QSAM Biosciences, Inc. - Annual Report: 2018 (Form 10-K)

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended: December 31, 2018

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period ended:

Q2Earth, Inc.

(Exact name of Registrant as specified in its Charter)

420 Royal Palm Way, #100

Palm Beach, FL 33480

(Address of Principal Executive Offices)

(561) 693-1423

(Registrant’s Telephone Number, including area code)

(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 [  ] No [X]

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or 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]

State the aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold, or the average bid and asked price of such common stock, as of the last business day of the Registrant’s most recently completed second fiscal quarter.

June 29, 2018 - $1,952,880. There are approximately 32,014,418 shares of common voting stock of the Registrant beneficially owned by non-affiliates on June 29, 2018. There is a limited public market for the common stock of the Registrant, so this computation is based upon the closing bid price of $0.061 per share of the Registrant’s common stock on the OTCQB.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [X] Yes [  ] No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Documents incorporated by reference: None.

Q2Earth Inc.

Index

FORWARD LOOKING STATEMENTS

This Annual 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” 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 Annual 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 Annual 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:

As an emerging growth company, we are exempt from various reporting requirements. Specifically, we are exempt from the following provisions:

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.

PART I

ITEM 1. BUSINESS

In this Annual Report, references to “Q2Earth,” the “Company,” “we,” “our,” “us” and words of similar import refer to Q2Earth, Inc., the Registrant, a Delaware corporation. References to “Q2P” or the “Subsidiary” refer to Q2Power Corp., a Delaware corporation, our subsidiary and former operating company.

Organizational History and Merger with Q2P

The Company, formerly known as Anpath Group, Inc. (“Anpath”), was organized pursuant of the laws of the State of Delaware on August 26, 2004. On November 12, 2015, the Company, its newly formed and wholly-owned subsidiary, AnPath Acquisition Sub, Inc., a Delaware corporation (“Merger Subsidiary”), and Q2P consummated an Agreement and Plan of Merger (the “Merger Agreement”), 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 approximately 24 million shares of the Company’s common stock, and the Company assumed both the Q2P 2014 Founders Stock Option Plan and the 2014 Employees Stock Option Plan (the “Option Plans”). Also pursuant to 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 after the Merger – that of Q2P, namely the development of waste-to-power systems. 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.

In August 2017, the Company sold its waste-to-power technology to a licensee and re-focused its efforts and resources to the pursuit of acquisitions and management of companies and assets in the business of compost and soil manufacturing. This business model arose from the work the Company was doing with wastewater treatment plants through Q2P and other external factors which led our Board to believe such opportunities would present the most beneficial path forward for the Company and its shareholders. In June 2017, the Company changed its name to Q2Earth, Inc. to better reflect its new business model.

Prior Waste-to-Power Business

Q2P was originally formed as a Florida limited liability company by Cyclone Power Technologies, Inc. (“Cyclone”) to pursue development and commercialization of its patented waste heat recovery engine. In July 2014, Q2P commenced operations as an independent company after receiving its initial round of funding and signing a formal Separation Agreement with Cyclone. From then until the end of 2016, the business of the Company was the development of waste-to-power systems based on technology licensed from Cyclone.

Q2P’s prime target market for its waste-to-power technology (the “Q2P Technology”) was small-scale Waste Water Treatment Plants (“WWTPs”), whereby the Q2P Technology could capture methane produced from the WWTPs and convert it into power and usable heat. The Q2P Technology was comprised of our unique external heat engine (the “Q2P Engine”) as well as waste fuel burners, controls and other subcomponents (collectively with the Q2P Engine, referred to as a “CHP System”). We developed the CHP System from proof-of-concept to a working “pilot stage” product between 2014 and 2015.

Our pilot program operated in central Ohio for approximately six months, during which time we collected significant information about the technology itself, and the operations and cost structures of WWTPs generally. A large portion of a WWTP’s operating expenditures are spent removing the residual sludge (called “biosolids”) from digesters, the vast portion of which is either combusted, landfilled or applied directly to the land. Technologies and processes that can convert biosolids to other useful products such as compost and engineered soils, we determined, could provide additional value to agricultural and construction sector customers and new revenue streams for this waste value chain. In mid-2016, along with the addition of two new Board of Director members with vast experience in the waste water, biosolids and waste recycling sectors, the Company started pursuing synergistic alliances with companies that have assets, technology and business networks for the manufacturing and sale of such beneficial re-use products. This led us to the composting industry.

Current Business Model: Compost and Engineered Soils

Overview. According to the U.S Composting Council (the “USCC”), one-third of the world’s arable land has been lost to soil erosion. In the United States, 99 million acres (28% of all cropland) 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 store water, making food production more difficult, reducing the earth’s ability to filter out carbon and produce oxygen, and adding significant pressure on water resources.

Management believes that soil health may be one of the most important issues facing our planet, affecting the food we eat, water we drink, and air we breathe. Composting is a critical process for recycling organic wastes for beneficial uses to replenish top soil, conserve water and reduce pollution. According to the USCC, composting further protects our climate by sequestering carbon in the soil and reducing methane production from landfills by reducing the volume of organic wastes disposed in this manner.

The composting industry is highly fragmented, comprised of over 5,000 facilities throughout the United States, most of which are small in size and supply varying product qualities. An estimated $5.6 billion in compost is sold annually in the United States, according to the USCC, but less than 10% of farms nationwide currently utilize compost to supplement top soil and reduce chemical and water requirements. New applications for compost such as engineered soils used in general construction, infrastructure projects, land reclamation, sod and turf farms and other green landscape projects are creating additional business opportunities globally.

One of the most compelling business aspects of the compost industry in management’s opinion is the trend among certain facilities to view their business less as simply a waste management solution (making money through “tipping fees” – i.e., the fees paid to take waste), and more as a manufacturing process to produce higher end compost and soil products that can be sold at higher margins and have greater beneficial uses for our planet.

We also believe that the composting industry in the United States is prime for consolidation, operational and technological efficiency improvements, and comprehensive sales and marketing strategies to increase demand and usage. We have a plan in place to build the Company over the next years by acquiring or overseeing the acquisition and management of strategic compost facilities, developing new distribution channels and product brands, investing in science and technology that support the industry and lead to more widespread usage, and implementing best operating practices and efficiency programs to foster growth and create value.

Acquisition and Funding Structure. Our business involves acquiring or overseeing the acquisition of companies in the compost and soils sector, as well as the operational management of those assets. This acquisition strategy, as well as the funding required to consummate these transactions, is currently being conducted through Earth Property Holdings, LLC (“EPH”), a Delaware limited liability company in which we hold a minority equity interest and an eight-year agreement to oversee and manage all of its operations. See “Management Agreement” below.

Through EPH we have completed two acquisitions to date: George B. Wittmer Associates Inc. (“GBWA”), based in Jacksonville, Florida in November 2018, and Employee Owned Nursery Enterprises Ltd., d/b/a Organics by Gosh (“OBG”), based in Austin, Texas in January 2019. See “Acquired Facilities” below.

Management Agreement. Our agreement to manage the operations of EPH (the “Management Agreement”) provides an eight-year term and an annual fee starting at $200,000; however, upon the closing of the GBWA and OBG acquisitions, we received a total of $700,000 in management fees in 2018 and January 2019  which will be earned by us over the 2019 fiscal year. We expect fees to increase as we have more assets under management, but such increase is not guaranteed. The Management Agreement can be terminated by the board of directors of EPH which is controlled by the Class A Unit holders, the equity investors in EPH. If we are terminated by EPH without cause, we would receive a severance payment equal to one-year of management fees plus any accrued management fees  to the date of termination. If we are terminated by EPH with cause, we would receive any accrued management fees only.

The Management Agreement provides EPH with a first right of refusal for prospective acquisitions of compost manufacturing companies and facilities; but allows us to pursue such deals if rejected by EPH’s board. Further the agreement allows us to pursue independently agreements, licenses or acquisitions related to soil marketing and distribution outside the geographic markets of EPH facilities, new product and brand development, and soil science research (the “Q2 Activities”). Management believes these Q2 Activities can be supportive of the EPH facilities we manage as well as provide additional revenue streams at the Company level and value creation for our shareholders. To date, we have not yet commenced any material Q2 Activities, but plan to start building this side of our business in 2019.

LLC Agreement. EPH is governed by a Limited Liability Company Agreement (the “LLC Agreement”), which sets forth the relative rights of its members. Most importantly, EPH has two outstanding classes of membership units: Class A Units, which provide its holders with an 8% preferred annual distribution; and Class B Units, which share in the profits and liquidation value of EPH after the Class A Unit holders have received a return of their preferred distributions and capital investments. The Class A Unit holders have the right to nominate two of three EPH Board of Director members, who have ultimate authority over material decisions effecting that company. The LLC Agreement also provides restrictions on transfer of units, drag-along/tag-along rights, pre-emptive rights for new issuances, and other terms and rights that are fairly standard in agreements of this nature.

There are currently 715,909 Class A Units outstanding held by four investors representing 80.1% of the voting power of EPH, and 178,969 Class B Units outstanding all held by the Company and representing 19.9% of the voting power of EPH. There are also 100,000 Class C Units authorized but not issued. These Class C Units are non-voting, but allow the holders to share in profit distributions and liquidation value on par with the Class B Units. Two EPH equity members who are affiliated with each other also have warrants to acquire up to 14,610 additional Class A Units in EPH before March 2025 for $0.01 per Unit.

Equity Funding. In connection with the closing of the GBWA acquisition, EPH issued 500,000 Class A Units to one institutional investor for $4,400,000. Concurrently, EPH issued to the Company 124,999 Class B Units for $50,000 and the transfer to EPH of the GBWA agreement and future compost facility acquisition rights under a Transfer Agreement. In connection with the closing of OBG, EPH issued an additional 215,909 Class A Units to the same institutional investor and three other investors for $1,900,000, and the Company acquired 53,970 more Class B Units for $21,588.

Debt Funding. In connection with the OBG transaction, EPH closed a $6 million mezzanine debt facility (the “Mezzanine Debt”), under which it drew down $3 million and reserved $3 million for future acquisitions. The Company is neither a borrower nor guarantor under the Mezzanine Debt agreements.

Bridge Financing. The Company issued a total of $2,821,908 in Convertible Promissory Notes (the “Bridge Notes”) during 2017 and 2018 (the “Bridge Offering”). Proceeds from the Bridge Notes were used to diligence, negotiate and secure the initial compost acquisitions, as well as for operational expenses and legacy debt repayment. The Bridge 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 Bridge Notes are able to be converted. The Bridge Notes convert into common stock, or preferred stock if received by investors in the Equity Offering, commencing on the soonest of the Equity Offering closing or December 31, 2017, at the discretion of the holder. $50,000 of the Bridge Notes were converted to common stock in 2018. Maturity is 36 months from issuance (except for certain Bridge Notes issued in 2018, which have a 24-month term) with 15% annual compounded interest which is capitalized each year into the principal of the Notes and paid in kind. There are no warrants issued in connection with the Bridge Offering.

Future Financing. Management is currently working on securing the next round of funding for EPH needed to close future acquisitions. We are also considering capital raises for the Company, which would allow us to better pursue Q2 Activities such as soil brand acquisition, distribution channels, soil science and technology, and other similar value creation opportunities. Management can make no guaranty that such financing can be completed on terms acceptable to either EPH or the Company if at all, or that such Q2 Activities leading to additional value creation for Company shareholders can be consummated.

Acquired Facilities

In November 2018 and January 2019 respectively, the Company through EPH completed two acquisitions in the compost and environmental services space. EPH is an unconsolidated equity method investment for the Company; and therefore, the results of operations, balance sheets, and other material aspects of the business of EPH and the acquired companies are not presented in our financial statements or included in current reports or exhibits thereto. The following are summaries of the business of GBWA and OBG.

GBWA, based in Callahan, FL, recycles hundreds of thousands of cubic yards of industrial discard streams and supplies millions of pounds of compost, soil amendments, soil blends, and potting soil materials to the agriculture and horticulture markets annually. Through long term environmental management contracts with large papermills in Florida, Georgia and Alabama, GBWA recovers, reconditions, processes and ships residual streams such as wood ash, precipitated carbonates, flume grit, wood yard waste, off-specification boiler fuel solids, stockpiled bark, and other materials previously landfilled. GBWA eliminates waste stream management, handling, storage and liability by transforming industrial residual streams into commodities for use by other industries.

OBG, based in Austin, Texas, is a leading organics recycler and compost manufacturer, receiving yard trimmings and wasted food from over half of the homes and almost a third of the restaurants and commercial food preparers in the Austin area. The company produces high quality compost, blended soils and other products, which they sell in over a million bags per year through major retailers and in bulk to landscapers and contractors throughout central Texas.

Through our Management Agreement, we oversee all of the operations of GBWA and OBG, including sales, manufacturing, permitting and legal, accounting, staffing, business development and other areas of their respective businesses. We believe that we can implement processes, practices and systems that can make the operations of these companies more efficient and profitable; and pursue strategies to expand their business within and beyond their current territories. Through EPH, we are also seeking additional acquisition opportunities in Florida, Texas, Georgia, North Carolina and other areas throughout the Southeast and Southwest.

Business of Compost and Soils

Tipping Fees. The business of composting has historically been driven by tipping fees – the amount paid to the compost facility to haul and/or receive waste products. In the case of biosolids received from WWTPs, tipping fees can range from $35 to $80 per ton or more based on location and hauling distance. In the case of yard or “green” waste, these fees are significantly less, ranging from $4 per ton to $8 per ton, but also vary based on location, hauling distance, type of plant waste, and other factors. Food waste tipping fees are usually higher than green waste and less than biosolids. A medium to large compost facility may accept between 50,000 and 200,000 tons of waste per year.

Manufacturing. There are several processes for manufacturing compost that are accepted by the U.S. Environmental Protection Agency (the “EPA”) and state regulators. The two most common are “static pile” and “windrowing”. Using the static pile method, ground-up feedstock is formed into large piles and “cured” for periods of at least 12 months (which can be accelerated by different forced air procedures). During this process, the waste materials breakdown in both aerobic and anaerobic conditions. The windrowing process involves positioning ground-up feedstock into long rows that are mechanically turned every few days and can produce a final product in as little as one to three months. In both static pile and windrowing, there are time and temperature thresholds to create an EPA approved compost.

The compost manufacturing method employed by different facilities depends on may factors such as feedstock used, space requirements, environmental conditions, and desired end product. Both GBWA and OBG currently use a static pile method, but we may consider windrowing in future applications which can allow for greater inventory turn-over and more consistent end-products, but requires additional equipment and space.

Manufacturing compost is a capital intensive process, requiring equipment such as grinders, screeners, turners, excavators and other heavy machinery. Maintaining equipment in good working condition is critical to proper operations, and equipment downtime can materially affect financial performance.

Product Sales. For many compost facilities, margins made on tipping fees drive their business model and little effort or expense is incurred on producing a quality, consistent end product. For these facilities, limited additional revenue and margin is made on the back end – at times only about 10% to 20% of their revenue is from soil sales. Such facilities may even give away product to landfills for daily cover or sell it to farmers at prices that cover transportation costs.

As mentioned above, one of the most compelling aspects of the compost industry is the trend among certain facilities to view their business less as a waste management solution and more as a manufacturing process to produce higher end compost and soil products. Management believes this is a fundamental transition in thinking about operations, procedures and priorities. Those facilities that have made the transition to focus on end product may have higher production costs to assure consistency of feedstock, better manufacturing procedures, and greater marketing costs, but the financial benefits can be material. Whereas average lower quality compost may sell for $4/cubic yard, high quality products can fetch much higher prices – between $12/cubic yard and $80/cubic yard for the top-end blended soil products.

Compost can be sold as a stand-alone product or used a base material for soil blends. For instance, potting soil purchased in a nursery or “big box” retailers may contain 20% to 30% compost blended with other materials such as top soil, bark or peat. Compost is also used as a base material for “engineered” soils in large landscaping and construction projects. In these applications, compost manufacturers will blend their compost to meet specifications of the contractor that include organic content, weight, water retention, compactibility and other necessary qualities. Such soil blends can sell for the higher range in the market.

The market for compost and soils is localized, limited in large part by the cost of transporting materials. Typically, shipping material over 100 miles from its place of manufacturing becomes less economical. As a result, the larger compost manufacturers will create a dominant presence in their community, and expand their business by offering a broader range of products, better service to both inbound and outbound customers, and identifiable brands that can then be scaled to other markets.

Business Plan and Value Appreciation Strategy

Our business involves acquiring or overseeing the acquisition of compost and soil manufacturing facilities through EPH, and managing those facilities through a long-term agreement. We believe that by creating a regional or, ultimately, nationwide footprint of composting facilities that can produce consistent, quality products, combined with strong sales, marketing/branding and scientific research, we can create substantial added value from these acquired assets.

Through this strategy, value to the Company’s shareholders can be achieved in several ways. Most directly, both acquisitions and organic growth at the EPH level can lead to higher fees paid to us through our Management Agreement and equity appreciation from our investment in EPH. Possibly more importantly, however, the intellectual property that we develop through these managerial activities – understanding, creating and scaling the best operating practices, systems and processes for compost and soil manufacturing – has potential to generate revenue and fees for the Company beyond just EPH owned facilities. Further, investment or acquisitions at the Company level in brands and new product development, non-traditional sales and marketing channels, and soil science research, may provide “asset and capital light” opportunities to expand our reach nationally and internationally.

Product Focus. As discussed above, we plan to achieve growth for the facilities we manage by maximizing sales of high-end compost and soils through a network of traditional and new distribution channels. Part of this strategy would include transitioning facilities that are more reliant on tipping fees to better manufacturing processes that can achieve higher quality products. For those facilities that already have these procedures in place, we plan to introduce into their regional markets new branded and blended soil products that command higher prices and margins and are supported by sound scientific research. Such product and brand development and scientific studies may be provided through the Q2 Activities, created and controlled directly by the Company.

Sales Channels/Distribution. We will seek to develop nationwide marketing and sales channels with large corporate customers, government agencies, and other groups. Marketing is a major component of compost sales that seems to be lacking in the industry, but can result in product differentiation, consumer identification and value creation by opening new customer bases. The engineered soils market is generally in its early growth stages. We believe there are substantial opportunities to promote these products for construction, federal/municipal infrastructure programs, and land reclamation/mining projects. We plan to invest in sales and marketing at the Company level to attract nationwide customers that can benefit from and place large orders for compost and engineered soils both from EPH owned facilities and other facilities with which the Company may partner in the future.

Efficiencies. We expect that consolidating composting companies can lead to better operational and sales efficiencies. Activities such as safety, accounting, legal, advertising, government outreach, training and others can be done at the corporate level, thus reducing overlapping personnel and efforts. Under our Management Agreement with EPH, these are the duties of the Company. We believe that the proprietary knowledge and intellectual property that we develop in this management role can also be applied to facilities not owned by EPH. In this respect, the Company can develop a management system of controls, procedures and other best operating practices that can be licensed or contracted by other companies.

Moving forward, we intend to pursue these and other opportunities based on the overall mission of doing good for our planet by reducing waste, toxic chemical usage and pollution, while supporting food supply and security.

Composting Industry

Size and Composition. According to research conducted by the USCC, there are approximately 5,000 commercial composters in the United States diverting an estimated 19.4 million tons of organics from landfills. These organic waste streams primarily consist of yard trimmings, food scraps, biosolids (from waste water treatment plants) and some agricultural waste streams, including manure.

Of the approximately 5,000 composting sites in the U.S., most are small producers generating under $1 million per year in revenue. Less than 400 composters in the U.S., by the Company’s count based on industry data, generate more than $5 million in revenue per year, and even fewer over $10 million.

Compost manufacturers can also be segmented by the types of waste they collect for processing. The three main feedstocks are biosolids from WWTPs, yard (or “green”) waste from commercial or municipal waste collection firms, and pre or post-consumer food waste. The largest number of composters utilize green waste, however, the largest volume of compost in the U.S. comes from biosolids.

Applications/Sectors for Compost Sales. The applications for compost and engineered soils are wide and growing. Engineered soils (sometimes called manufactured soils) are blends of soil, soil components and soil-like material used in horticulture, landscape, construction and site restoration applications. Using engineered soils allows for “tailoring” of soil properties to specific needs. Soil blending is performed at a production scale across the U.S., generating millions of cubic yards of product annually. Compost is a primary component of engineered soils, typically comprising 1/3 of its volume.

The largest segments for the application of compost and engineered soils include the following:

Agriculture. Making farmland more productive and sustainable is the largest application of compost. Compost improves infiltration rates, water holding capacity and soil tilth; and fertilizes the soil to supplement nitrogen, phosphorus and potassium. Use of compost can save farmers money by decreasing water, chemical fertilizer and pesticide uses by up to 80%. Despite the utilization of compost on farmland being an age-old practice, the market for this in the U.S. is still largely untapped, estimated at only a 10% utilization rate relative to all farmable land, according to the USCC.

Horticulture. The next largest segment of the market is landscaping and gardening (horticulture), which includes customers ranging from commercial landscapers who buy compost, soil and mulch products in bulk, to the home gardener who buys these products in bags at nurseries and big box retailers. The home gardener is a very interesting segment of this group. Concerns surrounding the use of synthetic chemicals on lawns, gardens and the food we eat are creating a growing demand for environmentally friendly, organic based products to replace fertilizers and pesticides. Compost is a natural alternative to synthetic chemicals, and we believe as more consumers are educated about the benefits of using compost, demand for these products will grow.

Construction: For both traditional construction and LEED certified projects, use of engineered soils for control of erosion, water retention, sedimentation and pollution can result in cost savings and easier compliance with permitting. Further, Low Impact Development (LID) approaches – maintaining and enhancing pre-development watershed regimes – have become critically important, especially in urban settings. Engineered soils play a major role in green roofs, bio-retention cells, rain gardens, infiltration trenches and open grid pavement systems. The goals of these systems are to reduce the flow rate, volume and contaminant level of storm water runoff (compost can retain 20X its weight in water).

Silviculture and Land Reclamation (Mining): Engineered soils are being used to repopulate forests (silviculture) and other land where heavy use, industry or other activities such as mining have decimated the vegetation. This is an important area to help control water conservation and climate change.

Sod and Turf: Engineered soils are being used to improve sod and turf quality, produce a lighter material, and enhance growth efficiency. They are being used for college and high school athletic fields (especially to replace synthetic turf fields), and for golf course construction and maintenance.

Competition

The composting industry is highly fragmented with no clear leader on a national basis. As composting is very much a localized business constrained by the costs of transporting soils over long distances, each region or community that we may enter will likely have a dominant market player. We view these local leaders as potential acquisition targets or partners; however, there is no assurance that we will be able to acquire or build a dominant business in each location we choose to enter.

Large waste companies own compost facilities in their respective portfolios. Waste Management in particular owns over 40 compost facilities, typically connected to a landfill property. We believe that compost sites like these are under-utilized and not geared to creating the highest value end-products for sale into multiple markets. As a result, we believe there is an opportunity to work with large waste companies to help them expand their sales and marketing operations.

The largest buyers of compost and soil products nationwide are aggregators such as Scotts Miracle-Gro and Old Castle. These companies typically purchase material from companies like those we manage, bag and brand the material, and sell it through big box retailers including Home Depot and Lowe’s. These aggregators are both customers and competitors of our current and future facilities, as they control important distribution channels and consumer identifiable brands. These companies also have far greater resources that we do.

Intellectual Property

Compost. With respect to the Company’s composting business model, we do not hold any specific intellectual property; however, certain of the companies acquired through EPH, or identified for future acquisition or partnership, do have trade secrets in soil formulas, manufacturing processes, and patentable compost additives, all of which could be valuable for our on-going growth strategy. The companies that we manage have certain local or industry-specific product brands and service marks that have value. We will seek to protect and further monetize this intellectual property on behalf of EPH under our Management Agreement.

Engine Development. On August 8, 2017, the Company sold the intellectual property developed in connection with the Q2P Engine and the CHP System to Phoenix Power Group. This intellectual property consisted of designs, drawings, manufacturing processes, and potentially patentable technology, as well as a license agreement with Cyclone Power Technologies.

Patents. The Company currently does not hold any patents.

Trade Secrets. With respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on among other things, trade secret protection and confidentiality agreements to safeguard our interests. We also require our customers and business partners to enter into confidentiality agreements before we disclose any sensitive aspects of our technology or business plans.

Trademarks. We have received approval from the USPTO for use of our Q2P and Q2Power trademarks. We acquired from Cyclone the U.S. trademarks for “WHE”, WHE Generation” and “Generation WHE” in connection with our Separation Agreement. The Company is not currently using any of these marks.

Government Regulation

Generally, individual states determine the regulatory process for composting operations and oversee the permitting, siting, design and operations requirements. Federal regulations through the EPA generally apply for facilities handling biosolids, and in some states, animal manures. In cases where the state has not established requirements specifically for composting source separated organics or other mixed feedstocks, the state may defer back to the federal biosolids regulations. Typically, the pollutant limits and pathogen and vector attraction reduction processes are utilized.

Even with regulations in place at the state level, local planning and zoning requirements are important for composting facilities as well. These requirements are often cumbersome to navigate due to outdated laws, lack of familiarity with composting processes and conflicting community priorities. Facilities often must meet local requirements before receiving a permit to operate from the state.

Composting is often not recognized as a traditional land use designation and may be classified as an industrial, rather than an agricultural, activity. This designation can burden composters with excessive regulations. Local land use rules may also require compliance with criteria that is already covered by state rules. This creates both a financial and regulatory burden to the processor.

Composting regulations typically address concerns over litter, leachate, odor, vectors, dust, noise, security against illegal dumping, protection of surface and groundwater, neighborhood compatibility and pathogen and metal levels in the finished product. Requirements for yard waste composting tend to be much more lenient than those for food waste because of the reduced risk of leachate, odors, vectors and pathogens, generally leading to decreased feelings of “Not In My Back Yard” (NIMBYism). Some state regulations facilitate composting of source separated organics (SSO), based on type (e.g., vegetative only with no meat, preconsumer) and quantity (e.g., <500 cy at any one time). In these cases, less onerous and less costly permits may be available. Typically, composting facilities seeking to process larger quantities and/or a wide range of types of SSO (e.g., vegetative and meat/dairy as well as postconsumer, such as plate scrapings) need to apply for a more complex and costly permit.

In addition to governmental oversight of compost operations, certain self-governed organizations such as the US Composting Council through its Seal of Testing Assurance Program (“STA”) and OMRI, which certifies organic products, may apply to our products. STA, for instance, is a compost testing, labeling and information disclosure program created in 2000 through the consensus of leading compost research scientists in the United States. STA is not mandatory in the industry, but if a facility chooses to work within its standards, it requires continuous third-party lab testing and reporting of compost samples which can be costly. The benefits of this program include differentiation of qualifying compost in the marketplace.

Exchange Act

We are subject to the following regulations of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and applicable securities laws, rules and regulations promulgated under the Exchange Act by the SEC. Compliance with these requirements of the Exchange Act increases our legal and accounting costs.

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.

Emerging Growth Company

We are also an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or “JOBS Act.” As long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not an “emerging growth company,” like those applicable to a “smaller reporting company,” including, but not limited to, a scaled down description of our business in SEC filings; no requirements to include risk factors in Exchange Act filings; no requirement to include certain selected financial data and supplementary financial information in SEC filings; not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements that we file under the Exchange Act; no requirement for Sarbanes-Oxley Act Section 404(b) auditor attestations of internal control over financial reporting; and exemptions from the requirements of holding an annual nonbinding advisory vote on executive compensation and seeking nonbinding stockholder approval of any golden parachute payments not previously approved. We are also only required to file audited financial statements for the previous two fiscal years when filing registration statements, together with reviewed financial statements of any applicable subsequent quarter.

We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We can remain an “emerging growth company” for up to five years. We would cease to be an “emerging growth company” prior to such time if we have total annual gross revenues of $1 billion or more and when we become a “larger accelerated filer,” have a public float of $700 million or more or we issue more than $1 billion of non-convertible debt over a three-year period.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

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.

Number of Total Employees and Number of Full Time Employees

As of the date of this Annual Report, we have five full-time employees. This does not include employees at the EPH level.

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.

Item 1a. Risk Factors

A number of factors could affect the business of the Company, which include the following:

We have a limited operating history and are operating at a loss, and there is no guaranty that we will remain as a going concern or become profitable.

We recently began operations under our new business model and anticipate that we will operate at a loss for some time. Since we have limited operating history and no history of profitability, we have limited financial results upon which you may judge our potential. There can be no guarantee that we will become a going concern or ever become profitable. In the future, we may experience under-capitalization, development delays, set-backs with closing or integrating acquisitions, lack of funding options, setbacks and many of the problems, delays and expenses encountered by any early stage business, many of which are beyond our control. These include, but are not limited to:

Because our history is limited and we are subject to intense competition, any investment in us would be inherently risky.

Because we are a company with limited operational history and no profitability, our business activity can be expected to be early-staged and subject to numerous risks. The compost and soil business is highly competitive in different regions with many companies having access to the same products and markets. Many of them have greater financial resources and longer operating histories than we have and can be expected to compete within the business in which we engage and intend to engage. There can be no assurance that we will have the necessary resources to become or remain competitive. We are subject to the risks which are common to all companies with a limited history of operations and profitability. Therefore, investors should consider an investment in us to be an extremely risky venture.

We will require additional financing.

For the foreseeable future, we expect to rely upon funds generated from our Management Agreement, as well as funds that may be raised from future debt or equity offerings to provide growth and operating capital for the Company. We will have to obtain additional financing in order to continue operations expand our business consistent with our proposed plans. There can be no guarantee that additional funds will be available when and if needed. If we are unable to obtain such financing, or if the terms thereof are too costly, we may be forced to curtail or cease operations until such time as alternative financing may be arranged, which could have a materially adverse impact on our planned operations and our shareholders’ investment.

There is substantial doubt on our ability to continue as a going concern.

The Report of Independent Registered Public Accounting Firm issued in connection with our audited financial statements for the calendar year ended December 31, 2018 expressed substantial doubt about our ability to continue as a going concern, due to the fact that we have recurring operating losses and our lack of liquidity and working capital.

We remain at risk regarding our ability to conduct successful operations.

The results of our operations will depend, among other things, upon our ability to complete acquisitions both on behalf of EPH and ourselves, integrate their operations and culture into a cohesive unit, and manage and grow those operations. Further, it is possible that our operations will not generate income sufficient to meet operating expenses or will generate income and capital appreciation, if any, at rates lower than those anticipated or necessary to sustain ourselves. Our operations may be affected by many factors, some known by us, some unknown, and some which are beyond our control. Any of these problems, or a combination thereof, could have a materially adverse effect on our viability as an entity and might cause the investment of our shareholders or debtors to be impaired or lost. Our management team has not yet been fully formed, and we may not be able to find people suitable to fill those positions at the salary levels we are able to afford. Some of our projects may not be completed in time to allow production or marketing due to the inherent risks of product development, limitations on financing, competition, obsolescence, loss of key personnel and other factors. Unanticipated obstacles can arise at any time and result in lengthy and costly delays or in a determination that further development is not feasible.

The consummation of our acquisition and integration plan may take longer than anticipated and could be additionally delayed. We may not be able to complete acquisitions at valuations and prices that provide upside appreciation to investors in those projects and our shareholders. Therefore, there can be no assurance of timely completion and introduction of projects on a cost-effective basis, or that such projects, if introduced, will achieve the results anticipated such that, in combination with existing projects, they will sustain us or allow us to achieve profitable operations.

Our success will be dependent on our management, and the continued service of key employees.

Our success is dependent upon the decision making of our directors and executive officers. We believe that our success depends on the continued service of our key employees and our ability to hire additional key employees when and as needed. Although we currently intend to retain our existing management, we cannot assure you that such individuals will remain with us. Further, we cannot assure that we will be able to find and recruit new employees on terms acceptable to the Company. We have fixed term employment agreements with our two key employees – Messrs. Bolin and Nelson — but have not obtained key man life insurance on the lives of either of them. The unexpected loss of the services of one or more of our key executives, directors and advisors, or the inability to find new key employees within a reasonable period of time could have a material adverse effect on the economic condition and results of operations of the Company.

We may not be able to effectively control and manage our growth.

Our strategy envisions a period of potentially rapid growth. We currently maintain nominal administrative and personnel capacity due to the early-staged nature of our business, and our expected growth may impose a significant burden on our future planned administrative and operational resources. The growth of our business will require significant investments of capital and increased demands on our management, workforce and facilities. We will be required to substantially expand our administrative and operational resources and attract, train, manage and retain qualified management and other personnel. Failure to do so or satisfy such increased demands would interrupt or would have a material adverse effect on our business and results of operations.

Acquisitions, other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations.

Acquisitions are an important element of our overall corporate strategy and use of capital, and these transactions could be material to our financial condition and results of operations. We expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquired company, business, or product has created, and will continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks include:

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments or strategic alliances could cause us to fail to realize the anticipated benefits of such acquisitions, investments or alliances, incur unanticipated liabilities, and harm our business generally.

Our acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or impairment of goodwill and purchased long-lived assets, and restructuring charges, any of which could harm our financial condition or results of operations and cash flows. Also, the anticipated benefits of many of our acquisitions may not materialize.

Our sales cycles may be long.

We expect that the period between initial contact with a potential customer for new products such as engineered soils and the purchase of those products may be long and subject to delays associated with the budgeting, approval, and competitive evaluation processes which frequently accompany such projects. We believe that a customer’s decision to purchase our products may be discretionary and is influenced by budgetary cycles or forces such as commodity costs. Further, industries such as construction are historically cyclical, and to the extent we focus manufacturing and sales resources on products geared towards these markets, we could experience a material effect on our revenue and profitability if we are caught in a market downturn.

Our failure to develop and introduce improved products could hurt our growth. Investment in new product lines and products and technologies is inherently risky and could disrupt our ongoing businesses.

We plan to invest financial resources in research and development, soil sciences, and marketing of new soil products and technologies. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenues to offset liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments, and unidentified issues not discovered in our due diligence of such strategies and offerings. Because these new ventures are inherently risky, no assurance can be given that such strategies and offerings will be successful and will not adversely affect our reputation, financial condition, and operating results.

Problems with product quality may damage our market reputation and prevent us from maintaining or increasing our market share.

Any widespread product failures may damage the market reputation of EPH, its subsidiaries and the Company, and cause sales to decline, which could have a material adverse effect on our financial results, including loss of management fees or equity value in our investment. Such product failures may open us to litigation for which we may not be properly insured, and for which an unfavorable result could have a material adverse effect on our operations and value of your holdings.

A significant interruption in the operation of EPH’s facilities could impact our reputation, contractual relations and operations, which could adversely affect revenues.

Operations at EPH’s facilities are subject to disruption for a variety of reasons, including fire, flooding or other natural disasters, disease outbreaks or pandemics, acts of war, terrorism, government shut-downs and work stoppages. A significant interruption in the operation of EPH’s facilities could significantly impact our business, which could have a material adverse effect on our revenues and financial position.

Climate change and unfavorable weather conditions could adversely impact financial results.

The issue of climate change is receiving ever increasing attention worldwide. The possible effects, as described in various public accounts, could include changes in rainfall patterns, water shortages, changing storm patterns and intensities, and changing temperature levels that could adversely impact our costs and business operations and the supply and demand for compost and soil products. In addition, fluctuating climatic conditions may result in unpredictable modifications in the manner in which consumers garden or their attitudes towards gardening, making it more difficult for us to provide appropriate products to appropriate markets in time to meet consumer demand. Because of the uncertainty of weather volatility related to climate change and any resulting unfavorable weather conditions, we cannot predict its potential impact on our financial condition, results of operations and cash flows.

Potential conflicts of interest.

Virtually all of our current operations involve facilitating acquisitions on behalf of EPH and managing those acquired assets, all under a Management Agreement. EPH has equity holders and creditors that are different from ours. Our management owes a fiduciary duty to both the Company’s shareholders and, by virtue of the Management Agreement, the equity holders of EPH. While there is a certain alignment of interests between the Company and EPH in that we own a minority equity stake in EPH, receive management fees from EPH, and have an interest in assuring the success of EPH, there may be instances in the future when those interests are no longer aligned. In such cases, management may face a conflict in selecting between the Company and EPH interests. We have not formulated a formal policy for the resolution of such conflicts. Further, the officers and directors of the Company are and may in the future become involved in other business activities and opportunities. If a specific business opportunity becomes available, such person(s) may face a conflict in selecting between the Company and his other business interests. The Company has not formulated a policy for the resolution of such conflicts.

Our Management Agreement is terminable at will, and the loss of this agreement would have a material adverse effect on our financial condition.

All of our revenue currently comes from our Management Agreement with EPH. That agreement may be terminated at will by the board of EPH. If this were to occur for reasons other than “for cause”, we would receive a one-year severance payment; however, the exact dollar amount of that payment is not certain. If this agreement were cancelled, we would likely need to layoff employees and curtail operations. The termination of this agreement would have a material adverse effect on our business and results of operations.

Our Class B ownership in EPH is subordinated to other membership interests, and we hold a minority voting stake in that company.

We own Class B Units in EPH, which are subordinated to the Class A Units and debt. Until such time that the Class A Unit holders have received all of their capital plus an 8% preferred distribution from the profits or liquidation value of EPH, our Class B Unit will not receive any distributions and have minimal economic value. We cannot guarantee that the Class B Units will realize profit or value for the Company. Further, the Class A Unit control a significant majority of the voting power of EPH as well as a majority of the board of director seats. As such, we cannot control the major decisions of EPH which could affect our ownership, including dilution, addition of new members, liquidation of assets, and the like. The LLC Agreement provides us with few protections as a minority holder in EPH.

EPH has debt which is senior to the equity holders in that company and secured by all of the assets of EPH and its subsidiaries.

EPH has a $6 million debt facility, of which $3 million was outstanding as of the date of filing. This debt is secured by all of the assets of EPH and the acquired companies. The Company is not a party to that debt, nor are any of our assets used as collateral to that debt. Both of the EPH acquired companies also have debt secured by equipment, receivables and other assets. While we are not obligated under any of these liabilities, these loans have priority over our equity interests in EPH as well as payment of our management fees, and if EPH or its acquired companies cannot repay these loans, our equity value in EPH could be reduced to nothing and we may not receive any additional management fees.

EPH is an unconsolidated equity method investment, and our shareholders will not receive financial statements or other information that may be material to their understanding of the risks in that investment.

Since we do not control the voting or board decisions of EPH, among other criteria, we account for our investment in EPH as an equity method investment. As such, we are not required to consolidate the results of operations or balance sheet of EPH, nor are we required to file audited financial statements for EPH with our Annual Report as we are a Smaller Reporting Company. We may in the future provide summary financial results for EPH in the footnotes to our consolidated financial statements, but are not required to do so in this 10-K report. We are also not required to file Current Reports on Form 8-K or include exhibits of material agreements on behalf of EPH. For this reason, you may not have access to full and complete information about the performance and results of EPH.

Liquidity risks associated with our common stock.

Limited Public Market. There is a limited trading market for our shares of common stock and a robust trading market for our securities may not develop in the foreseeable future. If no market develops, it may be difficult or impossible for you to sell your shares if you should desire to do so. Our common stock is quoted on the OTCQB. There is extremely limited and sporadic trading of our common stock and no assurance can be given, when, if ever, an active trading market will develop or, if developed, that it will be sustained.

No Trading of Stock. Current rules promulgated by the SEC may prohibit shareholders from trading their shares of common stock under Rule 144 for at least six months unless registered. We have heard from shareholders trying to deposit their previously restricted stock certificates into brokerage accounts that they were unable to do so.

Limited Marketability, Transferability and Liquidity. There is a limited market through which our common stock may be sold, and transfer of these shares is subject to significant restrictions. Unless our shares are registered with the Securities and Exchange Commission and any required state authorities, or an appropriate exemption from registration is available, a holder of the shares may be unable to liquidate an investment in such securities, even though his or her personal financial condition may dictate such a liquidation. In addition, the shares will likely not be readily acceptable as collateral for loans. Therefore, prospective stockholders who require liquidity in their investments should not invest in our common stock.

The price of our common stock may fluctuate significantly, which could lead to losses for stockholders.

The securities of public companies can experience extreme price and volume fluctuations, which can be unrelated or out of proportion to the operating performance of such companies. We expect our common stock price will be subject to similar volatility. Any negative change in the public’s perception of the prospects of our Company or companies in our market could also depress our common stock price, regardless of our actual results. Factors affecting the trading price of our common stock may include:

The application of the “penny stock” rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.

As long as the trading price of our common stock is below $5.00 per share, the open-market trading of our common stock will be subject to the “penny stock” rules. The penny stock rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1 million or annual income exceeding $200,000 or $300,000 together with their spouses). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common stock, and may result in decreased liquidity of our common stock and increased transaction costs for sales and purchases of our common stock as compared to other securities.

We do not intend to pay dividends.

We have not paid any cash dividends on our common stock since inception and we do not anticipate paying any cash dividends in the foreseeable future. Earnings, if any, that we may realize will be retained in the business for further development and expansion.

Concentration of Stock Ownership and Control.

Our executive officers currently control approximately 35.5% of our common stock. Our Bridge Note holders are able to convert their debt principal and interest into common or preferred stock at prices that may be significantly less than current market prices, and would result in significant dilution. The Company has employee options and warrants, and the Board has approved a founder’s plan similar to restricted forfeitable shares that could result in further dilution, although no founder’s shares have been issued. Our business plan entails conducting multiple acquisitions and funding rounds, much of which may utilize our common stock. In this regard, management, Bridge Note holders, future investors and target owners may control a significantly large amount of equity, and as a result, these stockholders acting together will be able to influence many matters requiring stockholder approval including the election of directors and approval of mergers and other significant corporate transactions. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control, and could deprive our stockholders of an opportunity to receive a premium for their shares of common stock as part of a sale of our company and may affect the market price of our stock.

The Company has Preferred Stock with additional priority rights.

The Company has 600 shares of Series A Convertible Preferred Stock (the “Preferred Stock”) outstanding with a purchase value of $600,000, held by two institutional investors. The Preferred Stock converts into common stock at $0.10 per share, per a March 2018 amendment, subject to price protection provisions in the instance certain shares are issued at a lower price. The Preferred Stock must be redeemed by the Company if not converted prior to July 1, 2019, per a modification agreement signed in March 2019. Holders of the Preferred Stock have additional rights to approve extraordinary transactions, including a sale or merger, additional debt and other similar items. While the Preferred Stock does not vote, the holders of the Preferred Stock can control significant influence over the Company.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None. Not required for smaller reporting companies.

ITEM 2. PROPERTIES

The Company currently conducts its business from offices in Palm Beach, Florida. The Company has no formal agreement for this space which is leased by Greenblock Capital, a company for which our President is also Managing Director but owns no equity or voting position. In 2017 and 2018, the Company also leased temporary office space in Atlanta, Georgia from a company that our CEO was previously an executive. The Company pays $500 per month for this space, which it believes to be market rates.

ITEM 3. LEGAL PROCEEDINGS

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 2015 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 to the knowledge of management still outstanding and management cannot guaranty that it will not be brought back into the litigation or collection efforts in the future.

ITEM 4. MINE SAFETY DISCLOSURES

None; not applicable.

part II

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

There is no “established trading market” for our shares of common stock. No assurance can be given that any market for our common stock will develop or be maintained. If a public market ever develops in the future, the sale of shares of our common stock that are deemed to be “restricted securities” pursuant to Rule 144 of the SEC by members of management or others may have a substantial adverse impact on any such market.

Set forth below are the high and low closing bid prices for our common stock for each quarter of the years 2017 and 2018. These bid prices were obtained from OTC Markets Group, Inc. All prices listed herein reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.

Rule 144

The following is a summary of the current requirements of Rule 144:

Holders

The number of record holders of our common stock as of the date of this Annual Report is 306. This figure does not include approximately 420 beneficial owners who may hold their shares in “street name,” based on a recent NOBO list.

Dividends

We have not declared any cash dividends with respect to our common stock, and do not intend to declare dividends in the foreseeable future. The future dividend policy of our Company cannot be ascertained with any certainty, and if and until we determine to engage in any business or we complete any acquisition, reorganization or merger, no such policy will be formulated. There are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our securities.

Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plan Information.

Recent Sales of Unregistered Securities

The following table sets forth the sales of unregistered securities by the Company in 2018 and up to the date of filing that were not previously reported in Form 10-Q or 8-K filings. Further, the following table does not reflect sales of unregistered securities made by Q2P prior to the consummation of the Merger.

We issued all securities previously reported to persons who were “accredited investors” as that term is defined in Rule 501 of Regulation D of the SEC, or to “sophisticated investors” or key employees; and each such person had prior access to all material information about us prior to the offer and sale of these securities, and had the right to consult legal and accounting professionals. We believe that the offer and sale of these securities were exempt from the registration requirements of the Securities Act, pursuant to Sections 4(a)(2) and 4(6) thereof, and Rule 506 of Regulation D of the SEC.

Purchases of Equity Securities by Us and Affiliated Purchasers

None.

ITEM 6: SELECTED FINANCIAL DATA

Not required for smaller reporting companies.

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report.

Our initial 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 its waste-to-power technology with the goal of pursuing business opportunities in the clean energy sector. We re-domiciled to Delaware as a corporation in April 2014, formally split from our former parent in July 2014, and changed our name to “Q2Power Corp.” in February 2015. We are licensed to do business in Florida, where we maintain an office.

On November 12, 2015, Q2P consummated its Agreement and Plan of Merger (the “Merger Agreement”) with the Company (then called Anpath Group, Inc.) and a 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 approximately 24 million shares of our common stock. In addition, we 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, we 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 our common stock and ESI retaining all of the old liabilities of ESI including a litigation judgment. In December 2015, we officially changed our name to Q2Power Technologies, Inc. to reflect our new business direction – that of Q2P – after the Merger. In February 2016, we changed our fiscal year end from March 31 to December 31 to reflect the year-end of our operating Subsidiary, and up-listed our 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, we changed our name to Q2Earth, Inc.

Since May 2016, management began to pursue opportunities in the business of manufacturing compost and soils from yard waste, food waste, biosolids and other waste streams. In 2017, we received and fulfilled our 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 a Florida-based company, which was subsequently terminated.

Current Acquisitions and Agreements with EPH

On July 27, 2018, we signed a definitive Stock Purchase Agreement (the “GBWA Purchase Agreement”) for the purchase of all of the outstanding capital stock of George B. Wittmer Associates Inc. (“GBWA”) of Jacksonville, Florida, from its sole shareholder. GBWA is a residual waste management and compost manufacturing company that services papermills in the southeast United States. The company’s assets include land and improvements, equipment, inventory, proprietary know-how and tradenames, long-term contracts and extensive customer lists.

On November 9, 2018, we transferred the GBWA Purchase Agreement to Earth Property Holdings LLC, a Delaware limited liability company (“EPH”), plus $50,000 in non-reimbursed expenses, in return for approximately a 19.9% Class B equity stake and an eight-year Management Agreement to run EPH for an initial annual management fee of $200,000. One institutional entity, in which our CEO is an investor and member, provided $4,400,000 in funding upon transfer of the GBWA Purchase Agreement in return for 500,000 Class A Units equal to approximately 80.1% of the voting equity of EPH. Immediately subsequent to the transfer of the GBWA Purchase Agreement and equity funding, EPH consummated the GBWA acquisition.

On January 18, 2019, EPH completed the acquisition (the “OBG Acquisition”) of Employee Owned Nursery Enterprises Ltd., a Texas limited partnership d/b/a Organics by Gosh (“OBG”). OBG is an organics recycling and compost and soil manufacturing company based in Austin, Texas. In connection with the OBG Acquisition, EPH raised an additional $1.9 million in Class A equity units and secured a $6 million mezzanine credit facility, from which EPH drew down $3 million at closing. Also, the Company acquired an additional 53,970 Class B equity units for $21,588 to maintain a 19.9% equity interest in EPH and received an additional $500,000 annual management fee plus reimbursed expenses.

In addition to our investment in EPH and the closing of the GBWA and OBG transactions, which we will manage and oversee moving forward, we are currently in negotiations with several other composting facilities to acquire in 2019 through EPH. We can make no guarantee that these additional acquisitions will close due to many factors including failure to raise required funding, failure to reach definitive agreements, and findings of items in the diligence process that would make closing not in the best interests of our shareholders.

Bridge Offering and Follow-On Bridge

The Company issued a total of $2,821,908 in Convertible Promissory Notes (the “Bridge Notes”) during 2017 and 2018 (the “Bridge Offering”). 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. The Bridge 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 Bridge Notes are able to be converted. The Bridge Notes convert into common stock, or preferred stock if received by investors in the Equity Offering, commencing on the soonest of the Equity Offering closing or December 31, 2017, at the discretion of the holder. 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, 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.

Sale of Engine Technology

On August 14, 2017, we closed a Technology Transfer and Assignment Agreement (the “Transfer Agreement”) with Phoenix Power Group LLC (“Phoenix”) to transfer to Phoenix all of our technology and materials associated with Q2P’s external combustion engine, controls and auxiliary systems (the “Q2P Technology”), developed both in conjunction with our 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, we 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 our prior engine manufacturer, and provided full releases from liability from both Phoenix and Cyclone. We recorded a net gain from the extinguishment of liabilities of $95,178 in the consolidated statement of operations for the year ended December 31, 2017.

A. Plan of Operation

During 2018 our plans for acquiring and overseeing the acquisition of commercial composting and sustainable soils manufacturing companies advanced materially in the opinion of management. These advancements include and culminated in the closing of the GBWA Purchase Agreement through EPH in November, the signing of a term sheet and significant progress towards completing diligence and a definitive purchase agreement with OBG in Texas (which closed in January 2019), and completion of $4.4 million in equity funding through EPH. In January 2019, we close the OBG Purchase Agreement, along with another $1.9 million in equity and $6 million in a mezzanine debt facility. In connection with the acquisition of GBWA, we also brought onto our team a highly experienced compost operations manager

Management’s plan for 2019 is to complete several more acquisitions in the compost space through EPH, which will require raising additional equity and debt from current and future investors. We will also be focused on our role managing the operations of EPH and its subsidiary entities, which may lead to additional management fees and other opportunities. We cannot be certain that additional acquisitions will close due to many factors including failure to raise required funding, failure to reach definitive agreements, and findings of items in the diligence process that would make closing not in the best interests of our shareholders.

In addition to our acquisition and management role on behalf of EPH, we plan to seek other revenue and value creation opportunities for the Company. These may include development, acquisition or licensing of national soil brands and distribution channels outside the immediate markets of EPH facilities, and soil science and research projects that can be used to advance operations of EPH facilities as well as other companies in the US or internationally under sales or license agreements. We believe these “asset-light” business opportunities could create significant value for our shareholders. At the current time, we are in discussions with several groups regarding these topics, but we have no definitive agreements in place.

While we intend to focus on the business of compost and engineered soils, moving forward we may also review and pursue other synergistic opportunities in the waste-to-value, recycling and residual management sectors if approved by our Board of Directors.

To continue operations towards these goals, we will need to raise additional capital for the Company. We have a verbal commitment with the primary investor of EPH that they will continue to provide funding to the Company either as Bridge Notes, other Q2 securities, or advances on management fees, to maintain our operations through at least the end of 2019; however, we do not have any formal written agreement and there can be no guarantee that this investor will continue to fund our operations in the future. While we are cautiously optimistic that we will have funding to maintain our current operations and advance our business plan, especially with respect to the growth on our investment in EPH, management cannot guarantee that additional financing can be completed on terms acceptable to the Company, if at all.

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

Company Overview

Between July 2014 and mid-2016, through Q2P we primarily devoted our efforts to commercializing the Q2P engine and CHP system, developing our waste-to-power business model, and recruiting executive management and key employees. Starting in the second half of 2016, we began to phase out our R&D operations, and in August 2017, sold our engine technology. We are now focused on promoting our compost manufacturing business model, including providing soil management services and facilitating the acquisition of or investing in other compost manufacturing companies. As a new entity, we have limited current business operations and nominal assets. We currently operate at a loss with minimal to no revenue.

Starting in the third quarter of 2018, we have increased our operating expenses as new employees have been hired and operations to acquire and invest in compost facilities have increased. We currently have five full time employees, including our CEO, President, two VP-Operations, and controller. Other expenses which have increased recently 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.

Results of Operations for the years ended December 31, 2018 and 2017

For the year ended December 31, 2018, we recorded a net loss of $397,257, a decrease of $2,320,948 (85%) from our net loss of $2,718,205 for the same period in 2017. Basic and diluted net loss per share was $0.01 for the year ended December 31, 2018, as compared to a basic and diluted net loss per share of $0.06 in the same period of 2017. The primary underlying reasons for the decrease in net loss include the decrease in fair value of the convertible bridge notes of $1,576,482 for the year ended December 31, 2018 compared to an increase in fair value of $1,254,379 for the same period in 2017, partially offset by an increase of $274,475 in operating expenses for the year ended December 31, 2018 compared to the same period in 2017, and a loss from equity investment of $50,000 in 2018.

The majority of the $274,475 increase in operating expenses was due to an increase in payroll and related expenses of $440,011, or 166%, to $705,484 for the year ended December 31, 2018 from $265,473 for the same period in 2017, due to the hiring of a CFO, VP of Operations and financial controller during the current period, as well as the reclassifying of consulting fees to payroll for two executives. In addition, professional fees decreased by $148,043, or 17%, to $728,329 for the year ended December 31, 2018 from $876,372 for the same period in 2017, due to the reclassification of payroll expenses for two executives.

We recorded $33,000 of revenue related to management fees from our 19.9% equity method investment EPH which is considered to be a related party during the year ended December 31, 2018 compared to the same period in 2017 which reflected $74,759 from the completion of a service agreement in the soil business.

Financial Condition, Liquidity and Capital Resources

For year ended December 31, 2018, cash decreased by $138,638. This decrease was primarily the result of cash used in operating activities of $1,068,638, partially offset by proceeds from the Follow-On Bridge Offering of $980,000.

Net cash used by operating activities was $1,068,638 for the year ended December 31, 2018, which reflected our net loss during the period of $397,257, non-cash adjustments of $849,611, partially offset by a net increase in operating liabilities of $172,397. The majority of non-cash adjustments consists of a $1,576,482 gain on change in fair value of the Bridge Notes, partially offset by a $50,000 loss on our equity method investment, $154,286 of shares issued for outside services, $339,146 in paid-in-kind interest related to the Bridge Notes, and $177,178 in stock compensation expense.

Our net loss resulted largely from our funding of activities related to the execution of our business strategy 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, as well as ongoing general and administrative expenses.

Net cash used in investing activities during year ended December 31, 2018 consisted of the deposit paid to GBWA for an extension of the purchase agreement term. This deposit was transferred to EPH in the fourth quarter and comprises the basis for our equity investment in that limited liability company.

Net cash provided by financing activities during the year ended December 31, 2018 consisted of additional convertible Bridge Note subscriptions by investors in that convertible debt offering.

At December 31, 2018, our cash totaled $160,035. Our cash is currently held at large U.S. banks.

Based on our current strategy and operating plan, we need to raise additional capital to support operations; therefore, there is substantial doubt about our ability to operate as a going concern. See “Note 2 – Basis of Presentation and Going Concern” in our consolidated financial statements.

Since July 2014, we have raised over $7 million in capital over several financings, inclusive of cash invested and some debt and payables converted to stock. With these funds, we have been able to complete the prototype stage of our 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 which culminated in the closing of the GBWA acquisition, establishment and funding of EPH, and securing of our long-term Management Agreement with EPH in late 2018, as well as additional activity in 2019.

Bridge Financing. In 2017 and 2018, we completed our Bridge Offering with $2,630,0000 of new cash raised and an additional $191,908 in old debt converted into the round. In 2018, one Bridge Note in the principal amount of $50,000 was converted into shares of common stock. The Bridge Notes convert at a 50% discount to the post-funding valuation of the Company at the closing of our next offering in the minimum amount of $5,000,000 (the “Equity Offering”). The conversion valuation has a ceiling of $12,000,000, and a “floor” company value of $6,000,000 in the event there is no Equity Offering before the Bridge Notes are able to be converted.

The Bridge Notes are currently convertible into our common stock, or preferred stock if received by investors in the Equity Offering, at the discretion of the individual holders. Maturity is 36 months (24 months for Bridge Notes issued in 2018) from issuance with 15% annual interest which will be capitalized each year into the principal of the Bridge Notes and paid in kind.

The 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 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.

Funds from the Bridge Offering were used to secure our acquisitions of or investments in compost and soil companies, retire old debt, and pay operating expenses in 2017 and 2018.

Company’s Prior Financings.

Subsequent to the Merger into the public company, we raised $600,000 in our 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 we 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 our assets (secondary to our debt holders), and certain negative covenant guaranties that we 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 on July 1, 2019 per a March 2019 modification, and has no voting rights until converted to common stock. The Preferred Stock holders 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 December 31, 2018.

On March 15, 2016, we entered into a 120-day term loan agreement with one accredited investor in the principal amount of $150,000. The loan bore 20% interest with interest payments due monthly. The holders of the term loan received 100,000 shares of common stock valued at $26,000, $3,000 cash and a second security interest in our assets of in exchange for arranging the financing. This loan matured on July 15, 2016, and a 10% late penalty was assessed on July 15, 2016. On March 22, 2017, we entered into an addendum 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, 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 was repaid in full in December 2017.

On April 29, 2016, our three independent Directors loaned us a total of $60,200 pursuant to three convertible notes. The total principal amount of all three notes was $66,000. The notes were converted into the Bridge Offering in March 2017. In June 2016, three other shareholders provided an additional $30,000 us on the same loan terms, which were also subsequently converted into the Bridge Offering.

In July and August 2016, we 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 $0.21 per share for an aggregate of $157,500, less $610 in financing costs.

In September 2016, our three independent Board members advanced us $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 our 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 Quarterly 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”).

In August 2017, we closed our Transfer Agreement which transferred to Phoenix all of our technology and materials associated with the old Q2P Technology, including transferring and assigning our License Agreement with Cyclone to Phoenix.

We 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 contract liabilities on the December 31, 2018 and 2017 consolidated balance sheets.

Cash and Working Capital

We have incurred negative cash flows from operations since inception. As of December 31, 2018, we had an accumulated deficit of $10,367,231.

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 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 December 31, 2018.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Q2Earth, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Q2Earth, Inc. (the Company) as of December 31, 2018, and the related consolidated statements of operations, statement of stockholders’ deficit, and statement of cash flows for the year then ended. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit includes performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred operating losses, has incurred negative cash flows from operations and has a working capital deficit. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is also described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ D. Brooks and Associates CPA’s, P.A.

We have served as the Company’s auditor since 2019.

Palm Beach Gardens, FL

April 1, 2019

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Q2Earth, Inc. and Subsidiary

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Q2Earth, Inc. and Subsidiary (the “Company”) as of December 31, 2017, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company’s lack of liquidity and working capital and its recurring operating losses raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ EisnerAmper LLP

We served as the Company’s auditor from 2016 to 2018. (Note: Partners of Mallah Furman joined EisnerAmper LLP in 2015. Mallah Furman had served as the Company’s auditor since 2015.)

EISNERAMPER LLP

Fort Lauderdale, Florida

April 9, 2018

Q2EARTH, INC.

CONSOLIDATED BALANCE SHEETS

See notes to the consolidated financial statements.

Q2EARTH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to the consolidated financial statements

Q2EARTH, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

See notes to consolidated financial statements.

Q2EARTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to the consolidated financial statements.

Q2EARTH INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Q2Earth, Inc. (hereinafter the “Company”), incorporated in Delaware on August 26, 2004, is currently engaged in the business of managing compost and soil manufacturing facilities, and is pursuing a plan of strategic acquisitions and investments in this sector through an unconsolidated investee called Earth Property Holdings LLC, a Delaware limited liability company (“EPH”). Through EPH, the Company completed one acquisition in November 2018 and a second in January 2019. The Company owns a 19.9% equity interest in EPH and manages all of its operations pursuant to an eight-year management contract. The Company previously owned and licensed technology that converts waste fuels and heat to power, which it sold to a licensee in August 2017. Formerly, the Company’s name was Q2Power Technologies, Inc., and before that, Anpath Group, Inc. (“Anpath”).

Q2Power Corp. (the “Subsidiary” or “Q2P”) operated as an R&D company focused on the conversion of waste to energy and other valuable “reuse” products since July 2014. The operations of the Company have from 2014 until early 2017 been essentially those of the Subsidiary. In May 2016, the Company began exploring other synergistic business lines such as compost and soil manufacturing from waste water biosolids and other waste feedstocks. In 2017, the Company formally shifted its focus from waste-to-energy technology R&D, including selling its technology to a license in August 2017, to facilitating the acquisition of, investment in, and operation of facilities that manufacture compost and sustainable soils from waste resources.

NOTE 2 – BASIS OF PRESENTATION AND GOING CONCERN

For the year ended December 31, 2018, the Company used cash in operating activities of $1,068,638. The accumulated deficit since inception is $10,367,231, which is comprised of operating losses and other expenses. Additionally, certain of the Company’s debentures and redeemable convertible preferred stock mature on July 1, 2019. 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 revenue and/or raise capital sufficient to support its operations. The ability of the Company to continue as a going concern is dependent on management’s plans which include implementation of its business model to facilitate the acquisition of and investment in cash-flowing businesses, grow revenue and earnings of those companies which may result in added management fees for the Company, and continue to raise funds for the Company through debt or equity offerings.

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

On March 31, 2017, the Company completed the first $1,050,000 tranche of a convertible bridge note offering (the “Bridge Offering”). Through the end of 2017, the Company closed an additional $600,000 of follow-on investments in the Bridge Offering. In 2018, the Company raised an additional $980,000 in convertible notes on substantially same terms as the Bridge Offering with three accredited investors and one institutional investor (the “Follow-On Bridge Offering”).

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