NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 ORGANIZATION AND DESCRIPTION OF BUSINESS
Q2Power Technologies, Inc. (hereinafter the Company) was incorporated in Delaware on August 26, 2004. The Company is primarily a holding company for its sole subsidiary, Q2Power Corp. Formerly, the Companys name was Anpath Group, Inc. (Anpath).
The Company, through its subsidiary, Q2Power Corp. (the Subsidiary or Q2P), has operated a renewable power R&D company focused on the conversion of waste to energy and other valuable reuse products since July 2014. The operations of the Company are essentially those of the Subsidiary. In May 2016, the Company began exploring other synergistic business lines, such as composting from waste water biosolids. Although no operations in these fields have commenced, management has made progress towards acquiring certain operational composing facilities in the U.S. Moving forward, the Company intends to phase out its R&D activities and focus entirely on the business of compost and engineered soils manufacturing and sales.
On November 12, 2015, the Company and its special purpose merger subsidiary completed a merger (the Merger) with Q2P. As a result of the Merger, all outstanding shares of Q2P were exchanged for 24,034,475 shares of the Companys common stock. In addition, the Company assumed both the Q2P 2014 Founders Stock Option Plan and the 2014 Employees Stock Option Plan (the Option Plans), and 1,095,480 options outstanding thereunder. Also pursuant to the Merger, the officers and directors of Q2P assumed control over the management and Board of Directors of the Company. Subsequent to the Merger, the Company officially changed its name to Q2Power Technologies, Inc.
On December 1, 2015, in connection with the Merger the Company also sold its prior operating subsidiary, EnviroSystems Inc. (ESI), to three former shareholders in exchange for a return of 470,560 shares of the Companys common stock. ESI assumed all debt, payables and a litigation judgment that was on its books as of the Merger date.
On February 12, 2016, the Board of Directors of the Company approved a change in the fiscal year end for the Company from March 31 to December 31. This change is a result of the Merger, and reflects the fiscal year-end period for Q2P.
NOTE 2 BASIS OF PRESENTATION AND GOING CONCERN
The unaudited condensed financial statements include all accounts of the Company. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included. The December 31, 2015 condensed consolidated balance sheet information contained herein was derived from the audited consolidated financial statements as of that date included in the Annual Report on Form 10-KT filed on April 14, 2016. The audited consolidated financial statements contained an explanatory paragraph in the Report of the Independent Registered Public Accounting Firm, regarding substantial doubt about the Companys ability to continue as a going concern.
The Company has incurred a net loss of $1,183,231 for the nine months ended September 30, 2016, which included a gain from the change in fair value of derivative liabilities of $724,415. The accumulated deficit since inception is $6,548,611, which is comprised of operating losses (which were paid in cash, stock for services and other equity instruments) and other expenses. The Company has a working capital deficit at September 30, 2016 of $1,812,489. These conditions raise substantial doubt about the Companys ability to continue as a going concern. There is no guarantee whether the Company will be able to generate enough revenue and/or raise capital sufficient to support its operations. The ability of the Company to continue as a going concern is dependent on managements
9
plans which include implementation of its business model to generate revenue from product sales and royalties, acquisition of cash-flowing businesses, and continuing to raise funds through debt or equity offerings. The Company will also likely continue to rely upon related-party debt or equity financing, which may not be available at the time required by the Company. See also Note 12, Subsequent Events.
The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
U.S. Generally Accepted Accounting Principles (GAAP) requires the Company to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, the reported amounts of revenues and expenses, cash flows and the related footnote disclosures during the period. On an on-going basis, the Company reviews and evaluates its estimates and assumptions, including, but not limited to, those that relate to the realizable value of identifiable intangible assets and other long-lived assets, derivative liabilities, income taxes and contingencies. Actual results could differ from these estimates.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its Subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation. References herein to the Company include the Company and its subsidiary, unless the context otherwise requires.
Cash
The Company considers all unrestricted cash, short-term deposits, and other investments with original maturities of no more than ninety days when acquired to be cash and cash equivalents for the purposes of the statement of cash flows. The Company maintains cash balances at two financial institutions, and has experienced no losses with respect to amounts on deposit.
At September 30, 2016 and December 31, 2015, cash held in banks totaled $319 and $1,012, respectively.
Revenue Recognition
Revenue from the Companys waste-to-power operations is recognized at the date of shipment of engines and systems, engine prototypes, engine designs or other deliverables to customers when a formal arrangement exists, the price is fixed or determinable, the delivery or milestone deliverable is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. The Company will not allow its customers to return prototype products.
For the three and nine months ended September 30, 2016, the Company recognized revenue of $0 and $40,000, respectively. The $40,000 was related to the first achieved milestone and delivery under a technology sales agreement. The Company also received an additional $50,000 upon signing of that agreement, which is accounted for as deferred revenue that will be recognized upon contract completion.
Research and Development
Research and development activities for product development are expensed as incurred. Costs for the three months ended September 30, 2016 and 2015 were $43,154 and $372,533, respectively. Costs for the nine months ended September 30, 2016 and 2015 were $355,884 and $1,056,924, respectively.
10
Stock Based Compensation
The Company applies the fair value method of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718,
Share Based Payment
, in accounting for its stock based compensation. This standard states that compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The Company values stock based compensation at the market price for the Companys common stock and other pertinent factors at the grant date.
The Company accounts for transactions in which services are received from non-employees in exchange for equity instruments based on the fair value of the equity instruments exchanged, in accordance with ASC 505-50,
Equity Based payments to Non-employees
. The Company measures the fair value of the equity instruments issued based on the market price of the Companys stock at the time services or goods are provided.
Common Stock Options
The Black-Scholes option pricing valuation method is used to determine fair value of these options consistent with ASC 718,
Share Based Payment.
Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields, expected term of the awards and risk-free interest rates.
Derivatives
Derivatives are recognized initially at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes are therein generally recognized in profit or loss.
Software, Property and Equipment
Software, property and equipment are recorded at cost. Depreciation is computed on the straight-line method, based on the estimated useful lives of the assets as follows:
|
|
| |
|
|
Years
|
Software
|
|
2
|
Furniture and equipment
|
|
7
|
Computers
|
|
5
|
Expenditures for maintenance and repairs are charged to operations as incurred.
Impairment of Long Lived Assets
The Company continually evaluates the carrying value of intangible assets and other long lived assets to determine whether there are any impairment losses. If indicators of impairment are present and future cash flows are not expected to be sufficient to recover the assets carrying amount, an impairment loss would be charged to expense in the period identified. To date, the Company has not recognized any impairment charges.
Income Taxes
Income taxes are accounted for under the asset and liability method as stipulated by FASB ASC 740, Income Taxes (ASC 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are
11
reduced to estimated amounts to be realized by the use of a valuation allowance. A valuation allowance is applied when in managements view it is more likely than not (50%) that such deferred tax will not be utilized.
In the event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether there is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. Reserves for uncertain tax positions would be recorded if the Company determined it is probable that a position would not be sustained upon examination or if payment would have to be made to a taxing authority and the amount is reasonably estimated. As of September 30, 2016, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability to the taxing authorities. Interest and penalties related to any unrecognized tax benefits is recognized in the condensed consolidated financial statements as a component of income taxes.
Basic and Diluted Loss Per Share
On July 22, 2015, the previous Board of Directors authorized that the Company effectuate a reverse split of its issued and outstanding Common Stock in the ratio of one (1) post-split share of Common Stock for every seven (7) shares of pre-split Common Stock, while retaining the current par value of $0.0001 per share, with appropriate adjustments being made in the additional paid-in capital and stated capital accounts of the Company, with all fractional shares that would otherwise result from such reverse split being rounded up to the nearest whole share. The reverse stock split has been retroactively adjusted throughout the condensed consolidated financial statements.
Net loss per share is computed by dividing the net loss less preferred dividends by the weighted average number of common shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss less preferred dividends by the weighted average number of common shares outstanding during the period plus any potentially dilutive shares related to the issuance of stock options, shares issued from the conversion of convertible preferred stock and shares issued for the issuance of convertible debt. There were no potentially dilutive shares as of September 30, 2016 and 2015.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU), No. 2014-09,
Revenue from Contracts with Customers
, to replace the existing revenue recognition criteria for contracts with customers and to establish the disclosure requirements for revenue from contracts with customers. The ASU is effective for interim and annual periods beginning after December 15, 2017. Adoption of the ASU is either retrospective to each prior period presented or retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The Company is currently assessing the future impact of the ASU on its consolidated financial statements; however, in light of the material changes in the Companys business model which have occurred after September 30, 2016, the Company expects to do further review in the second quarter of 2017.
In June 2014, the FASB issued ASU No. 2014-12,
CompensationStock Compensation (Topic 718)
or ASU 2014-12. ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. The amendments in ASU 2014-12 were effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The Company adopted this ASU effective January 1, 2016. The adoption of this ASU did not have a material impact to the Companys financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements Going Concern
, to provide guidance within GAAP requiring management to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and requiring related disclosures. The ASU is effective for annual periods ending after December 15, 2016. The Company is currently assessing the impact of the ASU on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
, or ASU 2015-03. ASU 2015-03 amends current presentation guidance by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We adopted the
12
provisions of ASU 2015-03 effective January 1, 2016. The adoption of ASU 2015-03 did not have a material impact our consolidated financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Assets
, requiring management to provide a classification of all deferred taxes as noncurrent assets or noncurrent liabilities. This ASU is effective for annual periods beginning after December 15, 2016. The Company does not anticipate this ASU will have a material impact to the Companys financial position, results of operations or cash flows.
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, requiring management to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact of the ASU on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842) (the Update)
, requiring management to recognize any right-to-use-asset and lease liability on the statement of financial position for those leases previously classified as operating leases. The criteria used to determine such classification is essentially the same as under the previous guidance, but it is more subjective. The lessee would classify the lease as a finance lease if certain criteria at lease commencement are met. This ASU is effective for fiscal years beginning after December 15, 2018. The Company is currently assessing the impact of the ASU on its financial statements.
In March 2016, the FASB issued ASU 2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the FASB Emerging Issues Task Force)
, which applies to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options, and requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. One criterion is that the economic characteristics and risks of the embedded derivatives are not clearly and closely related to the economic characteristics and risks of the host contract. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the impact of the ASU on its financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which amends ASC Topic 718,
Compensation Stock Compensation
. The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, including the income tax effects of share-based payments and accounting for forfeitures. This ASU is effective for public business entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. The Company is currently assessing the impact of the ASU on its financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require adoption on a retrospective basis unless impracticable. If impracticable the Company would be required to apply the amendments prospectively as of the earliest date possible. The Company is currently evaluating the impact that ASU 2016-15 will have on its statement of financial position or financial statement disclosures.
Concentration of Risk
The Company does not have any off-balance sheet concentrations of credit risk. The Company expects cash and accounts receivable to be the two assets most likely to subject the Company to concentrations of credit risk. The Companys policy is to maintain its cash with high credit quality financial institutions to limit its risk of loss exposure.
13
The Company maintains cash accounts in two quality financial institutions. The Company has not experienced any losses in its bank accounts through September 30, 2016.
The Company purchased much of its machined parts through Precision CNC, a related party company that sublet office space to Q2P through June 27, 2016, and owns a non-controlling interest in the Company. See Note 6.
NOTE 4 SOFTWARE, PROPERTY AND EQUIPMENT, NET
Software, property and equipment, net consists of the following:
|
|
|
|
| |
|
September 30,
2016
|
|
December 31,
2015
|
Software
|
$
|
-
|
|
$
|
83,735
|
Furniture and Computers
|
|
1,328
|
|
|
51,643
|
Shop Equipment
|
|
9,540
|
|
|
9,540
|
Total
|
|
10,868
|
|
|
144,918
|
Accumulated depreciation and amortization
|
|
3,642
|
|
|
44,184
|
Net software, property and equipment
|
$
|
7,226
|
|
$
|
100,734
|
At December 31, 2015, the Company had software under capital leases with gross value of $24,671, net of accumulated depreciation and amortization of $15,419. The software was included in the disposal of assets to Precisions CNC discussed below in Note 6; however, the Company must continue to pay all outstanding amounts under the capital leases, a balance of $1,586 as of September 30, 2016.
Depreciation and amortization expense for the three months ended September 30, 2016 and 2015 was $493 and $13,267, respectively, and for the nine months ended September 30, 2016 and 2015 was $27,026 and $26,600, respectively.
The Company disposed of $70,495 of net software, property and equipment for the settlement of related party accounts payable during the nine months ended September 30, 2016 (see Note 6).
NOTE 5 CYCLONE SEPARATION, LICENSE RIGHTS AND DEFERRED REVENUE
In 2014, Q2P purchased for $175,000 certain licensing rights to use Cyclone Power Technologies (Cyclone) patented technology on a worldwide, exclusive basis for 20 years with two 10-year renewal terms for Q2Ps waste heat and waste-to-power business. This agreement contains a royalty provision equal to 5% of gross sales payable to Cyclone on sales of engines derived from technology licensed from Cyclone. Also, as part of a separation agreement with Cyclone, Q2P assumed a license agreement between Cyclone and Phoenix Power Group, which included deferred revenue of $250,000 from payments previously made to Cyclone for undelivered products. The net balances as of September 30, 2016 and December 31, 2015 for the Cyclone licensing rights were $80,208 and $113,021, respectively, and the net balances as of September 30, 2016 and December 31, 2015 for the Phoenix deferred revenue were $250,000 and $250,000, respectively, which are included as a component of deferred revenue on the condensed consolidated balance sheets. Under the terms of the revised agreement with Phoenix Power Group, revenue associated with these deferrals will be recognized subject to the achievement of certain milestones, as follows: (1) on the completion of certain performance testing of the engine, deferred revenue of $150,000 will be recognized; and (2) on the delivery of the first 10 Generation 1 Engines, other deferred revenue will be recognized at a rate of $10,000 per delivered engine.
In connection with the separation agreement with Cyclone, the Company also assumed a contract with Clean Carbon of Australia and a corresponding $10,064 prepayment for services or other value to be provided in the future. This deposit has been presented as deferred revenue on the September 30, 2016 and December 31, 2015 condensed consolidated balance sheets.
The licensing rights are amortized over its estimated useful life of 4 years. Amortization expense for the three months ended September 30, 2016 and 2015 was $10,938 and $10,938 respectively. Amortization expense for the nine months ended September 30, 2016 and 2015 was $32,813 and $32,813, respectively.
14
NOTE 6 RELATED PARTY TRANSACTIONS
Expenses prepaid with common stock at September 30, 2016 and December 31, 2015 totaled $43,333 and $135,321, respectively. The balance at September 30, 2016 relates to stock issued to Greenblock Capital (GBC) for future services with a remaining amount of $43,333. The balance at December 31, 2015 relates to stock issued to GBC for future services with a remaining amount of $119,167, and shares purchased by the CEO and paid for through salary deductions with a remaining amount of $16,154. Our CEO is a Managing Director of GBC, although he has no equity or voting rights in GBC.
The Company previously sublet approximately 2,500 square feet of assembly, warehouse and office space within the Precision CNC facility located at 1858 Cedar Hill Road in Lancaster, Ohio. The sublease provided for the Company to pay rent monthly in the amount of $2,500, which covered space and some utilities. Occupancy costs for the quarter ended September 30, 2016 and 2015 were $0 and $7,500, respectively, and for the nine months ended September 30, 2016 and 2015 were $15,000 and $15,000, respectively. The sublease has been terminated as of June 27, 2016, but may be reinstated at any time by the mutual agreement of the parties, and the Company is still able to use that facility in the short-term rent free. The Company also purchases much of its machined parts through Precision CNC. Precision CNC owns a non-controlling interest in the Company. The Company also maintains an executive office in Florida, which is leased by GBC. The Company has no formal agreement for this space and pays no rent.
For the three months ended September 30, 2016 and 2015, the amounts invoiced from Precision CNC totaled $0 and $39,040, respectively, and for the nine months ended September 30, 2016 and 2015, the amounts invoiced totaled $17,119 and $123,283, respectively. These amounts consisted of rent and research and development expenses for machined parts.
On June 27, 2016, the Company and Precision CNC entered into an agreement to eliminate $49,299 in payables owed to Precision CNC in return for the transfer of certain net assets of the Company with a remaining book value of $70,495, which included office furniture, software and computer systems, and 50,000 shares of restricted common stock valued at $10,500. The Company recorded a loss on this transaction in the amount of $31,696. Accounts payable and accrued expenses at September 30, 2016 and December 31, 2015 include $0 and $31,048, respectively, to Precision CNC.
During the first nine months of 2016, members of the Companys Board of Directors made several loans and advances to the Company, as follows:
·
On January 8, 2016, a member of the Board of Directors made an advance to the Company totaling $10,500 with a 6% per annum rate, payable on demand. As of September 30, 2016, such advance is still outstanding.
·
On April 29, 2016, the Companys three independent Directors loaned to the Company a total of $60,200 pursuant to three Convertible Notes which are automatically convertible into the equity securities issued in the Companys next financing of at least $1,000,000 at the same price and same terms. The Convertible Notes bear 8% interest and have a 10% Original Issuance Discount. The total principal amount of all three Notes was $66,000. The Notes mature in October 2016, and can be converted to common stock at $0.26 per share if a qualified financing event has not occurred by such time.
·
On June 13, 2016, one of the Companys independent directors loaned $15,000 to the Company on the same terms as the April 2016 notes, with a principal amount of $16,667.
·
In September 2016, three of the Companys Directors advanced $1,000 each for payment of insurance premiums. There were no formal terms for these advances; however, the Company started to impute 8% per annum interest in connection with the March 2017 conversion of the advances into the Convertible Promissory Note Bridge offering (see below).
15
In March 2017, all outstanding Director notes and advances with an aggregate amount of $168,152 were converted into the Companys new $1,500,000 Convertible Promissory Note Bridge offering (see Note 12, Subsequent Events).
NOTE 7 NOTES PAYABLE AND DEBENTURES
On July 2, 2014, the Company (then Anpath, under different management) closed a financing by which one accredited investor purchased two Original Issue Discount Senior Secured Convertible Debentures (the Debentures) in the total aggregate principal amount of $435,500 due March 31, 2015, and a Common Stock Purchase Warrant to purchase a total of 415,000 shares at $2.45 per share (based on post 7:1 reverse split numbers), exercisable for a period of five years.
The Debentures do not bear interest, but contained an Original Issue Discount of $20,750. All assets of the Company are secured under the Debentures, including our Subsidiary and its assets. The Debentures and warrants contain certain anti-dilutive protection provisions in the instance that the Company issues stock at a price below the stated conversion price of the debentures, as well as other standard protections for the holder.
On September 23, 2015, the Company entered into a Modification and Extension Agreement with the two holders to modify the terms of the Debentures to extend the maturity date to July 31, 2016, and reset the conversion price of the Debentures to $0.21. Pursuant to the Merger, the Debentures and warrants remained an outstanding obligation of the Company, thus were assumed by Q2P.
In January 2016, another accredited investor purchased $105,000 in outstanding principal amount of the convertible debentures from the current holder. The Company did not receive any consideration in this transaction as it was a transfer amongst the holders of the convertible debentures.
In March 2017, the Company entered into a second Modification and Extension Agreement with the two holders to extend the maturity date to July 31, 2017, reset the conversion price to $0.15, and waive any defaults under the Debentures. The warrants exercise price, which had been reset to $0.50 per verbal agreement of the parties in the third quarter of 2016, was formally documented under this March 2017 modification agreement.
During the nine months ended September 30, 2016, aggregate principal of $270,750 was converted to 1,289,285 shares of common stock (see Note 9).
On March 15, 2016, the Company entered into a 120-day term loan agreement with one accredited investor in the principal amount of $150,000. The loan bears 20% interest with interest payments due monthly. The Company incurred loan issuance costs of 100,000 shares of common stock valued at $26,000, $3,000 cash and provided a second security interest in the assets of the Company to the holders. Issuance costs expensed in the three months and nine months ended September 30, 2016 were $3,595 and $29,000, respectively. At September 30, 2016, the loan costs had been fully amortized and the loan balance was $150,000, and accrued interest related to the loan was $4,000. This loan matured on July 15, 2016, and a 10% late penalty was assessed on July 15, 2016.
On March 22, 2017, the Company and the term loan holder entered into an Addendum to the loan agreement which extended the maturity date to December 31, 2017, allowed for conversion of the principal amount and accrued interest at the discretion of the holder to common stock at a price of $0.15 per share, and waived all defaults in return for payment of $30,000 which included the late fee and accrued but unpaid interest.
In May 2016, three investors loaned to the Company a total of $26,709 pursuant to three Convertible Notes, which are automatically convertible into the equity securities issued in the Companys next financing of at least $1,000,000 at the same price and same terms. These notes are the same securities issued to the Companys Directors in April and June 2016 (see Note 6). The notes bear 8% interest and have a 10% Original Issuance Discount. The total principal amount of all three notes was $33,000. The notes mature in six months, and can be converted to common stock at $0.26 per share if a qualified financing event has not occurred by such time. In March 2017, these notes were converted into the Companys new $1,500,000 Convertible Promissory Note Bridge offering (see Note 12, Subsequent Events).
16
NOTE 8 FAIR VALUE MEASUREMENT AND DERIVATIVES
The Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: