present a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that use significant unobservable inputs (Level 3) and the related realized and unrealized gains (losses) recorded in the condensed consolidated statement of operations during the period. The table also shows the cumulative change effect of the derivative liabilities that were recorded as an adjustment of the opening balance of accumulated deficit for the year:periods.

The Company’s convertible bridge notesBridge Notes are valued by using Monte Carlo Simulation methods and discounted future cash flow models. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. These convertible bridge notesBridge Notes do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy. The following assumptions were used to value the Company’s convertible bridge notesBridge Notes at SeptemberJune 30, 2017:2020: dividend yield of -0-%, volatility of 90 – 95%148.5%, risk free rate of 1.55%0.15% and an expected term of 2.5.17 years. The fair value of the Bridge Note was estimated based on the present value expected future cash flows using a discount rate of 20%. The following assumptions were used to value the Company’s convertible Bridge Notes at June 30, 2019: dividend yield of -0-%, volatility of 170%, risk free rate of 2.01% and an expected term of 9 months. The fair value of the Bridge Note was estimated based on the present value expected future cash flows using a discount rate of 20%.

NOTE 98 – COMMON STOCK, PREFERRED STOCK AND WARRANTS

Common Stock

DuringOn February 7, 2020, the nine months ended September 30, 2017,Company’s stockholders approved an increase in the Company’s authorized common shares from 100,000,000 to 300,000,000.

The Company issued 18,738,1955,000,000 shares of common stock in the first quarter of 2020 in connection with a services contract valued at $470,279. Details$50,000, which is being expensed over the six-month service term of these issuances are provided below.the contract. During the six months ended June 30, 2020, the Company recognized $45,833 of stock-based compensation which is included in professional fees on the condensed consolidated statement of operations. The Company measured the fair value of the common stock issued based on the market price on contract execution date as no specific performance by the grantee is required to retain the issued shares.

On February 27, 2017,During the six months June 30, 2019, the Company issued an aggregaterecognized $115,714 of 15,000,000 sharesstock-based compensation in connection with a six-month service contract which is included in professional fees on the condensed consolidated statement of restricted common stock subject to forfeiture to its CEO and President. The expense of these shares is not recorded until the terms of forfeiture have been satisfied by the respective employees. Those terms of the stock issuances and forfeitures are materially as follows:

To fully earn 10,000,000 shares, the Company’s CEO must continue to serve with the Company for a period of at least 12 months, during which 12 month or extended period: (1) the Company must complete at least $3 million in funding and (2) complete its first strategic acquisition. To fully earn 5,000,000 shares, the Company’s President must continue to serve the Company as a senior executive on a full-time basis for a period of at least 18 months from December 2016, during which 18 month or extended period: (1) the Company must complete at least $3 million in funding and (2) complete its first strategic acquisition. If these conditions are not met, the executives may forfeit all of their shares at the discretion of the Board.

In April 2017, the Company issued 1,738,195 shares of common stock valued at $260,679 as consideration for the payment of accounts payable and accrued expenses to former employees and vendors.

On May 1, 2017, the Company issued 2,000,000 shares of common stock valued at $209,600 to a consultant for investor relations services.operations.

Redeemable Convertible Preferred Stock

The Company has 600 shares of Preferred Stock issued and outstanding, which currently are convertible at $0.15$0.10 per share of the Company’s common stock (the “Conversion Price”), as per the terms of thea March 20172018 Modification and Extension Agreement.Agreement (the “2018 Modification”). The Preferred Stock bears a 6% dividend per annum, calculable and payable per quarter in cash or additional shares of common stock as determined in the Certificate of Designation. The Preferred Stock has no voting rights until converted to common stock and has a liquidation preference equal to the Purchase Price. On the second anniversaryaggregate purchase price of the Original Issue Dates (the “Two Year Redemption Date”), which occur in$600,000 plus accrued dividends. In December 2017 and January 2018, the Company iswas obligated to redeem all of the then outstanding Preferred Stock, for an amount in cash equal to the Two Year Redemption Amount (such redemption, the “Two Year Redemption”). The Company extended the redemption date to July 1, 2019 pursuant to a new modification agreement signed in March 2019. The Preferred Stock is currently in default, and the Company is negotiating a modification with the holders. If a resolution cannot be reached, the holder can accelerate the redemption due, foreclose on the assets of the Company, or pursue other legal remedies available to it. Each share of Preferred Stock received warrants (the “Warrants”) equal to one-half of the Purchase Price to purchase common stock in the Company exercisable for five (5) years following closing, currently exercisable at a price of $0.50 per share.

The Preferred Stock has price protection provisions in the case that the Company issues any shares of stock not pursuant to an “Exempt Issuance” at a price below the Conversion Price. Exempt Issuances include: (i) shares of Common Stock or common stock equivalents issued pursuant to the Mergeroriginal merger of the company or any funding contemplated by the Merger;that transaction; (ii) any common stock or convertible securities outstanding as of the date of closing; (iii) common stock or common stock equivalents issued in connection with strategic acquisitions; (iv) shares of common stock or equivalents issued to employees, directors or consultants pursuant to a plan, subject to limitations in amount and price; and (v) other similar transactions. The Certificate of Designation contains restrictive covenants not to incur certain debt, repurchase shares of common stock, pay dividends or enter into certain transactions with affiliates without consent of holders of 67% of the Preferred Stock. The unconverted sharesholders of the Preferred Stock must be redeemed in two years from issuance.consented to the Bridge Offering.

Management has determined that the Preferred Stock is more akin to a debt security than equity primarily because it contains a mandatory 2-year redemption at the option of the holder, which only occurs if the Preferred Stock is not converted to common stock. Therefore, management has presented the Preferred Stock outside of permanent equity as mezzanine equity, which does not factor in tointo the totals of either liabilities or equity. In 2016, the proceeds were allocated between the three features of the stock offering: the embedded conversion feature in the Preferred Stock, the warrants, and the Preferred Stock itself. The fair values of the embedded conversion feature and warrants were recorded as a discount against the stated value of the Preferred Stock on the date of issuance. This discount was amortized to interest expense over the term of the redemption period (2 years), which would result in the accretion of the Preferred Stock to its full redemption value. Unamortized discount as of September 30, 2017 and December 31, 2016 was $22,232 and $126,217, respectively. Interest expense related to the preferred stock discount for the nine months ended September 30, 2017 and 2016 was $103,985 and $102,923, respectively.

In accordance with ASU 2017-11, the embedded conversion feature of the Preferred Stock previously classified and fair valued as a derivative liability has been retrospectively adjusted by means of a cumulative-effect to the consolidated balance sheet as January 1, 2017. The cumulative change effect of $42,925 is recognized as an adjustment of the opening balance of accumulated deficit for the year. The agreement setting forth the terms of the common stock warrants issued to the holders of the Preferred Stock also includes an anti-dilution provision that requires a reduction in the warrant’s exercise price, currently $0.50, should the conversion ratio of the Preferred Stock be adjusted due to anti-dilution provisions. In accordance with ASU 2017-11, these warrants previously classified and fair valued as a derivative liability have been retrospectively adjusted by means of a cumulative-effect to the consolidated balance sheet as January 1, 2017. The cumulative change effect of $69,957 is recognized as an adjustment of the opening balance of accumulated deficit for the year.

The Preferred Stock also carries a 6% per annum dividend calculated on the stated value of the stock and is cumulative and payable quarterly beginning July 1, 2016. These dividends are accrued at each reporting period. They add to the redemption value of the stock; however, as the Company shows an accumulated deficit, the charge has been recognized in additional paid-in capital.

Warrants

During the six months ended June 30, 2020, the Company did not issue any warrants, and 2,000,000 warrants expired. The following is a summary of all outstanding common stock warrants as of SeptemberJune 30, 2017:2020:

During the year ended December 31, 2018, we committed to issuing warrants to purchase 150,000 shares of common stock at $.04 per share and expiring in five years, to one of our consultants prior to the consummation of any merger or equity financing of more than $1,000,000. These warrants are provisional and are not considered outstanding or granted as of June 30, 2020.

NOTE 109 – STOCK OPTIONS AND RESTRICTED STOCK UNITS

On July 31, 2014, the Board of Directors of Q2P approved the Founders Stock Option Plan (“Founders Plan”) and the 2014 Employee Stock Option Plan (the “2014 Plan”), collectively the “Option Plans”. The Option Plans were developed to provide a means whereby directors and selected employees, officers, consultants, and advisors of the Company may be granted incentive or non-qualified stock options to purchase restricted common stock of the Company. On February 25, 2016, to accommodate the appointment of new Board members and additional incentive stock options and stock grants to key employees of the Company, the Board approved the 2016 Omnibus Equity Incentive Plan (“2016 Plan”), which allowed for an additional 4four million shares of common stock, stock options, stock rights (restricted stock units), or stock appreciation rights to be granted by the Board in its discretion. This authorized amount was increased to 10 million shares by Board resolution and amendment to the 2016 Plan in 2017. The 2016 Plan, as amended, was approved by the Company’s shareholders in January 2020.

The Company issued 3,200,000 stock options in the first six months of 2020, one million each to two of the Company’s independent directors, 500,000 each to one other independent director and one Board observer, and 200,000 to a new director. The options issued to the current directors and Board obverse were fully vested upon issuance, are exercisable at a price of $0.02 per share, and expire ten years after issuance. The 200,000 options to the new director vest half in 12 months and the balance in 24 months, expire in five years, and are exercisable at $0.02 per share. The options were valued at $18,023 (pursuant to the Black Scholes valuation model see below), based on an exercise price of $0.02 per share and estimated expected term of 5.0 years. This has been classified in general and administrative expense in the condensed consolidated statements of operations.

In May 2017,Option Repricing

On January 6, 2020, the compensation committee of the Company’s Board of Directors, approved a one-time stock option repricing program (the “Option Repricing”) to permit the Company issued 400,000 common stockto reprice certain options underto purchase the 2016 Plan to one new Board memberCompany’s Common Stock held by its current directors, officers and 400,000 common stock options underemployees (the “Eligible Options”), which actions became effective on January 6, 2020. Under the 2016 Plan to one new Board of Advisor Member. The options vest one-half immediately and the balance in 6 months,Option Repricing, Eligible Options with a 10-year term and exercisable at $0.21 per share. The options were valued at $96,800 (pursuant to the Black Scholes valuation model, and as shown in the table detailing the calculation of fair value below), based on an exercise price of $0.21at or above $0.10 per share and with a maturity life(representing an aggregate of 5.25 years.6,311,000 options, or 54% of the total outstanding) were amended to reduce such exercise price to $0.02.

ForThe impact of the nine months ended September 30, 2017,Option Repricing was a one-time incremental non-cash charge of $6,304, which was recorded as stock option expense in the charge tofirst quarter of 2020 which is included in general and administrative expenses on the condensed consolidated statement of operationsoperations.

Total stock-based compensation for stock options issued and the one-time incremental charge for the amortization ofOption Repricing for the six months ended June 30, 2020 was $24,327. There was no stock-based compensation recognized in 2019 related to stock option grants awarded under the Option Plans and 2016 Plan was $248,187.options.

A summary of the common stock options issued under the Option Plans and the 2016 Plan for the period from December 31, 2016 through Septembersix months ended June 30, 20172020 is as follows:

The vested and exercisable options at period end follows:

The fair value of new stock options granted and repriced stock options using the Black-Scholes option pricing model was calculated using the following assumptions:

assumptions for the six months ended June 30, 2020:

Expected volatility is based on historical volatility of a group of 4 comparable companies, due to the low trading volume of the Company’s own common stock. Short Term U.S. Treasury rates were utilized as the risk freerisk-free interest rate. The expected term of the options was calculated using the alternative simplified method codified as ASC 718 “Accounting for Stock Based Compensation,” which defineddefines the expected life as the average of the contractual term of the options and the weighted average vesting period for all issuances.

NOTE 1110 – COMMITMENTS AND CONTINGENCIES

OnIn April 1, 2017, the Company entered into two new Employment Agreements, the first with its Chairman and, as of July 2017, CEO; and the second with its previous CEO and, as of July 2017, President and General Counsel. The Chairman receives a $12,500 per month fee starting April 1annual salaries under these Employment Agreements are $350,000 and continuing until the Company raises its next round of funding in the minimum amount of $5,000,000, at which time, his base salary will be increased to $350,000 per year. The President$220,000, respectively, and General Counsel receives a $10,000 per month fee starting on April 1, and at such time that the Company raises its next round of funding in the minimum amount of $5,000,000, he will receive a base salary of $220,000 per year. Both agreements have provisions for a 12-month severanceseverances in the instance either executive is terminated without cause or after a change in control.control (24 months for the CEO and 12 months for the President).

Pursuant to a services agreement signed in 2018, an additional 150,000 warrants with a five-year term and exercisable at $0.04 per share are issuable to the provider but have not formally been issued as of June 30, 2020 and are not considered outstanding.

As disclosed in Note 5, in May 2019, the Company signed a worldwide, exclusive license agreement with Agrarian Technologies LLC and its affiliates (“Agrarian”) to sell Agrarian’s proprietary ABS bio-stimulant, an organic, natural compound designed to enhance root formation, increase vascular strength and promote overall plant health through the entire growth cycle. The license also provides the Company with the exclusive rights to market soil and mulch products under the Wild Earth® and Mulch Masters® federally registered trademarks. The agreement is 10-years with renewal terms, and provides Agrarian royalties based on the sale of the ABS formula including minimum annual guarantees of $30,000 paid quarterly. As of June 30, 2020, quarterly fees totaling $30,000 since execution of this agreement have not been paid but accrued and are included in accounts payable and accrued expenses on the condensed consolidated balance sheets.

As disclosed in Note 2, the QSAM License Agreement requires multiple milestone based payments including: $60,000 and other expense reimbursements within 60 days of signing, which have been paid, up to $150,000 as the Technology advances through multiple stages of clinical trials, and $1.5 million upon commercialization. IGL will also receive equity in QSAM equal to 5% of the company to be issued within 60 days of signing, which has not yet been issued. Upon commercialization, IGL will receive an on-going royalty equal to 4.5% of Net Sales, as defined in the License Agreement, and up to 50% of any Sublicense Consideration received by QSAM, as defined in the License Agreement. QSAM will also pay for ongoing patent filing and maintenance fees, and has certain requirements to defend the patents against infringement claims. As of June 30, 2020, the Company has paid $30,000 under the QSAM License Agreement representing the initial license fee (and another $30,000 representing the second license fee paid in the third quarter), as well $60,000 in expense reimbursements required under that agreement. These costs have been reflected as research and development expenses on the condensed consolidated statements of operations.

NOTE 1211 - SUBSEQUENT EVENTS

On October 30, 2017,In August 2020, QSAM issued a convertible promissory note to an institutional investor in the Company extendedamount of $110,000, which matures 12 months after the termination date of the four funding tranches provided by the investor – between June and August 2021. Two of these tranches totaling $60,000 were received in June 2020 (see Note 6). The note bears 8% interest payable at maturity, and its Membership Interest Purchaseprincipal and interest are convertible into equity of Company prior to maturity. The note is guaranteed by the Company. The proceeds from this note were used to fulfill commitments under the QSAM License Agreement, (the “Purchase Agreement”) with Environmental Turnkey Solutions LLC (“ETS”) until January 2018 by cancelling $100,000 in notes receivable from ETS (See Note 1)

as well as other development efforts for the Technology.

Item 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS

OverviewFORWARD LOOKING STATEMENTS