United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period: September 30, 20172020
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ended:
Q2Earth,QSAM Biosciences, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware | 000-55148 | 20-1602779 | ||
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) |
420 Royal Palm Way, #100
Palm Beach, FL 33480
(Address of Principal Executive Offices)
(561) 693-1423
(Registrant’s Telephone Number, including area code)
Q2Power Technologies,Q2Earth, Inc.
(Former name or former address, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [Yes[ ] No [X]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark 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.
(1) Yes [X] No [ ]]; (2) Yes [X] No [ ]
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:
Large accelerated filer | [ ] | Accelerated filer | [ ] |
Non-accelerated filer | [ | Smaller reporting company | [X] |
Emerging growth company | [ |
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 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).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
November 14, 2017:20, 2020: Common – 48,422,386
15,524,020
Documents incorporated by reference: None.
Q2EARTH,QSAM BIOSCIENCES, INC.
(F/K/A Q2POWER TECHNOLOGIES, INC.)
FORM 10-Q
TABLE OF CONTENTS
2 |
This Quarterly Report contains certain forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including or related to our future results, events and performance (including certain projections, business trends and assumptions on future financings), and our expected future operations and actions. In some cases, you can identify forward-looking statements by the use of words such as “may,” “should,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” “believe,” “expect” or “anticipate” or the negative of these terms or other similar expressions. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. In evaluating these statements, you should specifically consider the risks that the anticipated outcome is subject to, including the factors discussed under “Risk Factors” in previous filings and elsewhere. These factors may cause our actual results to differ materially from any forward-looking statement. Actual results may differ from projected results due, but not limited to, unforeseen developments, including those relating to the following:
You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from what we expect. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, future financings, performance, or achievements. Moreover, we do not assume any responsibility for accuracy and completeness of such statements in the future. We do not plan to update any of the forward-looking statements after the date of this Quarterly Report to conform such statements to actual results.
JUMPSTART OUR BUSINESS STARTUPS ACT DISCLOSURE
We qualify as an “emerging growth company,” as defined in Section 2(a)(19) of the Securities Act by the Jumpstart Our Business Startups Act (the “JOBS Act”). An issuer qualifies as an “emerging growth company” if it has total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year, and will continue to be deemed an emerging growth company until the earliest of:
● | the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1.0 billion or more; | |
● | the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement; | |
● | the date on which the issuer has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or | |
● | the date on which the issuer is deemed to be a “large accelerated filer,” as defined in Section 240.12b-2 of the Exchange Act. |
As an emerging growth company, we are exempt from various reporting requirements. Specifically, we are exempt from the following provisions:
● | Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires evaluations and reporting related to an issuer’s internal controls; | |
● | Section 14A(a) of the Exchange Act, which requires an issuer to seek shareholder approval of the compensation of its executives not less frequently than once every three years; and | |
● | Section 14A(b) of the Exchange Act, which requires an issuer to seek shareholder approval of its so-called “golden parachute” compensation, or compensation upon termination of an employee’s employment. |
Under the JOBS Act, emerging growth companies may delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies.
Smaller Reporting Company
We are subject to the reporting requirements of Section 13 of the Exchange Act, and subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting company.” That designation will relieve us of some of the informational requirements of Regulation S-K.
Sarbanes/Oxley Act
Except for the limitations excluded by the JOBS Act discussed under the preceding heading “Emerging Growth Company,” we are also subject to the Sarbanes-Oxley Act of 2002. The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management assessment of our internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act will substantially increase our legal and accounting costs.
Exchange Act Reporting Requirements
Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act like we are to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to shareholders at a special or annual meeting thereof or pursuant to a written consent will require us to provide our shareholders with the information outlined in Schedules 14A (where proxies are solicited) or 14C (where consents in writing to the action have already been received or anticipated to be received) of Regulation 14, as applicable; and preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our shareholders. We are also required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the SEC on a regular basis, and will be required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K.
Reports to Security Holders
You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may also find all of the reports that we have filed electronically with the SEC at their Internet site www.sec.gov.
3 |
PART I – FINANCIAL INFORMATION
Q2EARTH,QSAM BIOSCIENCES, INC. (F/K/A Q2POWER TECHNOLOGIES, INC.(f/k/a Q2Earth Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 671,540 | $ | 3,330 | ||||
Notes receivable | 100,000 | - | ||||||
Prepaid expenses | - | 8,753 | ||||||
TOTAL CURRENT ASSETS | 771,540 | 12,083 | ||||||
PROPERTY AND EQUIPMENT, NET | 620 | 6,732 | ||||||
OTHER ASSETS | ||||||||
Licensing rights in Cyclone, net | - | 69,271 | ||||||
Total other assets | - | 69,271 | ||||||
TOTAL ASSETS | $ | 772,160 | $ | 88,086 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 67,201 | $ | 798,444 | ||||
Debentures | 165,000 | 165,000 | ||||||
Derivative liabilities | - | 213,042 | ||||||
Notes payable | 150,000 | 183,000 | ||||||
Notes payable - related party | - | 107,567 | ||||||
Capitalized lease obligations | - | 1,586 | ||||||
Deferred revenue and license deposits | 10,064 | 310,064 | ||||||
TOTAL CURRENT LIABILITIES | 392,265 | 1,778,703 | ||||||
Convertible bridge notes, at fair value | 2,360,000 | - | ||||||
TOTAL LIABILITIES | 2,752,265 | 1,778,703 | ||||||
Redeemable convertible preferred stock - Series A; $0.0001 par value, 1,500 designated Series A, 600 shares issued and outstanding (liquidation preference of $666,871) | 644,639 | 513,729 | ||||||
STOCKHOLDERS’ DEFICIT | ||||||||
Preferred stock, $0.0001 par value; 5,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||
Common stock, $0.0001 par value, 100,000,000 shares authorized, 48,422,386 and 29,684,191 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 4,842 | 2,968 | ||||||
Additional paid-in capital | 6,063,747 | 4,659,575 | ||||||
Subscription receivable | (3,787 | ) | (3,787 | ) | ||||
Accumulated deficit | (8,689,549 | ) | (6,863,102 | ) | ||||
TOTAL STOCKHOLDERS’ DEFICIT | (2,624,748 | ) | (2,204,346 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 772,160 | $ | 88,086 |
September 30, | December 31, | |||||||
2020 | 2019 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 1,675 | $ | 478 | ||||
Prepaid expenses and other assets | 9,000 | 7,665 | ||||||
TOTAL CURRENT ASSETS | 10,675 | 8,143 | ||||||
TOTAL ASSETS | $ | 10,675 | $ | 8,143 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 279,888 | $ | 204,611 | ||||
Accrued payroll and related expenses | 231,218 | 36,337 | ||||||
Accrued bonus | 150,000 | 150,000 | ||||||
Accrued interest - related parties | 60,998 | 15,426 | ||||||
Notes payable - related parties | 1,093,873 | 788,500 | ||||||
Convertible notes payable - related parties | 30,500 | - | ||||||
Convertible notes payable | 142,500 | - | ||||||
Paycheck Protection Program Loan | 142,942 | - | ||||||
Debentures | 165,000 | 165,000 | ||||||
Convertible bridge notes, at fair value | 2,674,000 | 2,440,090 | ||||||
TOTAL CURRENT LIABILITIES | 4,970,919 | 3,799,964 | ||||||
Convertible bridge notes, at fair value | - | 32,910 | ||||||
TOTAL LIABILITIES | 4,970,919 | 3,832,874 | ||||||
Redeemable convertible preferred stock - Series A; $0.0001 par value, 1,500 designated Series A, 600 shares issued and outstanding (liquidation preference of $774,970) | 774,970 | 748,604 | ||||||
STOCKHOLDERS’ DEFICIT | ||||||||
Preferred stock, $0.0001 par value; 5,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||
Common stock, $0.0001 par value, 300,000,000 shares authorized, 14,297,967 and 2,079,898 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 6,421 | 5,199 | ||||||
Additional paid-in capital | 9,042,209 | 6,470,676 | ||||||
Accumulated deficit | (14,783,844 | ) | (11,049,210 | ) | ||||
TOTAL STOCKHOLDERS’ DEFICIT | (5,735,214 | ) | (4,573,335 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 10,675 | $ | 8,143 |
See notes to the unaudited condensed consolidated financial statements.
4 |
Q2EARTHQSAM BIOSCIENCES INC. (F/K/A Q2POWER TECHNOLOGIES, INC.(f/k/a Q2Earth Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
REVENUES | $ | 17,953 | $ | - | $ | 55,933 | $ | 40,000 | ||||||||
COST OF REVENUES | 20,187 | - | 48,269 | 7,172 | ||||||||||||
Gross profit (loss) | (2,234 | ) | - | 7,664 | 32,828 | |||||||||||
EXPENSES | ||||||||||||||||
Payroll | 72,355 | 70,393 | 187,117 | 512,561 | ||||||||||||
Professional fees | 217,352 | 176,771 | 770,480 | 692,416 | ||||||||||||
Research and development | - | 43,154 | - | 355,884 | ||||||||||||
General and administrative | 39,881 | 75,991 | 129,301 | 166,492 | ||||||||||||
Total Expenses | 329,588 | 366,309 | 1,086,898 | 1,727,353 | ||||||||||||
LOSS FROM OPERATIONS | (331,822 | ) | (366,309 | ) | (1,079,234 | ) | (1,694,525 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Financing costs, including interest | (109,220 | ) | (69,172 | ) | (245,779 | ) | (181,425 | ) | ||||||||
Gain (loss) on extinguishment of liabilities | 98,575 | - | 456,720 | (31,696 | ) | |||||||||||
Change in fair value of convertible bridge notes | 205,793 | - | (419,484 | ) | - | |||||||||||
Change in fair value of derivative liabilities | - | 47,872 | - | 724,415 | ||||||||||||
ETS transaction costs | (150,000 | ) | - | (150,000 | ) | - | ||||||||||
Total Other Income (Expense) | 45,148 | (21,300 | ) | (358,543 | ) | 511,294 | ||||||||||
LOSS BEFORE INCOME TAXES | (286,674 | ) | (387,609 | ) | (1,437,777 | ) | (1,183,231 | ) | ||||||||
INCOME TAXES | - | - | - | - | ||||||||||||
NET LOSS | (286,674 | ) | (387,609 | ) | (1,437,777 | ) | (1,183,231 | ) | ||||||||
PREFERRED STOCK | ||||||||||||||||
Series A convertible contractual dividends | (9,074 | ) | (9,074 | ) | (26,926 | ) | (26,844 | ) | ||||||||
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (295,748 | ) | $ | (396,683 | ) | $ | (1,464,703 | ) | $ | (1,210,075 | ) | ||||
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS: | ||||||||||||||||
BASIC AND DILUTED | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.04 | ) | ||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | ||||||||||||||||
BASIC AND DILUTED | 48,422,386 | 29,105,669 | 43,793,353 | 28,028,380 |
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
REVENUES-RELATED PARTY | $ | 174,999 | $ | 245,864 | $ | 524,997 | $ | 672,556 | ||||||||
REVENUES-OTHER | 16,200 | - | 16,200 | - | ||||||||||||
Total Revenues | 191,199 | 245,864 | $ | 541,197 | $ | 672,556 | ||||||||||
EXPENSES | ||||||||||||||||
Payroll and related expenses | 299,222 | 311,499 | 928,492 | 1,186,736 | ||||||||||||
Professional fees | 173,279 | 63,228 | 327,961 | 285,825 | ||||||||||||
General and administrative | 30,446 | 30,279 | 173,067 | 133,644 | ||||||||||||
Research and development expenses | 96,943 | - | 206,943 | - | ||||||||||||
Total Expenses | 599,890 | 405,006 | 1,636,463 | 1,606,205 | ||||||||||||
�� | ||||||||||||||||
LOSS FROM OPERATIONS | (408,691 | ) | (159,142 | ) | (1,095,266 | ) | (933,649 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Financing costs including interest | (168,899 | ) | (136,954 | ) | (474,185 | ) | (413,104 | ) | ||||||||
Change in fair value of convertible bridge notes | (1,343,237 | ) | 735,805 | (1,666,422 | ) | 490,079 | ||||||||||
Loss on equity method investment | - | - | - | (21,588 | ) | |||||||||||
Loss on debt extinguishment | (503,762 | ) | - | (503,762 | ) | - | ||||||||||
Other miscellaneous income | - | - | 5,000 | - | ||||||||||||
Total Other Income (Expense) | (2,015,898 | ) | 598,851 | (2,639,369 | ) | 55,387 | ||||||||||
LOSS BEFORE INCOME TAXES | (2,424,589 | ) | 439,709 | (3,734,635 | ) | (878,262 | ) | |||||||||
INCOME TAXES | - | - | - | - | ||||||||||||
NET INCOME (LOSS) | (2,424,589 | ) | 439,709 | (3,734,635 | ) | (878,262 | ) | |||||||||
PREFERRED STOCK | ||||||||||||||||
Series A convertible contractual dividends | (9,074 | ) | (9,074 | ) | (26,366 | ) | (26,926 | ) | ||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (2,433,663 | ) | $ | 430,635 | $ | (3,761,001 | ) | $ | (905,188 | ) | |||||
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS: BASIC AND DILUTED | $ | (1.03 | ) | $ | 0.21 | $ | (1.64 | ) | $ | (0.44 | ) | |||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: BASIC AND DILUTED | 2,365,613 | 2,079,898 | 2,296,748 | 2,079,898 |
See notes to the unaudited condensed consolidated financial statements.
5 |
Q2EARTHQSAM BIOSCIENCES INC. (F/K/A Q2POWER TECHNOLOGIES, INC.(f/k/a Q2Earth Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ DEFICIT
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
For the nine months ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (1,437,777 | ) | $ | (1,183,231 | ) | ||
Adjustments to reconcile net loss to net cash used in operations: | ||||||||
Depreciation and amortization | 23,060 | 59,839 | ||||||
Restricted shares issued for outside services | 209,600 | 47,667 | ||||||
Restricted shares issued for employee services | - | 117,000 | ||||||
Amortization of stock option and restricted stock unit grants | 248,187 | 415,746 | ||||||
Amortization of prepaid expenses via common stock | - | 189,487 | ||||||
Change in fair value of derivative liabilities | - | (724,415 | ) | |||||
Change in fair value of convertible bridge notes | 419,484 | - | ||||||
Amortization of debt issuance costs | 2,500 | 40,251 | ||||||
Amortization of preferred stock discount | 103,984 | 102,923 | ||||||
(Gain) loss on extinguishment of liabilities | (456,720 | ) | 31,696 | |||||
Changes in operating assets and liabilities | ||||||||
Increase in prepaid expenses and other current assets | 8,753 | 18,914 | ||||||
Increase (decrease) in accounts payable and accrued expenses | (5,361 | ) | 325,674 | |||||
Increase in deferred revenue and license deposits | - | 50,000 | ||||||
Net cash used in operating activities | (884,290 | ) | (508,449 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Expenditures for property and equipment | - | (4,013 | ) | |||||
Note receivable from ETS | (100,000 | ) | - | |||||
Net cash used in financing activities | (100,000 | ) | (4,013 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payment of capitalized leases | (600 | ) | (8,140 | ) | ||||
Proceeds from note payable net of issuance costs | - | 173,709 | ||||||
Proceeds from notes payable - related party | 18,100 | 88,700 | ||||||
Proceeds from sale of common stock | - | 157,500 | ||||||
Proceeds from sale of redeemable preferred stock and common stock warrant | - | 100,000 | ||||||
Proceeds from convertible bridge notes, net of issuance costs | 1,635,000 | - | ||||||
Net cash provided by financing activities | 1,652,500 | 511,769 | ||||||
NET CHANGE IN CASH | 668,210 | (693 | ) | |||||
CASH - Beginning of period | 3,330 | 1,012 | ||||||
CASH - End of period | $ | 671,540 | $ | 319 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURES: | ||||||||
Payment of interest in cash | $ | 45,646 | $ | - | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Forgiveness of deferred salary by officer | $ | 112,797 | $ | - | ||||
Conversion of payables, accrued interest, notes payable and notes payable - related parties to debentures | $ | 191,908 | $ | - | ||||
Settlement of accounts payable and accrued expenses to 1,738,195 shares of common stock | $ | 260,679 | $ | - | ||||
Reclassification of derivative liabilities to equity upon adoption of ASU 2017-11 | $ | 213,042 | $ | - | ||||
Settlement of accounts payable with property, equipment and licensing rights in Cyclone | $ | 147,500 | $ | - | ||||
Accrual of contractual dividends on Series A convertible preferred stock | $ | 26,926 | $ | 26,844 | ||||
Conversion of debentures to 1,289,285 shares of common stock | $ | - | $ | 270,750 | ||||
Reclassification of derivative liabilities to additional paid in capital at conversion of debentures | $ | - | $ | 125,975 | ||||
Issuance of 100,000 shares of common stock for note payable issuance costs | $ | - | $ | 26,000 | ||||
Settlement of accounts payable to 187,919 shares of common stock | $ | - | $ | 49,859 | ||||
Settlement of accounts payable with software, property and equipment and 50,000 shares of stock | $ | - | $ | 49,299 | ||||
Settlement of related party obligation - Cyclone | $ | - | $ | 150,000 |
Preferred Stock | Common Stock | Additional Paid In | Deferred Stock-based | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
Shares | Value | Shares | Value | Capital | Compensation | Deficit | Deficit | |||||||||||||||||||||||||
Balance, December 31, 2019 | - | - | 2,079,898 | $ | 5,199 | $ | 6,470,676 | $ | - | $ | (11,049,210 | ) | $ | (4,573,335 | ) | |||||||||||||||||
Stock-based compensation for services | - | - | 200,000 | 20 | 49,980 | (29,167 | ) | - | 20,833 | |||||||||||||||||||||||
Stock-based compensation expense and stock option modification | - | - | - | - | 24,327 | - | - | 24,327 | ||||||||||||||||||||||||
Series A, preferred stock contractual dividends | - | - | - | - | (8,317 | ) | - | - | (8,317 | ) | ||||||||||||||||||||||
Net loss period ended March 31, 2020 | - | - | - | - | - | - | (437,402 | ) | (437,402 | ) | ||||||||||||||||||||||
Balance, March 31, 2020 | - | - | 2,279,898 | $ | 5,219 | $ | 6,536,666 | $ | (29,167 | ) | $ | (11,486,612 | ) | $ | (4,973,894 | ) | ||||||||||||||||
Stock-based compensation for services | - | - | - | - | - | 25,000 | - | 25,000 | ||||||||||||||||||||||||
Series A, preferred stock contractual dividends | - | - | - | - | (8,975 | ) | - | - | (8,975 | ) | ||||||||||||||||||||||
Net loss period ended June 30, 2020 | - | - | - | - | - | - | (872,645 | ) | (872,645 | ) | ||||||||||||||||||||||
Balance, June 30, 2020 | - | - | 2,279,898 | $ | 5,219 | $ | 6,527,691 | $ | (4,167 | ) | $ | (12,359,255 | ) | $ | (5,830,514 | ) | ||||||||||||||||
Stock-based compensation for services | - | - | 600,000 | 60 | 126,940 | 4,167 | - | 131,167 | ||||||||||||||||||||||||
Conversion of bridge notes and accrued interest to common stock | - | - | 11,418,069 | 1,142 | 2,396,653 | - | - | 2,397,795 | ||||||||||||||||||||||||
Series A, preferred stock contractual dividends | - | - | - | - | (9,074 | ) | - | - | (9,074 | ) | ||||||||||||||||||||||
Net loss period ended September 30, 2020 | - | - | - | - | - | - | (2,424,588 | ) | (2,424,588 | ) | ||||||||||||||||||||||
Balance, September 30, 2020 | - | - | 14,297,967 | $ | 6,421 | $ | 9,041,209 | $ | - | $ | (14,783,844 | ) | $ | (5,735,214 | ) | |||||||||||||||||
Balance, December 31, 2018 | - | - | 2,079,898 | $ | 5,199 | $ | 6,394,748 | $ | (3,787 | ) | $ | (10,367,231 | ) | $ | (3,971,071 | ) | ||||||||||||||||
Stock-based compensation for services | - | - | - | - | 115,714 | - | - | 115,714 | ||||||||||||||||||||||||
Series A, preferred stock contractual dividends | - | - | - | - | (8,876 | ) | - | - | (8,876 | ) | ||||||||||||||||||||||
Net loss period ended March 31, 2019 | - | - | - | - | - | - | (505,274 | ) | (505,274 | ) | ||||||||||||||||||||||
Balance, March 31, 2019 | - | - | 2,079,898 | $ | 5,199 | $ | 6,501,586 | $ | (3,787 | ) | $ | (10,872,505 | ) | $ | (4,369,507 | ) | ||||||||||||||||
Series A, preferred stock contractual dividends | - | - | - | - | (8,976 | ) | - | - | (8,976 | ) | ||||||||||||||||||||||
Net loss period ended June 30, 2019 | - | - | - | - | - | - | (812,697 | ) | (812,697 | ) | ||||||||||||||||||||||
Balance, June 30, 2019 | - | - | 2,079,898 | $ | 5,199 | $ | 6,492,610 | $ | (3,787 | ) | $ | (11,685,202 | ) | $ | (5,191,180 | ) | ||||||||||||||||
Series A, preferred stock contractual dividends | - | - | - | - | (9,074 | ) | - | - | (9,074 | ) | ||||||||||||||||||||||
Net loss period ended September 30, 2019 | - | - | - | - | - | - | 439,709 | 439,709 | ||||||||||||||||||||||||
Balance, September 30, 2019 | - | - | 2,079,898 | $ | 5,199 | $ | 6,483,536 | $ | (3,787 | ) | $ | (11,245,493 | ) | $ | (4,760,545 | ) |
See notes to the unaudited condensed consolidated financial statements.
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Q2EARTHQSAM BIOSCIENCES INC.(F/K/A Q2POWER TECHNOLOGIES, INC. (f/k/a Q2Earth Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended | For the nine months ended | |||||||
September 30, | September 30, | |||||||
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net Loss | $ | (3,734,635 | ) | $ | (878,262 | ) | ||
Adjustments to reconcile net loss to net cash provided by operations: | ||||||||
Depreciation | - | 354 | ||||||
Loss on equity investment | - | 21,588 | ||||||
Stock-based compensation for services | 177,000 | 115,714 | ||||||
Stock-based compensation and stock option modification | 24,327 | - | ||||||
Change in fair value of convertible bridge notes | 1,666,422 | (490,079 | ) | |||||
Amortization of debt issuance costs | 1,250 | 3,750 | ||||||
Paid-in-kind interest - convertible bridge notes | 427,360 | 403,329 | ||||||
Loss on extinguishment of debt | 503,762 | - | ||||||
Accrued interest - related party | 45,572 | - | ||||||
Changes in operating assets and liabilities | ||||||||
Decrease (increase) in prepaid expenses and other current assets | (1,335 | ) | (11,914 | ) | ||||
(Decrease) increase in accounts payable and accrued expenses | 75,278 | (42,491 | ) | |||||
Increase accrued payroll and related expenses | 194,881 | 150,000 | ||||||
Increase in contract liabilities - related party | - | 126,444 | ||||||
Decrease in contract liabilities | - | (10,064 | ) | |||||
Net cash used in operating activities | (620,118 | ) | (611,631 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from convertible notes payable and notes payable - related parties | 335,873 | 425,000 | ||||||
Proceeds from convertible notes payable | 142,500 | 30,000 | ||||||
Proceeds from Paycheck Protection Program | 142,942 | - | ||||||
Net cash provided by financing activities | 621,315 | 455,000 | ||||||
NET INCREASE IN CASH | 1,197 | (156,631 | ) | |||||
CASH - Beginning of period | 478 | 160,035 | ||||||
CASH - End of period | $ | 1,675 | $ | 3,404 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURES: | ||||||||
Payment of interest in cash | $ | - | $ | - | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Accrual of contractual dividends on Series A convertible preferred stock | $ | 26,366 | $ | 26,926 | ||||
Investment purchased with a subscription payable | $ | - | $ | 21,588 | ||||
Conversion of convertible bridge notes and accrued interest to 11,418,069 shares of common stock | $ | 2,511,975 | $ | - |
See notes to the unaudited condensed consolidated financial statements.
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QSAM BIOSCIENCES INC. (f/k/a Q2Earth Inc.)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
QSAM Biosciences Inc. (f/k/a Q2Earth, Inc.) (hereinafter the “Company”), incorporated in Delaware on August 26, 2004, is currently engaged in the business of developing a novel radiopharmaceutical drug candidate for the treatment of bone cancer. This business line commenced in earnest after the end of the third fiscal quarter of 2020, as a result of the separation and transfer pursuant to an Omnibus Separation Agreement (the “Separation Agreement”) of the Company’s prior business of managing compost and soil manufacturing facilities (the “Legacy Business”) through an unconsolidated investee entity called Earth Property Holdings LLC, a Delaware limited liability company (“EPH”). The financial statements presented herein represent primarily the operations of the Legacy Business prior to the Separation Agreement which was consummated on November 6, 2020 (see Note 11). The Company owns approximately an 18% subordinated equity interest in EPH.
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 pursuingpart of the Company’s strategic plan to transition its business into other technologies in the broader biosciences sector which currently is the Company’s focus.
In connection with the transition to the biosciences sector and other events occurring subsequent to September 30, 2020, as disclosed in Note 11, the Company changed its name to QSAM Biosciences Inc. on September 4, 2020, and subsequently changed its stock symbol to QSAM, to better reflect its business moving forward.
On September 4, 2020, the Company completed a plan25:1 reverse stock split of strategic acquisitionsits common shares. All shares and share prices set forth in this sector. Thereport have been adjusted to account for this reverse stock split as if it had occurred on the date presented.
Prior to 2017, the Company previously 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.
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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 nine months ended September 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 nine months ended September 30, 2017 and2020, the Company used cash in operating activities of $884,290.$620,118 and incurred a loss of $3,734,635. The accumulated deficit as of September 30, 2020 since inception is $8,689,549,$14,783,844, 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 September 30, 2020, $1,777,516 of principal and accrued capitalized interest under multiple convertible bridge notes (the “Bridge Notes”), which were issued by the Company primarily between March 31, 2017 and the end of 2018, were in default; and $2,511,975 in principal and accrued and capitalized interest under additional Bridge Notes were settled during the period ended September 30, 2020, with the holders of these notes converting their debt into 11,418,069 shares of common stock of the Company. After September 30, 2020, an additional $130,000 of Bridge Notes including accrued and capitalized interest that was previously in default was also settled for the issuance of, and agreement to issue, a total of 590,909 shares of common stock (see Note 11). The Company is in discussions with the remaining group of Bridge Note holders – amounting to $1,646,646 in principal and accrued and capitalized interest — to reach a settlement which may include an extension of the notes, conversion into equity, or some other combination of these options.
As of September 30, 2020, the Company had a working capital deficit of $4,960,244.
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 new business model to acquire cash-flowing businesses, grow revenuedevelop and earnings of those companies,commercialize its drug candidate, and continue to raise funds through debt or equity offerings.
On March 31, 2017, the Company completed the first $1,050,000 tranche 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.
equity offerings. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
U.S. Generally Accepted Accounting Principles (“GAAP”) requires
Management is aware of the Company’s liquidity and going concern issues and is actively taking steps to improve its negative cashflow and reduce its significant debt burden. Such steps were advanced in the fourth quarter of 2020 (see Note 11). Further, the Company expects to make judgments, estimates and assumptionsraise up to $3 million of new equity to pursue the QSAM drug development opportunity. There are no guarantees that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, the reported amounts of revenues 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 limited to, those that relate to the realizable value of identifiable intangible assets and other long-lived assets, derivative liabilities, convertible bridge notes, income taxes and contingencies. Actual results could differ fromwill 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.
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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 twoone financial institutions,institution and has experienced no losses with respect to amounts on deposit. The Company held no cash equivalents as of September 30, 2020 and December 31, 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 fromin 2020 and 2019 included contracts related to the Company’s compost and soil business includes contractsLegacy Business 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 provided to the Company’s prior waste-to-power operations wasrelated parties, as well as other 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, 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. Payments received before all of the relevant criteria for revenue recognition are satisfied was recorded as deferred revenue. The Company did not allow its customers to return prototype products.
service period.
Research and Development
Research and development activities for product development are expensed as incurred and are primarily comprised of salaries. Costs for the three months ended September 30, 2017 and 2016 were $0 and $43,154, respectively. Costs forDuring the nine months ended September 30, 20172020, revenues generated by the Company’s Legacy Business were primarily from one customer which is related to the Company. Additional revenue in the period was generated from a feasibility study performed and 2016satisfied in the same period for a soil customer unrelated to the Company in the amount of $16,200. The Company recognizes revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers (“ASC 606”) and all the related amendments. During the nine months ended September 30, 2019, revenues generated by the Company’s Legacy Business were $0 and $355,884, respectively.from two customers, both of which are related to the 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.
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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 $206,943 for the nine-month period identified. To date,ended September 30, 2020 and are a result of the License Agreement executed during the period (see Notes 2 and 10). The Company hasdid not recognizedincur any impairment charges.research and development costs during the nine-month period ended September 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, 2017,2020, 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.
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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
At September 30, 2017 and 2016.
At September 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: 6,915,480 shares from common stock options, 3,568,845 shares from common stock warrants, 1,100,000 shares from the conversion of debentures (not inclusive of shares that may be converted from the Bridge Round, as the valuation and corresponding share price will not be determined until the closing of the next financing by the Company in an amount of at least $5,000,000 or December 31, 2017, whichever is sooner), and 4,000,000 shares from the conversion of redeemable convertible preferred stock.
● | 468,619 shares from common stock options; | |
● | 46,154 shares from common stock warrants; | |
● | 66,000 shares from the conversion of debentures; | |
● | 8,079,617 shares that may be converted from Bridge Notes (based upon an assumed conversion price at September 30, 2020 of $0.22 per share); and | |
● | 309,988 shares from the conversion of redeemable convertible preferred stock (inclusive of cumulative dividends which may be converted to shares of common stock). |
At September 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: 5,315,480 shares from common stock options, 1,568,845 shares from common stock warrants, 785,714 shares from the conversion of debentures, and 2,857,142 shares from the conversion of redeemable convertible preferred stock.
● | 340,619 shares from common stock options, | |
● | 213,494 shares from common stock warrants, | |
● | 66,000 shares from the conversion of debentures, | |
● | 1,823,631 shares that may be converted from Bridge Notes (based upon an assumed conversion price at September 30, 2019 of $2.05 per share), and | |
● | 240,000 shares from the conversion of redeemable convertible preferred stock (inclusive of cumulative dividends which may be converted to shares of common stock). |
Significant Estimates
Effective January 1, 2016,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.disclosures.
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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).
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 much of its machined parts through Precision CNC, a related party company that sublet office space to Q2P through June 27, 2016, and owns a non-controlling interest in the Company. See Note 6.
NOTE 4 –PROPERTY AND EQUIPMENT, NET
Property and equipment, net consistsMost of the following:
September 30, 2017 | December 31, 2016 | |||||||
Furniture and Computers | $ | 1,328 | $ | 1,328 | ||||
Shop Equipment | - | 9,540 | ||||||
Total | 1,328 | 10,868 | ||||||
Accumulated depreciation | (708 | ) | (4,136 | ) | ||||
Net property and equipment | $ | 620 | $ | 6,732 |
Depreciation expense for the three months ended September 30, 2017 and 2016 was $209 and $493, respectively, andCompany’s revenue for the nine months ended September 30, 20172020 and 20162019 was $1,196 and $27,026, respectively.from fees earned from its equity method investment, EPH, under the Management Agreement. As of September 30, 2020, this has been the Company’s primary source of on-going revenue. That agreement was terminated in the fourth quarter of 2020 (see Note 11).
NOTE 4 – EQUITY METHOD INVESTMENT
During November 2018, the Company invested $50,000 for a 19.9% Class B limited liability membership interest in EPH and recorded this transaction as an equity method investment due to the Company’s ability to exercise significant influence over EPH. The carrying value of the investment in EPH was reduced to zero after recording the proportionate share of the investee’s net loss for the 2018 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 September 30, 2020 and December 31, 2019 and is included in accounts payable and accrued expenses on the unaudited condensed consolidated balance sheets. The carrying value of the investment remains at zero at September 30, 2020 and December 31, 2019 due to continued losses incurred by EPH. There were no distributions received from the equity method investment in 2020 or 2019.
In 2019 and 2020, EPH issued an additional 317,784 Class A Units in consideration for $2,796,500 additional investments. The Company disposeddid not purchase additional Class B Units during this time, and as a result, its equity stake in EPH has been diluted to approximately 18%. 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.
For the nine months ended September 30, 2020, EPH generated unaudited revenue of $4,927$7,736,370 and recorded an unaudited net loss of net property and equipment as part of the transfer of its licensing rights$1,765,240.
See Note 5 for transactions with Cycloneour equity method investment during the nine months ended September 30, 2017 (see Note 5).
NOTE 5 – CYCLONE SEPARATION, LICENSE RIGHTS AND DEFERRED REVENUE
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 heat2020 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 deferred revenue of $250,000 from payments previously made to Cyclone for undelivered products. The net balances as 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.2019.
On January 9, 2017, the Company transferred 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.
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 accounts payable, accrued expenses and notes payable – related parties with an aggregate amount of $156,368 were converted into the Company’s Bridge Offering (see Note 7).
In April 2017, the Company’s President forgave $112,797 of deferred salary. This amount was reclassified from accrued expenses to additional paid in capital duringDuring the nine months ended September 30, 2017.2020 and 2019, the Company recognized $524,997 and $672,556 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 unaudited condensed consolidated statement of operations. The Company’s CEO and President each own minority interests in CECO.
On April 7, 2020, the Company received $15,000 under multiple demand notes with interest payable at 10% annually from three Directors of the Company. These notes matured on June 30, 2020 and are in default. As of September 30, 2020, the principal amount due of $15,000 has been included on the unaudited condensed consolidated balance sheets as notes payable – related parties.
In the current quarter, the Company received $25,000 and $5,500 under two convertible notes with interest payable at 10% annuals from its President and one of its Directors. These notes are convertible into the security issued in the Company’s next equity raise. As of September 30, 2020, the principal amount due of $30,500 has been presented on the unaudited condensed consolidated balance sheets as convertible notes payable – related parties.
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. During the nine months ended September 30, 2020, the Company received an additional $290,373 from EPH with the same terms. As of September 30, 2020 and December 31, 2019, accrued interest on these notes payable was $57,821 and $15,426 which is presented on the unaudited condensed consolidated balance sheets as accrued interest – related parties. As of September 30, 2020 and December 31, 2019, the balance due on these demand notes payable was $1,078,873 and $788,500, respectively, which has been presented as notes payable – related parties on the condensed consolidated balance sheets. In the fourth quarter of 2020, these notes were settled through the Separation Agreement with EPH (see Note 11).
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During the nine months ended September 30, 2020 and 2019, the Company incurred approximately $52,753 and $10,993, in legal fees with a law firm in which the Company’s audit committee chair is an employee. As of September 30, 2020 and December 31, 2019, accounts payable and accrued expenses include $24,808 and $10,993, respectively, for legal fees due to the law firm for services.
In 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. As part of the transaction, the Company hired the principal owner of Agrarian and inventor of its technology to serve as the Company’s vice president of product 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 September 30, 2020 and December 31, 2019, $37,500 and $15,000 of license fees have been accrued and included in accounts payable and accrued expenses on the unaudited condensed consolidated balance sheets. In the fourth quarter of 2020, this license agreement was transferred to EPH, and the related liabilities are expected to be assumed by EPH (see Note 11).
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.September 30, 2020 and December 31, 2019, and which currently are convertible at $2.50 per share and were due July 1, 2019. All assets of the Company are secured under the Debentures, including our Subsidiary and its assets.Debentures. 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,Convertible Bridge Notes
In 2017 and 2018, 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 conversionissued a total 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$2,771,908 in a significantly different instrument, and, accordingly, accounted forconvertible promissory note (the “Bridge Notes”) offering (collectively, the addendum as a modification of debt.
On March 31, 2017, the Company closed the initial $1,050,000 tranche in a Convertible Promissory Note (the Bridge Offering). In addition, as part of that initial closing,“Bridge Offering”), which included three of the Company’s directors converting $156,368 and one shareholder converted $168,152converting $11,784 of prior notes and cash advances, including interest thereon, into the Bridge Offering. In 2019, an additional $30,000 Bridge Note was issued to one investor. In June 2018, one of the original Bridge Notes for $50,000 plus $7,664 accrued interest was converted by its holder into 24,538 shares of common stock. Maturity is 36 months from issuance (24 months for the Bridge Notes issued in 2018 and 2019) with 15% annual interest which is capitalized each year into the principal of the Bridge Notes and paid in kind.
As of September 30, 2017, an additional $600,000 was raised2020, $1,777,516 of principal and accrued capitalized interest under the Bridge OfferingNotes was in default; and $23,756$2,511,975 in principal and accrued and capitalized interest under additional Bridge Notes was settled during the period ended September 30, 2020, with the holders of these notes converting their debt into 11,418,069 shares of common stock of the Company with a fair value of $2,397,794 based on the stock price of the Company on the date of conversion. The Company recorded a loss on extinguishment of these Bridge Notes of $503,762 as presented on the unaudited condensed consolidated financial statements. After September 30, 2020, an additional prior notes were converted into this round.
$130,000 of Bridge Notes including accrued and capitalized interest that was previously in default was also settled for the issuance of 590,909 shares of common stock (see Note 11). The Company is currently in discussions with the holders of the remaining Bridge Notes in an effort to reach a similar settlement.
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The Convertible Promissory Notes (the “Notes”) from the Bridge Offering 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.
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 remaining outstanding Bridge Notes as of September 30, 20172020 and December 31, 2019 was $2,360,000$2,981,000 and $2,473,000 (see Note 8)7), and the principal amount due was $1,841,908. The$1,093,415 and $2,801,908, respectively. During the nine months ended September 30, 2020 and 2019, the change in fair value resulted in incomea (loss) gain of ($1,666,422) and $490,079, respectively, which is presented as change in fair value of convertible bridge notes on the unaudited condensed consolidated statements of operations (see Note 6).
Paycheck Protection Program
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 (charge) to earningsmaturity 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 September 30, 2020, the amount due on the loan of $142,929 has been presented in current liabilities in the three and nine months ended September 30, 2017 of $205,793 and ($419,484), respectively.
accompanying unaudited condensed consolidated balance sheets.
Convertible Notes Payable
On June 8 through September 9, 2020, the Company received a total of $142,500 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 Notes convertprincipal and accrued interest is convertible into common stock, or preferred stock if received bythe Company’s equity on the same terms, conditions and other rights provided to investors in the Equity Offering, commencingnext equity offering in an amount of at least $1 million. As of September 30, 2020, $142,500 remains due under these convertible notes payable and has been presented as such on the earliest of the Equity Offering closing or December 31, 2017, at the discretion of each holder. Maturity is 36 months from issuance with 15% annual interest which will be capitalized each year into the principal of the Notes and paid in kind. There are no warrants issued in connectionaccompanying unaudited condensed consolidated balance sheets.
See Note 5 for notes payable outstanding with the Offering.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:
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; | |
Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and | |
Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
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 September 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.
Fair value at | ||||||||||||||||
September 30, 2017 | Level 1 | Level 2 | Level 3 | |||||||||||||
Convertible bridge notes | $ | 2,360,000 | $ | - | $ | - | $ | 2,360,000 | ||||||||
Total | $ | 2,360,000 | $ | - | $ | - | $ | 2,360,000 |
Fair value at | ||||||||||||||||
Sept. 30, 2020 | Level 1 | Level 2 | Level 3 | |||||||||||||
Convertible Bridge Notes | $ | 2,674,000 | $ | - | $ | - | $ | 2,674,000 | ||||||||
Total | $ | 2,674,000 | $ | - | $ | - | $ | 2,674,000 |
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Fair value at | ||||||||||||||||
December 31, 2016 | Level 1 | Level 2 | Level 3 | |||||||||||||
Preferred stock embedded conversion feature | $ | 123,266 | $ | - | $ | - | $ | 123,266 | ||||||||
Anti-dilution provision in common stock warrants included with preferred stock | 52,904 | - | - | 52,904 | ||||||||||||
Debenture embedded conversion feature | 25,884 | - | - | 25,884 | ||||||||||||
Anti-dilution provision in common stock warrants included with debentures | 10,988 | - | - | 10,988 | ||||||||||||
Total | $ | 213,042 | $ | - | $ | - | $ | 213,042 |
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.
Fair value at | ||||||||||||||||
December 31, 2019 | Level 1 | Level 2 | Level 3 | |||||||||||||
Convertible Bridge Notes | $ | 2,473,000 | $ | - | $ | - | $ | 2,473,000 | ||||||||
Total | $ | 2,473,000 | $ | - | $ | - | $ | 2,473,000 |
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.
Preferred stock embedded conversion feature | Anti-dilution provision in common stock warrants included with preferred stock | Debenture embedded conversion feature | Anti-dilution provision in common stock warrants included with debentures | Convertible Bridge Notes | Total | |||||||||||||||||||
Fair value, December 31, 2016 | $ | 123,266 | $ | 52,904 | $ | 25,884 | $ | 10,988 | $ | - | $ | 213,042 | ||||||||||||
Reclassification of derivatives to equity upon adoption of ASU 2017-11 | (123,266 | ) | (52,904 | ) | (25,884 | ) | (10,988 | ) | - | (213,042 | ) | |||||||||||||
Issuances of debt | - | - | - | - | 1,841,908 | 1,841,908 | ||||||||||||||||||
Accrued interest | - | - | - | - | 111,108 | 111,108 | ||||||||||||||||||
Unamortized debt issuance costs | - | - | - | - | (12,500 | ) | (12,500 | ) | ||||||||||||||||
Net unrealized loss on convertible bridge notes | - | - | - | - | 419,484 | 419,484 | ||||||||||||||||||
Fair value, September 30, 2017 | $ | — | $ | — | $ | — | $ | — | $ | 2,360,000 | $ | 2,360,000 |
Nine Months Ended Sept. 30, 2020 | ||||
Fair value, December 31, 2019 | $ | 2,473,000 | ||
Conversion to common shares | (1,894,032 | ) | ||
Accrued interest | (427,360 | ) | ||
Amortization of debt issuance costs | 1,250 | |||
Net unrealized loss on convertible bridge notes | 1,666,422 | |||
Fair value, September 30, 2020 – current portion | $ | 2,674,000 |
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 September 30, 2017:2020: dividend yield of -0-%, volatility of 90 – 95%177.2%, risk free rate of 1.55%0.09% and an expected term of 2.50.25 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%.
NOTE 98 – COMMON STOCK, PREFERRED STOCK AND WARRANTS
Common Stock
On September 4, 2020, the Company completed a 25:1 reverse stock split of its common shares. All shares and share prices set forth in the report have been adjusted to account for this reverse stock split as if it had occurred on the date presented.
As of September 30, 2020, the Company issued 11,418,069 shares of common stock in connection with Bridge Note conversions (see Note 6).
In September 2020, the Company issued 600,000 shares of common stock to three consultants in connection with services provided. All services were provided in the third quarter of 2020, and the Company incurred a professional fee expense of $127,000 related to the issuance of these shares during the three-month period ended September 30, 2020. The Company measured the fair value of the common stock issued based on the market price on contract execution date.
The Company issued 200,000 shares of common stock in the first quarter of 2020 in connection with a services contract valued at $50,000, which is being expensed over the six-month service term of the contract. During the nine months ended September 30, 2017,2020, the Company issued 18,738,195 sharesrecognized $50,000 of stock-based compensation which is included in professional fees on the unaudited condensed consolidated statement of operations. The Company measured the fair value of the common stock valued at $470,279. Details of these issuances are provided below.issued based on the market price on contract execution date as no specific performance by the grantee is required to retain the issued shares.
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On February 27, 2017,
During the nine months September 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$2.50 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$12.50 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 nine months ended September 30, 2020, the Company did not issue any warrants, and 80,000 warrants expired. The following is a summary of all outstanding common stock warrants as of September 30, 2017:2020:
Number of Warrants | Exercise price per share | Average remaining term in years | ||||||||||
Warrants issued in connection with issuance of Preferred Stock | 46,154 | $ | 12.50 | 0.20 |
Number of Warrants | Exercise price per share | Average remaining term in years | ||||||||||
Warrants issued in connection with issuance of Debentures | 415,000 | $ | 0.50 | 1.75 | ||||||||
Warrants issued in connection with issuance of Preferred Stock | 1,153,845 | $ | 0.50 | 3.10 | ||||||||
Warrants issued in connection with a services contract | 1,000,000 | $ | 0.20 | 2.58 | ||||||||
Warrants issued in connection with a services contract | 1,000,000 | $ | 0.35 | 2.58 |
During the year ended December 31, 2018, we committed to issuing warrants to purchase 6,000 shares of common stock at $1.00 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 September 30, 2020.
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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 memberscompensate officers, directors and additional incentive stock options and stockother key service providers with equity grants, to key employees of the Company, the Board approved the 2016 Omnibus Equity Incentive Plan (“2016 Plan”), which initially allowed for an additional 4 million160,000 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 400,000 shares by Board resolution and amendment in 2017. The 2016 Plan, as amended, was approved by the Company’s shareholders in January 2020.
In May 2017, theThe Company issued 400,000 common128,000 stock options underin the 2016 Planfirst nine months of 2020, 40,000 each to two of the Company’s independent directors, 20,000 each to one other independent director and one Board observer, and 8,000 to a new Board member and 400,000 common stock options under the 2016 Plan to one new Board of Advisor Member.director. The options issued to the current directors and Board observer were fully vested upon issuance, are exercisable at a price of $0.50 per share, and expire ten years after issuance. The 8,000 options to the new director vest one-half immediatelyhalf in 12 months and the balance in 624 months, with a 10-year termexpire in five years, and are exercisable at $0.21$0.50 per share. The options were valued at $96,800$18,023 (pursuant to the Black Scholes valuation model and as shown in the table detailing the calculation of fair valuesee below), based on an exercise price of $0.21$0.50 per share and with a maturity lifeestimated expected term of 5.255.0 years. This has been classified in general and administrative expense in the unaudited condensed consolidated statements of operations.
ForOption 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 to reprice certain options to purchase the Company’s Common Stock held by its current directors, officers and employees (the “Eligible Options”), which actions became effective on January 6, 2020. Under the Option Repricing, Eligible Options with an exercise price at or above $2.50 per share (representing an aggregate of 252,440 options, or 54% of the total outstanding) were amended to reduce such exercise price to $0.50.
The impact of the Option Repricing was a one-time incremental non-cash charge of $6,304, which was recorded as stock option expense in the first quarter of 2020 which is included in general and administrative expenses on the unaudited condensed consolidated statement of operations.
Total stock-based compensation for stock options issued and the one-time incremental charge for the Option Repricing for the nine months ended September 30, 2017, the charge2020 was $24,327. There was no stock-based compensation recognized in 2019 related to the condensed consolidated statement of operations for the amortization of 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 and prior stock option plans for the period from December 31, 2016 throughnine months ended September 30, 2017 follows:2020 is as follows (shares and prices have been adjusted to account for a 25:1 reverse split):
Number Outstanding | Weighted Avg. Exercise Price | Weighted Avg. Remaining Contractual Life (Years) | ||||||||||
Balance, December 31, 2016 | 6,115,480 | $ | 0.21 | 6.1 | ||||||||
Options issued | 800,000 | $ | 0.21 | 9.4 | ||||||||
Options exercised | — | — | — | |||||||||
Options cancelled | — | — | — | |||||||||
Balance, September 30, 2017 | 6,915,480 | $ | 0.21 | 5.9 |
Number Outstanding | Weighted Avg. Exercise Price | Weighted Avg. Remaining Contractual Life (Years) | ||||||||||
Balance, December 31, 2019 | 340,619 | $ | 3.00 | 3.9 | ||||||||
Options issued | 128,000 | 0.50 | 9.2 | |||||||||
Balance, September 30, 2020 | 468,619 | 1.75 | 5.9 |
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The vested and exercisable options at period end follows:
Exercisable/ Vested Options Outstanding | Weighted Avg. Exercise Price | Weighted Avg. Remaining Contractual Life (Years) | ||||||||||
Balance, September 30, 2017 | 5,985,480 | $ | 0.21 | 5.7 |
Exercisable/ Vested Options Outstanding | Weighted Avg. Exercise Price | Weighted Avg. Remaining Contractual Life (Years) | ||||||||||
Balance, September 30, 2020 | 460,619 | $ | 1.75 | 5.9 |
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 nine months ended September 30, 2020:
Nine Months Ended September 30, 2017 | ||||
Risk free interest rate | 1.09 | % | ||
Expected volatility | 101.2 | % | ||
Expected dividend yield | 0 | % | ||
Expected term in years | 5.25 | |||
Average value per options | $ | 0.12 |
Nine Months Ended Sept. 30, 2020 | ||||
Risk free interest rate | 1.610 | % | ||
Expected volatility | 149.67 | % | ||
Expected dividend yield | - | % | ||
Expected term in years | 5.0 |
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). In the fourth quarter of 2020, the CEO’s agreement was terminated by mutual consent of the parties, and all severance payments were released (see Note 11).
Pursuant to a services agreement signed in 2018, an additional 6,000 warrants with a five-year term and exercisable at 1.00 per share are issuable to the provider but have not formally been issued as of September 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. As of September 30, 2020, quarterly fees totaling $37,500 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. In the fourth quarter of 2020, this license agreement was transferred to EPH and accrued fees are expected to be assumed by EPH (see Note 11).
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 September 30, 2020, the Company has paid $60,000 under the QSAM License Agreement representing the full upfront license fee, as well $60,000 in expense reimbursements required under that agreement. Total costs of $120,000 paid under and in connection with this license, as well as an additional $86,943 in drug development costs paid to service providers, have been reflected as research and development expenses on the unaudited condensed consolidated statements of operations.
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NOTE 1211 - SUBSEQUENT EVENTS
Separation Agreement
On October 30, 2017,November 6, 2020 (the “Effective Date”), the Company extended the termination date of its Membership Interest Purchaseentered into an Omnibus Separation Agreement (the “Purchase“Separation Agreement”) with Environmental Turnkey Solutions LLC (“ETS”) until January 2018 by cancelling $100,000its unconsolidated investee entity, EPH. Under the terms of the Separation Agreement, the parties have agreed that the Company will continue to operate and pursue opportunities in notes receivable from ETS (See Note 1)the biosciences and pharmaceutical fields while EPH will continue to operate in the compost and soil manufacturing fields. More specifically:
1. | On the Effective Date, the Management Agreement, dated January 18, 2019, as amended, between EPH and the Company (then Q2Earth) was terminated by mutual agreement of the parties. | |||
a. | In lieu of any severance or other termination payments due thereunder, EPH has released QSAM from a total of $993,985 in liabilities, inclusive of advanced management fees and multiple promissory notes, including accrued and unpaid interest. Such promissory notes have been cancelled and are no longer enforceable. An additional $114,700 in promissory notes owed to an affiliate of EPH was agreed to be converted into Company common stock at a price of $0.22 per share. | |||
b. | The prior officers and employees of the Company engaged in the compost and soil manufacturing business have been released from any non-competition, non-solicitation or other restricted covenants pursuant to their respective employment agreements (as agreed in the Separation Agreement and further defined in individual release agreements with each such employee). | |||
2. | As of the Effective Date, EPH has the right in its sole discretion to use the name “Q2Earth” in all jurisdictions of the United States and worldwide. | |||
3. | The Company has agreed to transfer to EPH the License Agreement for the ABS product and all associated knowhow, trade secrets and trademark/service marks. Additionally, the Company has agreed to transfer to EPH the distributorship agreement, dated June 1, 2019, with Senn, Senn & Senn LLC (the “Senn Agreement”). Both these transfers are subject to consent by the granting parties, which has not been received as of the current date. The Company’s Board determined that these agreements had no material value, were not generating revenue, and had accumulated $37,500 in liabilities. | |||
4. | The Company has agreed that up to $175,000 in funds raised in a next financing will be used to pay any remaining legacy debt and liabilities after the Effective Date. |
Conversion of Debt for Common Shares
In addition to Bridge Notes settled and converted to common stock as of September 30, 2020, in October 2020, an additional $130,000 of principal and interest in defaulted Bridge Notes were converted into 590,909 shares of common stock issued or to be issued as of the date hereof.
On November 6, 2020, $147,797 in deferred employee compensation owed to the Company’s CEO was converted to 444,527 shares of common stock issued or to be issued as of the date hereof, plus the employee forgave an additional $32,598 in deferred compensation.
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On November 1, 2020, the Company issued 800,000 shares of common stock to a service provider under a 12 month consulting agreement in connection with corporate communications and investor relations activities.
Resignation of former CEO and Chairman, and appointment of new CEO and Executive Chairman
On November 6, 2020, Kevin Bolin resigned as Chairman and CEO of the Company. At such time, Mr. Bolin was owed $180,395 in deferred unpaid salary, of which $147,797 was converted into 444,527 shares of common stock issued or to be issued, and $32,598 was forgiven. Further, the forfeiture provision on 400,000 shares of common stock issued to Mr. Bolin in 2018 was terminated.
On November 6, 2020, Douglas Baum, age 53, was appointed as Chief Executive Officer of the Company. Mr. Baum has been a director of the Company since January 2020. Mr. Baum received a three year employment agreement with the Company providing for $250,000 per year in base salary, of which only half will be paid in the first year or until certain results have been achieved in the ongoing drug development program. He will receive additional equity compensation to be subsequently approved and granted by the Board. Mr. Baum’s employment agreement provides for a 12 month severance payment if he is terminated for cause or leaves for “good reason” as defined in the agreement.
On November 6, 2020, C. Richard Piazza, age 73, was appointed as a Member of and the Executive Chairman of the Board of the Company. Mr. Piazza received a three year employment agreement with the Company providing for $220,000 per year in base salary, of which only half will be paid in the first year or until certain results have been achieved in the ongoing drug development program. He will also receive additional equity compensation to be subsequently approved and granted by the Board. Mr. Piazza’s employment agreement provides for a 12 month severance payment if he is terminated for cause or leaves for “good reason” as defined in the agreement. Mr. Piazza also serves as President, and is a minority shareholder, of IGL Pharma Inc., the licensor of the Company’s drug technology, and a consultant to IsoTherapeutics Group, LLC, the inventors of the technology. Mr. Piazza does not have any family relationship with other directors or officers of the Company.
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Item 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS
OverviewFORWARD LOOKING STATEMENTS
The following discussionThis Quarterly Report on Form 10-Q contains certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including or related to our future results, events and performance (including certain projections, business trends and assumptions on future financings), and our expected future operations and actions. In some cases, you can identify forward-looking statements by the use of words such as “may,” “should,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” “believe,” “expect” or “anticipate” or the negative of these terms or other similar expressions. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. In evaluating these statements, you should specifically consider the risks that reflect the Company’s plans, estimatesanticipated outcome is subject to, including the factors discussed under “Risk Factors” in previous filings and beliefs, andelsewhere. These factors may cause our actual results couldto differ materially from any forward-looking statement. Actual results may differ from projected results due, but not limited to, unforeseen developments, including those relating to the following:
● | We fail to raise capital; | |
● | We fail to implement our business plan; | |
● | We fail to complete acquisitions or fail to integrate acquired companies successfully; | |
● | We fail to compete at producing cost effective products; | |
● | Market demand does not materialize for the products we are development and sell; | |
● | The availability of additional capital at reasonable terms to support our business plan; | |
● | Economic, competitive, demographic, business and other conditions in our markets; | |
● | Changes or developments in laws, regulations or taxes; | |
● | Actions taken or not taken by third-parties, including our suppliers and competitors; | |
● | The failure to acquire or the loss of any license or patent; | |
● | The failure to obtain or loss of a permit or operating license; | |
● | Changes in our business strategy or development plans; | |
● | The availability and adequacy of our cash flow to meet our requirements; | |
● | Economic and other conditions caused by the Covid-19 or other pandemics; and | |
● | Other factors discussed under the section entitled “RISK FACTORS” in previous filings or elsewhere herein. |
You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from what we expect. Although we believe that the expectations reflected in the forward-looking statements. Factors that could causestatements are reasonable, we cannot guarantee future results, levels of activity, future financings, performance, or contributeachievements. Moreover, we do not assume any responsibility for accuracy and completeness of such statements in the future. We do not plan to update any of the forward-looking statements after the date of this Quarterly Report to conform such statements to actual results.
A. Plan of Operation
Legacy Business.
Until November 2020, our primary business was acquiring and overseeing the acquisition of companies in the compost and soil health sector (the “Legacy Business”). Through an affiliated company, Earth Property Holdings LLC (“EPH”) we completed two acquisitions of compost facilities in Austin, Texas and Jacksonville, Florida, and had been managing all the operations of those entities through an eight-year Management Agreement providing us $700,000 per year in fees. Prior to these differences include those discussed below and elsewhere in this Quarterly Report.
The Company’s operating subsidiary, Q2P, was originally formed in April 2010 in the state of Florida as a limited liability company called “Cyclone-WHE LLC.” The purpose of the Company at such time was essentially the same as it was through most of 2016: to complete research and development on itsoperations, we were developing waste-to-power technology with the goal of pursuing business opportunities in the renewable powerclean energy sector. The Company re-domiciledIn 2017 we raised funding through our Bridge Offering (discussed below) to Delaware astransition into the soil health sector, and sold our waste-to-power technology to a corporation in April 2014, formally split from its former parent in July 2014, and changed its name to “Q2Power Corp.” in February 2015. It is licensed to do business in Florida, where it maintains an office.licensee.
On November 12, 2015, Q2P consummated its AgreementEPH is an unconsolidated investee entity in which we currently own approximately an 18% Class B subordinated equity stake. Class A equity holders comprised of one primary institutional investor and Plan of Merger (the “Merger Agreement”) with the Company (then called Anpath Group, Inc.) and the Company’s newly formed and wholly-owned subsidiary, AnPath Acquisition Sub, Inc., a Delaware corporation (“Merger Subsidiary”), resulting in the Merger Subsidiary merging with and into Q2P. As a result, Q2P was the surviving company and a wholly-owned subsidiary of AnPath (the “Merger”). As a result of the Merger, all outstanding shares of Q2P were exchanged for 24,034,475 shares of the Company’s common stock, representing approximately 93% of the total issued and outstanding common stock of the Company, excluding stock options, warrants and convertible notes outstanding at such time. In addition, the Company assumed both the Q2P 2014 Founders Stock Option Plan and the 2014 Employees Stock Option Plan (the “Option Plans”), and 1,095,480 options outstanding thereunder. As of the date of the Merger, the officers and directors of Q2P took over the management and Board of Directors of the Company.
In connection with the Merger, the Company sold the former operating entity of Anpath, ESI, to three former officers and shareholders of Anpath in exchange for the return of 470,560 shares of common stock of the Company and ESI retaining all of the old liabilities of ESI including a litigation judgment. In December 2015, the Company officially changed its name to Q2Power Technologies, Inc. to reflect the new business direction of the Company – that of Q2P – after the Merger. In February 2016, the Company changed its fiscal year end from March 31 to December 31 to reflect the year-end of its operating Subsidiary, and up-listed its common stock to the OTCQB. The financial statements and footnotes to the financial statements reflect this change of fiscal year end. On August 18, 2017, the Company changed its name to Q2Earth, Inc.
Since May 2016, the Company began to pursue opportunities in business of manufacturing of compost and soils from biosolids and other waste streams. In the second quarter of 2017, the Company received and fulfilled its first paid services contract to provide a feasibility study for the manufacturing of soils from a large-scale development project; signed two letters of intent providing for an exclusivity period to acquire two separate compost manufacturing companies in the southeastern United States, and executed a definitive purchase agreement with one of those companies (described below).
Purchase Agreement. 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.
ETS is a compost and soil manufacturing company founded in 2011 that operates in an area from the Florida Keys to Sarasota, Florida. ETS is currently generating approximately $8 million revenue and $1.8 million EBITDA on an annualized basis, not including forecasted growth from recently signed contracts and a facility acquisition that could substantially increase their operating revenue and earnings over the following 12 months. The company’s assets include land and improvements, equipment, proprietary know-how and tradenames, long-term contracts and extensive customer lists. ETS’ principalsfollow-on investors who have collectively over 90 years experience in waste management, organics recycling, compost manufacturing, and logistics. ETS’ CEO, Anthony Cialone, will become Executive Vice Presidentprovided approximately $7 million to EPH, own the other 82% of the Company upon closing, under a two-year agreement with renewal options.that company.
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 Q2Earth common stock valued at $0.15 per share, which is at or above current market prices. 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. Approximately $725,000 of the purchase price will be held in escrow to assure performance under certain representations and warranties in the Purchase Agreement, in addition to other indemnification obligations of the sellers. 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 delivery of the purchase price to the sellers, signing of two-year Employment Agreements and 18-month stock Lock-Up Agreements with ETS’ principal manager, completion of ETS’ two-year audited financial statements and September 30 financial GAAP review, consents from ETS’ lenders and landlord to the change in control, and the Company securing financing required to close the transaction.
The Purchase Agreement contains standard representations and warranties from both parties, as well as pre-closing covenants including three-year non-compete agreements with all the principals. Indemnification is subject to a $100,000 basket and a $2.4 million cap, except for certain specified indemnities. There were no brokers involved with the transaction. The parties anticipate closing the Purchase Agreement in the fourth quarter of 2017.
Sale of Engine Technology.On August 14, 2017, the Company closed a Technology Transfer and Assignment Agreement (the “Transfer Agreement”) with Phoenix Power Group LLC (“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 Power Technologies, Inc. (“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 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.
Moving forward, the Company intends focus entirely on the business of compost and engineered soils manufacturing and sales.
Bridge Offering.In May 2017, the Company completed its Convertible Promissory Note “Bridge” offering (the “Bridge Offering”) with $1,450,000 of new cash raised and an additional $191,908 in old debt converted into the round. The Company raised an additional $200,000 in a follow-on Bridge Offering on the same terms in September 2017. Discussion of the Bridge Offering is provided in “Financial Condition, Liquidity and Capital Resources”. Funds from the Bridge Offering are sufficient to provide for operations for the Company through the first quarter of 2018, including advancing its strategy to acquire cash-flowing composting businesses.
A. Plan of Operation
In the second half of 2016, the Company announced that it had taken several important steps to expand its business model into the commercial composting and sustainable soils sector. This included starting an alliance with a leading company in this space based in Georgia, and adding a key advisor with over 40 years of experience in this industry to our team. Two of the Company’s independent Directors also have significant experience and contacts in waste water, biosolids, waste management and other areas that are synergistic and overlapping with composting.
In 2016, the Company, ERTH Products LLC and Exceptional Products Inc. (the “ERTH Companies”), entered into a letter of intent (the “LOI”) contemplating the acquisition of the ERTH Companies by the Company. The ERTH Companies, based in Georgia, manufacture agricultural compost and engineered soils for the construction industry from waste water biosolids. The Company also added Wayne King Sr., the founder of the ERTH Companies, to the Company’s Board of Advisors. The exclusivity period of this LOI has been extended from September 30, 2017 until September 30, 2018 by agreement of the parties.
In August 2017, the Company and ETS signed a definitive Purchase Agreement to acquire all of the membership interests in 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, $4.5 million in Q2Earth common stock valued at $0.15 per share, and a $1.5 million stock earnout. The Company will assume approximately $2.5 million in commercial equipment loans and $1.5 million in a real property loan. A more detail description of this transaction is provided above inOverview – Purchase Agreement.
During the second half of 2017, the Company expects to advance its plans to consolidate companies in the compost and soil manufacturing business by completing these or other acquisitions. Management believes these plans have a greater likelihood of success since the completion of its Bridge Offering earlier in the year, as the Company now has funding to staff diligence operations and advance contract negotiations, and to set up at least one of these acquisitions for a possible closing in the fourth quarter of 2017.
The Company’s strategy in composting and sustainable soils is supported by a Research & Markets report published May 2016 stating that the global market for these products — specifically engineered soils, of which composting is a major component — is projected to reach $7.8 billion by 2021, at a CAGR of 6.7% from 2016 to 2021. The growth of this market is being driven by soil productivity, water conservation and pollution concerns in the United States and worldwide. According to these and other reports, 99 million acres (28% of all cropland) in the U.S. are eroding above soil tolerance rates, meaning the long-term productivity of the soil cannot be maintained and new soil is not adequately replacing the lost soil. This erosion reduces the ability of the soil to support plant growth and hold water, adding significant pressure on this critical depleting resource. Further, soils produced with compost are being used with more frequency in construction, infrastructure and land reclamation projects to reduce costs, accelerate permitting, and create more sustainable landscapes. Management sees an opportunity in the composting and engineered soils markets to build a strong, cash flowing company, while also benefitting the environment.
In connection with these new plans the Company began to phase out its R&D overhead in 2016, including scaling back all of its engineering and technical personnel in order to dedicate more resources to pursuing partnerships and acquisitions in the compost industry.
In January 2017, the Company transferred its sales agreement with MagneGas to Phoenix Power Group (“Phoenix”), a licensee of the Company’s technology. Under this agreement, Phoenix assumed all responsibility and liabilities associated with delivering a waste-to-power system to the customer utilizing the Company’s technology, and will receive any additional fees paid by the customer for successful performance. Phoenix released the Company of approximately $250,000 in deferred revenue liabilities in connection with this contract assignment, and agreed to certain royalty fees payable to the Company for sales of the engine and system. This release from performance was recorded as a component of gain from extinguishment of liabilities in the nine months ended September 30, 2017.
In August 2017, the Company closed its Transfer Agreement which transferred to Phoenix all of the Company’s technology and materials associated with the old Q2P Technology, including transferring and assigning its License Agreement with Cyclone 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 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. Management reviewed the accounting treatment for discontinued operations in connection with this transaction and determined that such treatment would not be appropriate due to the Company’s gradual re-focusing of its business away from technology development over an 18 month period, which resulted in a minimal financial impact on the Company’s operations and financial results upon the consummation of this transaction.
From October 1 through December 31, 2017, management expects to spend approximately $250,000 on operations, not including funds required to close the previously discussed or future acquisitions, which may require as much as $10 million in capital to complete if all potential targets are included. Our average monthly burn-rate through the end of the year, not including acquisition costs, is approximately $75,000 per month. Additional amounts will be spent on signing LOI’s containing exclusivity periods with potential acquisition targets.
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In addition to our management role on behalf of EPH, in May 2017,2019, we signed a worldwide, exclusive license agreement with Agrarian Technologies LLC and its affiliates (“Agrarian”) to sell Agrarian’s proprietary ABS bio-stimulant. As part of that transaction, we also hired the principal owner of Agrarian and inventor of its technology, Richard Stewart, to serve as our Vice President of Product Development. As of the end of third quarter of 2020, we had failed to generate any material revenue from this technology, and owed its licensor $37,500 in guaranteed payments.
New Strategic Plan.
In January 2020, our Board of Directors authorized a strategic plan comprised of: (1) securing new technologies and business opportunities in the broader biosciences sector, including both human and soil health; and (2) significantly reducing debt and liabilities of the Company completedand eliminating under-performing assets and agreements. The successful results of these actions are intended to attract new capital to fund long term growth opportunities for the Company; however, there is no guaranty that we will be successful in implementing this plan.
To advance these plans, in January 2020, we appointed Douglas R. Baum to our Board of Directors. Mr. Baum has over 28 years of experience in the bioscience and biotech industries, including development, commercialization and marketing of multiple drugs and medical devices. Over his senior executive tenure, including as CEO of Xeris Pharmaceuticals, he has overseen 15 product approvals through the FDA and raised over $80 million in capital to fund breakthrough technologies. Mr. Baum was granted a 5-year option to purchase 8,000 shares of the Company’s commons stock exercisable at $0.50 per share. The options vest one-half in 12 months and the balance in 24 months.
After his appointment to the Board, Mr. Baum secured for the Company an Exclusive Dealing Option Agreement to provide us a 90-day period to negotiate with IGL Pharma Inc. (“IGL”) for a license to the radiopharmaceutical Samarium-153 DOTMP (“Sm-153 DOTMP”). Sm-153 DOTMP is a promising drug with initial indications for pediatric osteosarcoma, a devastating form of bone cancer afflicting children, as well as a broader market in bone marrow ablation and other metastasized bone cancers. IGL is an affiliated entity of IsoTherapeutics Group LLC, whose founders created Quadramet® (Samarium-153-EDTMP) one of the first effective commercial radiopharmaceuticals. Since signing the option agreement for the licensing of Sm-153-DOTMP, we have provided IGL with $50,000 of advanced support fees to fund a single patient test for the drug, which was approved by the FDA to treat a patient in a bone marrow ablation procedure and was performed with technical success.
On April 20, 2020, we exercised our option and executed a Patent and Technology License Agreement and Trademark Assignment (the “License Agreement”) with IGL, through a newly created, wholly-owned subsidiary called QSAM Therapeutics Inc. (“QSAM”). The License Agreement provides our subsidiary QSAM with exclusive, worldwide and sub-licensable rights to all of IGL’s patents, product data and knowhow with respect to Sm-153 DOTMP. 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 (such expenses have been paid), up to $150,000 as Sm-153 DOTMP 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 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.
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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 Sm-153 DOTMP.
Separation from EPH and New Business Path.
Our Board of Directors have determined that the opportunities presented through the development of the new drug candidate technology present shareholders with the best path forward. As a result, after the reporting date of this Form 10-Q, on November 6, 2020, we entered into an Omnibus Separation Agreement (the “Separation Agreement”) with EPH. Under the terms of the Separation Agreement, the parties have agreed that we will continue to operate and pursue opportunities in the biosciences and pharmaceutical fields while EPH will continue to operate in the compost and soil manufacturing fields. More specifically:
1. | On November 6, 2020 (the “Effective Date”), the Management Agreement, dated January 18, 2019, as amended, between EPH and the Company (then Q2Earth) was terminated by mutual agreement of the parties. | |||
a. | In lieu of any severance or other termination payments due thereunder, EPH has released the Company from a total of $993,984 in liabilities, inclusive of advanced management fees and multiple promissory notes, including accrued and unpaid interest. Such intercompany promissory notes have been retired and are no longer enforceable. An additional $114,700 in promissory notes owed to an affiliate of EPH are being converted into our common stock at a price of $0.22 per share, and consequently, will be retired and no longer enforceable. | |||
b. | Our prior officers and employees engaged in the compost and soil manufacturing business have been released from any non-competition, non-solicitation or other restricted covenants pursuant to their respective employment agreements (as agreed in the Separation Agreement and further defined in individual release agreements with each such employee). | |||
2. | As of the Effective Date, EPH has the right in its sole discretion to use the name “Q2Earth” in all jurisdictions of the United States and worldwide. | |||
3. | We have agreed to transfer to EPH the License Agreement with Agrarian and Mulch Masters Inc. for the ABS product and all associated knowhow, trade secrets and trademark/service marks. Additionally, we have agreed to transfer to EPH the Distributorship Agreement, dated June 1, 2019, with Senn, Senn & Senn LLC (the “Senn Agreement”). Both these transfers are subject to consent by the granting parties, which has not been received as of the current date. The Company’s Board determined that these agreements had no material value, were not generating revenue, and had accumulated $37,500 in liabilities. | |||
4. | We have agreed that up to $175,000 in funds raised in a next financing will be used to pay any remaining legacy business debt and liability payments any time after the Effective Date. |
We believe that the results of the successful completion of this plan could mean a stronger balance sheet and the infusion of new capital to pursue this novel pharmaceutical opportunity. While a transition into this new business line is a departure from our legacy composting business, which was not financially sustainable for us, management believes that the path to creating shareholder value is more visible and probable with this new direction in the biosciences.
Bridge Offering with $1,450,000and Follow-On Funding. We issued a total of new cash raised$2,821,908 in Convertible Promissory Notes (the “Bridge Notes”) during 2017 and an additional $191,9082018 (the “Bridge Offering”) and $30,000 in old debt converted into the round. In September 2017, the Company raised an additional $200,000 in a follow-on Bridge Offering on the same terms. Discussion of the Bridge Offering is provided in “Financial Condition, Liquidity and Capital Resources”. Funds2019. Proceeds from the Bridge Offering are sufficientNotes were used to providecomplete due diligence, negotiate and secure the initial compost acquisitions, as well as for operationsoperational expenses and legacy debt repayment. In 2018, one Bridge Note in the principal amount of $50,000 was converted into shares of common stock. Maturity is 36 months from issuance (except for certain Bridge Notes issued in 2018 and 2019, which have a 24-month term) with 15% annual interest which is capitalized each year into the principal of the notes and paid in kind.
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As of September 30, 2020, the Company settled approximately $2.5 million in defaulted Bridge Note mostly issued in 2017 and 2018 with 17 total note holders. Under the terms of such settlements, each such note holder agreed to convert all principal and interest under their respective debt obligations into shares of the Company’s common stock at a price equal to $0.22 per share. In total, 11,418,069 shares of common stock were issued to the note holders as of September 30, 2020, of which 5,995,704 shares issued to one holder after the end of the quarter but related to a settlement dated as of September 30, 2020. After the end of the third quarter, an additional $130,000 in Bridge Notes were converted into 594,865 shares of common stock, issued or agreed to be issued, in settlement of those notes. Management is working on a plan to extend the term or convert into equity the remaining Bridge Notes, totaling $1,646,646 in principal and accrued capitalized interest as of the current date. If we cannot reach a settlement for these remaining obligations, our ability to operate will be materially adversely affected.
To continue operations through the first quarterend of 2018,2020 and into 2021, we will need to raise additional capital. Without additional funding, specifically equity funding, we will continue to face significant challenges pursuing our current business strategy and developing it to a state where we are self-sustaining or profitable. Management recognizes these uncertainties, and is seeking options to allow us to reduce our significant remaining debt load from the Bridge Notes, convertible notes and preferred stock; and also allow us to develop business opportunities that can attract new equity capital and ultimately generate revenue which includes advancing its strategycan support our ongoing operations and eventually lead to acquire cash-flowing composting businesses, but not enough for closing the ETS acquisition expectedprofitability. If we are unable to be closed in Q4 2017. Consummation of these acquisitions would require up to $10 million inraise additional capital which management is in the process of securing.
or develop profitable business opportunities, we may need to reduce materially our overhead, including laying-off employees and officers.
B.Management’s Discussion and Analysis of Financial Condition and Results of Operations
COVID-19
In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. We are 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 economic environment and our business is uncertain. Accordingly, while we do not anticipate an impact on our operations, we cannot estimate the duration of the pandemic and potential impact on our business. In addition, a severe or prolonged economic downturn could result in a variety of risks to our business, including a possible delay in our ability to raise money. At this time, the Company is unable to estimate the impact of this event on its operations.
Statement
Results of Operations for the three months ended September 30, 2017 vs. 20162020 and 2019
DuringFor the quarterthree months ended September 30, 2017, the Company2020, we recorded $174,999 in revenue from a related entity pursuant to a management service agreement, a decrease of $70,865 over revenue of $17,953 from the completion of a service agreement$245,864 recorded in the soil business.same period in 2019. The Company had nodecrease in revenue in the current year is mainly driven by the service fees earned in the amount of $81,579 in 2019 under our agreement with Community Eco Power (CECO). Additional revenue in the quarter ended September 30, 2016.
The Company recorded loss2020 was generated from operations of $331,822 in the quarter ended September 30, 2017, a decrease of $34,487 (9%) from our loss from operations of $366,309feasibility study performed and satisfied in the same period in 2016. Additionally,for a soil customer unrelated to the Company recognized additional interest expense in the 2017amount of $16,200.
For the three months ended September 30, 2020, we recorded a net loss of $2,424,589, an increase in net loss of $2,864,298 (651%) from our net income of $439,709 for the same period whichin 2019. Basic and diluted net income (loss) per share was offset by$1.03 and ($0.21), respectively, for the three month periods ended September 30, 2020 and 2019. The primary underlying reasons for the increase in the net loss for the current period over 2019 were a gain ondecrease of $70,865 in revenue, an increase in operating expenses of $194,884, a increase in the loss recognized due to the change in the fair value of the convertible bridge notes of $205,793$2,09,042, and a gainloss incurred on debt extinguishment of liabilities$503,762.
The majority of $98,575, that resultedthe $194,884 increase in a net lossoperating expenses was due to an increase in professional fees and research and development expenses of $286,674$110,051 (174%) and $96,943, respectively, for the three months ended September 30, 2017, a decrease of $100,935 (26%)2020 from our net loss of $387,609$63,228 and $0 for the same period in 2016. Some of the principal factors behind these results included, higher professional2019, primarily due to QSAM license fees higher interest as well as the change in fair value of the convertible bridge notes.
As noted above, includedincurred in the expenses for the quarter ended September 30, 2017 and 2016 were the following material items: professional fees increased to $217,352 in 2017, from $176,771 in the prior year period (23%) due to the Company’s acquisition strategy and the fact that its CEO and President received their pay in the formamount of consulting fees in 2017; and research and development decreased to $0 in 2017 from $43,154 in the previous year period (100%) due to the termination of R&D activities at the end of 2016.
$96,943.
StatementResults of Operations for the nine months ended September 30, 2017 vs. 20162020 and 2019
DuringFor the nine months ended September 30, 2017, the Company2020, we recorded $55,933$524,997 in revenue from the completion of a related entity pursuant to a management service agreement, in the soil business. The Companya decrease of $147,559 over revenue recorded $40,000 in revenue in the same period in 2016.2019. Additional revenue for the nine months in 2020 was generated from a feasibility study performed and satisfied in the same period for a soil customer unrelated to the Company in the amount of $16,200.
The Company recorded loss from operations of $1,079,234 inFor the nine months ended September 30, 2017,2020, we recorded a decreasenet loss of $615,291 (36%$3,734,635, an increase of $2,856,373 (325%) from our net loss from operations of $1,694,525 in$878,262 for the same period in 2016. Additionally, the Company recognized additional interest expense in the 2017 period,2019. Basic and adiluted net loss onper share was $1.64 and $0.44, respectively, for the change in fair valuenine-month periods ended September 30, 2020 and 2019.
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The majority of the convertible bridge notes$30,258 increase in operating expenses was due to research and development expenses, professional fees and general and administrative expenses of $419,484, which were$206,943 (100%), $42,136 (15%) and $39,423 (29%), respectively, offset by a gain on extinguishmentdecrease in payroll related expenses of liabilities of $456,720, that resulted in a net loss of $1,437,777$258,244 (22%) to $1,636,463 for the nine months ended September 30, 2017, an increase of $254,546 (22%)2020 from our net loss of $1,183,231$1,606,205 for the same period in 2016. Some of the principal factors behind these results included, lower payroll, higher professional fees and no R&D expenses, as well as the settlement of liabilities and change in fair value of the convertible bridge notes in 2017.
2019.
As noted above, included in the expenses forWe recorded $524,997 of revenue related to management fees from our equity method investment EPH which is considered to be a related party during the nine months ended September 30, 20172020 compared to the same period in 2019 which reflected $502,381 from the same contract and 2016 were$170,175 under our agreement with CECO.
In addition, the following material items: payroll decreased to $187,117 in 2017 from $512,561 inCompany received a $5,000 grant when applying for an Economic Injury Disaster Loan with the prior year (63%),U.S. Small Business Administration, which was principally duedenied by SBA. This $5,000 grant does not need to the reduction of staffbe repaid and management in 2017. Professional fees increased to $770,480 in 2017, from $692,416 in the prior year period (11%) due primarily to the Company’s increased investment and acquisition related activities in the 2017 period; and research and development decreased to $0 in 2017 from $355,884 in the previous year period (100%) due to the termination of R&D activities at the end of 2016.
Balance Sheet
Material changes in the Company’s balance sheet at September 30, 2017 over December 31, 2016 included: closing of $1,650,000 in the Company’s Bridge Offering through in September 2017 (not inclusive of an additional conversion of $191,908 in previously recorded notes, advances and payables from three board members and three investors for a total issuance of Bridge Offering debentures of $1,841,908); a decrease of $731,243 in accounts payable and accrued expenses (including the sale of the Q2P Technology in exchange for a release on $162,500 in liabilities) which includes settlements and conversions of accounts payable and accrued expenses with property and equipment, licensing rights in Cyclone and common stock, ; a decrease of $300,000 in deferred revenue from the transfer of the MagneGas Agreement and release from the Phoenix agreement; and $100,000 in loans to ETS, not including an additional $150,000 in deposits paid under the Purchase Agreement. Total liabilitiesis reflected as of September 30, 2017 were $2,752,265, as compared to $1,778,703 as of December 31, 2016.
Primarily as a result of the $1,437,777 net loss for the nine months ended September 30, 2017, accumulated deficit was $8,689,549, at September 30, 2017, resulting in total stockholders’ deficit at the period end of $2,624,748.
Results of Operations
Between July 2014 and mid-2016, the Company through Q2P primarily devoted its efforts to commercializing the Q2P engine and CHP system, developing its waste-to-power business model, and recruiting executive management and key employees. Starting in the second half of 2016, the Company began to phase out its R&D operations, and in August 2017, sold its old engine technology. The Company is now entirely focused on promoting its compost manufacturing business model, including providing soil management services to one customer and acquiring other compost manufacturing companies. As a new entity, the Company has limited current business operations and nominal assets. The Company currently operates at a loss with minimal to no revenue.
Since the change in business direction to focus on strategic partnerships and acquisitions in the compost and soil manufacturing space, the Company has reduced its operating expenses from approximately $150,000 per month to approximately $75,000 per month by laying-off engineering employees and terminating our R&D budget, which is off-set in part by added expenses in connection with our acquisition plans. As of the date of this Report, our CEO and President are receiving fees as consultants, even though they spend virtually all of their time on Company operations. We also have one additional financial consultant, who serves as the Principal Accounting Officer. Other expenses include legal and accounting, payment of fees for exclusivity and LOIs with acquisition targets, and other general expenses. We have also used equity, including common stock and stock options, to pay some expenses over the last year; and we reduced $423,179 in payables with settlements of stock and assets over the past year.
The net loss for the nine months ended September 30, 2017 of $1,434,777 was off-set primarily by non-cash operating expenses of: $248,187 in stock option grants and related amortization expense, $419,484 from the net change in fair value of the bridge subscriptions, $456,720 in gain from extinguishment of liabilities, $209,600 in restricted shares used for outside services, $23,060 of depreciation and amortization, and a $5,361 net decrease in accounts payable and accrued expenses. As a result, net cash used in operating activities amounted to $884,289 in the first three quarters of 2017.
With respect to our technology, in January 2017, the Company transferred its sales agreement with MagneGas to Phoenix Power Group, a licensee of the Company’s technology. Under this agreement, Phoenix assumed all responsibility and liabilities associated with delivering a waste-to-power system to the customer, and will receive any additional fees paid by the customer for successful performance. Phoenix released the Company of approximately $250,000 in deferred revenue liabilities in connection with this contract assignment, and agreed to certain royalty fees payable to the Company for sales of the engine and system. In August 2017, the Company closed its Transfer Agreement which transferred to Phoenix all of the Company’s technology and materials associated with the old Q2P Technology, including transferring and assigning its License Agreement with Cyclone to Phoenix.income.
Financial Condition, Liquidity and Capital Resources
The Company believes its funds asFor nine months ended September 30, 2020, cash increased by $1,197. This increase was primarily the result of the datefunds received in the amount of this filing are sufficient$142,942 from the Paycheck Protection Program, as well $30,500 in convertible notes from related parties, $142,500 in convertible notes from an unrelated party, and $305,373 notes payable from related parties.
Net cash used by operating activities was $620,118 for the nine months ended September 30, 2020, which reflected our net loss during the period of $3,734,635, offset by the non-cash adjustments of $2,845,693 and the net increase in operating assets and liabilities of $268,823. The majority of non-cash adjustments consists of $1,666,422 in the fair value change of the convertible bridge notes and the paid-in-kind interest on the convertible bridge notes of $427,360, in addition to the $503,762 loss incurred on the conversion of the bridge notes to common stock.
Our net loss resulted largely from our funding of activities related to the execution of our Legacy Business of facilitating the acquisition of and investment in and managing compost manufacturing businesses, including conducting due diligence and incurring consulting and professional expenses and hiring additional employees to support these operations, throughas well as ongoing general and administrative expenses. Net loss also consisted of fees and expenses paid to IGL to secure our license agreement for Sm-153 DOTMP.
Net cash used in investing activities during the nine months ended September 30, 2020 consisted of $0.
Net cash provided by financing activities during the nine months ended September 30, 2020 consisted of $621,315 due to additional proceeds under notes payable and convertible notes payable received from a related parties, proceeds from the convertible notes payable to Checkmate Capital and funds received from the Paycheck Protection Program that was used to keep our workforce employed during the Coronavirus (COVID-19) crisis.
At September 30, 2020, our cash totaled $1,675. Our cash is currently held at least the first quarter of 2018,large U.S. banks.
Based on our current strategy and possibly into the second quarter of 2018. However, the Company willoperating plan, we need to raise additional capital to close its initial acquisitions and support operations through the end of 2018;operations; therefore, management believes there is currently substantial doubt about itsour ability to operate as a going concern. See “Note 2 – Basis of Presentation and Going Concern” in the Company’s condensedour consolidated financial statements.
Since July 2014, Q2P has raised in excess of $6 million in capital over several financings, inclusive of cash invested and some debt and payables converted to stock. With these funds, the Company has been able to complete the prototype stage of its original technology, place our first operating pilot unit in the field, recruit a solid engineering and business team, and secure strong Directors with significant industry experience. Specifically with the closing of our Bridge Offering, described below, we have also been able to pivot our business model to the compost and soil manufacturing business, and secure letters of intent to acquire operating compost companies.
Bridge Financing.We issued a total of $2,821,908 in Bridge Notes during 2017 and 2018, and $30,000 in 2019. Proceeds from the Bridge Notes were used to complete due diligence, negotiate and secure the initial compost acquisitions, as well as for operational expenses and legacy debt repayment. In May 2017,2018, one Bridge Note in the Company completed its Bridge Offering with $1,450,000principal amount of new cash raised and an additional $191,908 in old debt$50,000 was converted into the round. In September 2017, the Company completed an additional $200,000 follow-up Bridge Offering on the same terms.
The Convertible Promissory Notes (the “Notes”) convert at a 50% discount to the post-funding valuationshares 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 Notes convert 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 the holder.stock. Maturity is 36 months from issuance (except for certain Bridge Notes issued in 2018 and 2019, which have a 24-month term) with 15% annual interest which will beis capitalized each year into the principal of the Notesnotes and paid in kind. There are no warrants
Between September 15, 2020 and October 31, 2020, the Company settled approximately $2.8 million in defaulted Bridge Note mostly issued in connection2017 and 2018 with 17 total note holders. Under the terms of such settlements, each such note holder agreed to convert all principal and interest under their respective debt obligations into shares of the Company’s common stock at a price equal to $0.22 per share. In total, 12,008,978 shares of common stock were issued to the note holders. Management is working on a plan to extend the term or convert into equity the remaining Bridge Offering.
Notes, totaling $1,646,646 in principal and accrued capitalized interest as of September 30, 2020. If we cannot reach a settlement for these remaining obligations, our ability to operate will be materially adversely affected.
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Funds from the Bridge Offering will be used to secure acquisitions of compost and soil companies with closings expected to occur concurrently with the closing of the Equity Offering, and operating capital through the first quarter of 2018. A limited portion of the funds have also been used to eliminate liabilities on the Company’s balance sheet.
TheThe Bridge Offering was led by two accredited investors and joined by approximately 25 additional accredited investors which included our Directors. The Bridge Notes issued in 2018 were mainly to one accredited investor that also led the Company’s Directors.equity funding for EPH. Management conducted the Bridge Offering and no broker fees were paid in connection with the initial closing. All securities issued in the Bridge Offering and debt settlements were issued pursuant to an exemption from registration under Section 4(a)(2) under the Securities Act of 1933.
Company’s Prior Financings.
SubsequentSubsequent to the Mergerour 2015 merger into the public company, the Companyvehicle, we raised $600,000 in itsour Series A 6% Convertible Preferred Stock (the “Preferred Stock”) from two separate accredited investors in November 2015 and January 2016, respectively. 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 was originally convertible at $0.26 per share at the discretion of the holders and contains price protection provisions in the instance that the Company issueswe issue shares at a lower price, subject to certain exemptions. As a result of the July 2016 common stock offering described below, the conversation price for these Preferred Shares automatically reduced to $0.21 per share, and as a result of the Bridge Offering, the conversion price was reset to $0.15 per share. Pursuant to the 2018 Modification, the conversion price is currently $0.10 per share. Preferred Stock holders also received other rights and protections including piggy-back registration rights, rights of first refusal to invest in subsequent offerings, security over the Company’sour assets (secondary to the Company’sour debt holders), and certain negative covenant guaranties that the Companywe will not incur non-ordinary debt, enter into variable pricing security sales, redeem or repurchase stock or make distributions, and other similar warranties. The Preferred Stock is redeemable after two years if not converted,on July 1, 2019 per a March 2019 modification and has no voting rights until converted to common stock. The Preferred Stock holdersStockholders also received 50% warrant coverage at an exercise price of $0.50, with a five-year term and similar price protections as in the Preferred Stock. Pursuant to agreements with the warrant holders, this conversion price remains at $0.50 as of SeptemberJune 30, 2017.
On January 11, 2016, the Company issued 100 shares of Preferred Stock to an accredited investor (the “Preferred Stock”) for $100,000. The Preferred Stock is currently convertible at $0.15 per share of the Company’s common stock (the “Conversion Price”). In total, we have 600 shares of Preferred Stock outstanding to two investors. 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.2020.
On March 15, 2016, the Companywe entered into a 120-day term loan agreement with one accredited investor in the principal amount of $150,000. The loan bearsbore 20% interest with interest payments due monthly. The holders of the term loan received loan issuance costs100,000 shares of a 100,000 share equity kickercommon stock valued at $26,000, $3,000 cash and a second security interest in theour assets of in exchange for arranging the Company.financing. This loan matured on July 15, 2016, and a 10% late penalty was assessed on July 15, 2016. On March 22, 2017, the Company and the lenderswe entered into an Addendumaddendum to the loan agreement with the lenders which extended the maturity date to December 31, 2017, allowed for conversion at the discretion of the holders to common stock, at a price of $0.15 per share, and waived all defaults in return for payment of $30,000 which included the late fee and accrued but unpaid interest. These fees and interest payments were paid in April 2017, and the loan is now current.was repaid in full in December 2017.
On April 29, 2016, the Company’sour three independent Directors loaned to the Companyus a total of $60,200 pursuant to three Convertible Notes which are automatically convertible into the equity securities issued in the Company’s next financing of at least $1,000,000 at the same price and same terms. The Convertible Notes bear 8% interest and have a 10% Original Issuance Discount.notes. The total principal amount of all three Notesnotes was $66,000. The Notes maturenotes were converted into the Bridge Offering in six months, and can be converted to common stock at $0.26 per share if a qualified financing event has not occurred by such time.March 2017. In June 2016, three other shareholders of the Company provided an additional $30,000 to the Companyus on the same loan terms.terms, which were also subsequently converted into the Bridge Offering.
In July and August 2016, the Companywe received subscription agreements from six accredited investors (four of whom were previous shareholders) to purchase 750,000 shares of restricted common at a price of $.21$0.21 per share for an aggregate of $157,500, less $610 in financing costs.
In September 2016, the Company’sour three independent Board members advanced the Companyus $3,000 for payment of insurance premiums. In the fourth quarter of 2016 and first quarter of 2017, the three Board members advanced an additional $29,500 to cover expenses. All of these advances were converted into the Company’s recentour Bridge Offering.
All promissory notes and shares in these offerings were sold pursuant to an exemption from the registration requirements of the Securities Exchange Commission under Regulation D to accredited or sophisticated investors who completed questionnaires confirming their status. Unless otherwise described in this CurrentQuarterly Report, reference to “restricted” common stock means that the shares have not been registered and are restricted from resale pursuant to Rule 144 of the Securities Act of 1933, as amended.
Separation from Cyclone and Related License Agreement
On July 28, 2014, Q2P (which at such time was called WHE Generation Corp., and renamed Q2Power Corp. on January 26, 2015) commenced operations as an independent company after receiving its initial round of seed funding and signing a formal separation agreement (the “Separation Agreement”) from Cyclone. The Separation Agreement between Q2P and Cyclone provided for a formal division of certain assets, liabilities and contracts related to Q2P’s business, as well as establishing procedures for exchange of information, indemnification of liability, and releases and waivers for the principals moving forward. As part of the separation from Cyclone, Q2P also purchased for $175,000 certain licensing rights to use Cyclone’s 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 (the “License Agreement”). The License Agreement contains a royalty provision equal to 5% of gross sales payable to Cyclone on sales of engines derived from technology licensed from Cyclone.
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Also, as part of the separation from Cyclone, Q2P assumed a license agreement between Cyclone and Phoenix Power Group, which included deferred revenue of $250,000 from payments previously made to Cyclone for undelivered products. The net balances as of September 30, 2017 and December 31, 2016 for the Cyclone licensing rights were $0 and $69,271, respectively. The licensing rights were amortized over its estimated useful life of 4 years.
Accumulated amortization for the periods ended September 30, 2017 and December 31, 2016 was $127,604 and $105,729, respectively. The net balances as of September 30, 2017 and December 31, 2016 for the Phoenix deferred revenue were $0 and $250,000, respectively, due to the release of this contract liability item with the transfer of the Magnegas contract to Phoenix in January 2017.
In August 2017, the Company closed its Transfer Agreement which transferred to Phoenix all of the Company’s technology and materials associated with the old Q2P Technology, including transferring and assigning its License Agreement with Cyclone to Phoenix.
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.
Cash and Working Capital
We have incurred negative cash flows from operations since inception.inception on an annual basis. As of September 30, 2017, the Company2020, we had an accumulated deficit of $8,689,549. Details$14,783,844 and negative working capital of this are discussed above in the Balance Sheet disclosure.
$4,960,244.
Critical Accounting Policies
Our financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP). Disclosures regarding our Critical Accounting Policies are provided in Note 3 – Summary of Significant Accounting Policies of the footnotes to our condensed consolidated financial statements.
Off-Balance Sheet Arrangements
The Company did not engage in any “off-balance sheet arrangements” (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of September 30, 2017.2020.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 4: CONTROLS AND PROCEDURES
In connection with the preparation of this Quarterly Report, management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief FinancialAccounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Management concluded that, as of September 30, 2017,2020, the Company’s disclosure controls and procedure were not effective based on the criteria inInternal Control – Integrated Framework issued by the COSO, version 2013.
Management’s Quarterly Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process, under the supervision of the Chief Executive Officer the President and the PrincipalChief Accounting Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles in the United States (GAAP). Internal control over financial reporting includes those policies and procedures that:
● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; |
● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and |
● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s managementManagement conducted an assessment of the effectiveness of the Company’sour internal control over financial reporting as of September 30, 2017,2020, based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 (“COSO”). As a result of this assessment, management identified certain material weaknesses in internal control over financial reporting. A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’sour annual or interim financial statements will not be prevented or detected on a timely basis. The identified material weakness isweaknesses are disclosed below:
● | |
● | The Company has experienced significant turnover in the role that oversees the day-to-day accounting and financial reporting functions, which increases the risk of a material misstatement in the financial statements. |
● | The Company lacks knowledge and expertise with accounting for stock -based compensation arrangements. |
As a result of the material weakness in internal control over financial reporting described above, management concluded that, as of September 30, 2017, the Company’s2020 , our internal control over financial reporting was not effective based on the criteria inInternal Control – Integrated Framework issued by the COSO.
The Company is in the process of addressing and correcting thisthese material weakness.weaknesses, including drafting, formalizing and implementing greater internal controls to assure proper financial reporting. As the Company retained but then lost its interim CFO in 2020, and its Principal Accounting Officer and new acting-CFO have not had the resources to implement proper controls, these weaknesses still exist. Management will be diligent in its efforts to continue to improve the reporting processes of the Company, including the addition of accounting resources and the continued development of proper accounting policies and procedures.
This quarterly report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we, engaged our independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting other than described below, in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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In July 2017, the Company created an Audit Committee by resolution of the full Board of Directors and implemented an Audit Committee Charter to provide written guidance for the Committee. Joel Mayersohn was named Chairman of the Audit Committee. Messrs. Scott Whitney and Tristan Peitz were named Committee members. All of these individuals are independent Board members. Management believes that the establishment of this independent Audit Committee will help strengthen our internal control over financial reporting in future periods.
We are not a party to any pending legal proceeding and, to the knowledge of our management, no federal, state or local governmental agency is presently contemplating any proceeding against us. No director, executive officer, affiliate of ours, or owner of record or beneficially of more than five percent of our common stock is a party adverse to the Company or has a material interest adverse to us in any proceeding.
When the Company sold the ESI subsidiary to three former shareholders following the Merger, that company had a judgment against it from a litigation brought in the Superior Court of the County of Iredell, North Carolina, seeking payment of wages of approximately $25,000, together with vacation pay, the value of health insurance benefits and medical expenses. On April 10, 2015, the Court entered judgment against ESI in favor of the plaintiff. Claims made by the plaintiff against AnPath (the Company at that time) and certain of the officers and directors of Anpath at that time were dismissed by the Court. The Company does not believe it has any liability in this matter, and that the judgment was properly retained by ESI in the sale; however, the judgment is still outstanding and management cannot guaranty that it will not be brought back into the litigation or collection efforts in the future.
Not required for smaller reporting companies.
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
There were noUnregistered Sales of Equity Securities
During the quarter ended September 30, 2020, the Company made the following sales of unregistered securitiessecurities:
Purpose / Holder | Number of Shares | Total Price/Amount | ||||||
Conversion of promissory notes among multiple note holders | 11,418,069 | $ | 2,397,795 | |||||
Shares issued to three service providers | 600,000 | $ | 127,000 |
Subsequent to the quarter ended September 30, 2020, the Company made the following sales of unregistered securities:
Purpose / Holder | Number of Shares | Total Price/Amount | ||||||
Conversion of promissory notes among multiple note holders (1) | 442,096 | $ | 130,870 | |||||
Shares issued to one service provider | 800,000 | $ | 176,0000 |
(1) An additional 187,529 shares are due to be issued in connection with this transaction.
Purchases of Equity Securities by the Company in the third fiscal quarter of 2017Issuer and up to the date of filing that have not been previously reported.Affiliated Purchasers
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
As of the date of filing this Report, theThe Company wasis in default under its convertible debenturesOriginal Issue Discount Senior Secured Convertible Debentures in the total principal amount of $165,000. The Company is currently in discussionsnegotiations with this lenderthe holders to amendmodify and extend the termsmaturity date on those notes. As of this debt.September 30, 2020, approximately $1,777,516 of the original issuance principal amount of the Bridge Notes was in default. Management is working on a plan to extend the term or convert into equity these and the other Bridge Notes.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
(a) | There was no information required to be disclosed in a report on Form 8-K during the period that the Company failed to report. | |
(b) | None, not applicable. |
ITEM 6: EXHIBITS AND FINANCAL STATEMENT SCHEDULES
(a) Financial Statements.
Condensed Consolidated Balance Sheets of the Company as of September 30, 2017 (unaudited) and December 31, 2016
Condensed Consolidated Statements of Operations of the Company for the three and nine months ended September 30, 2017 and 2016 (unaudited)
Condensed Consolidated Statements of Cash Flows of the Company for the nine months ended September 30, 2017 and 2016 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
(b) Exhibits.
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Pursuant to the requirements of Section 13 or 15(d) 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.
Date: | 11/ | By: | /s/ | |
Date: | 11/ | By: | /s/ |
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