NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
It is management's opinion, however, that all material adjustments (consisting of normal and recurring adjustments) have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.
Indoor Harvest Corp. (the "Company,") is a Texas corporation formed on November 23, 2011. From its inception, the Company, through its brand name Indoor Harvest ®, specialized in equipment design, development, marketing and direct-selling of commercial grade aeroponics fixtures and supporting systems for use in urban Controlled Environment Agriculture (“CEA”) and Building Integrated Agriculture (“BIA”).
In the first half of 2017, the Company transitioned from an engineering, procurement, and construction management company for the vertical farming industry, into a developer of personalized cannabis medicines, and a provider of advanced cultivation technology, methods, and processes for cannabis production. Through its historical and current business and its brand name, Indoor Harvest ®, the Company continues to be a full-service state of the art design-build engineering firm for the indoor farming industry.
These unaudited interim condensed financial statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the United States Securities and Exchange Commission (the “SEC”) on April 17, 2017.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to the estimate of percentage of completion on construction contracts in progress at each reporting period which we rely on as a primary basis of revenue recognition, estimated useful lives of equipment for purposes of depreciation and the valuation of common shares issued for services, equipment and the liquidation of liabilities.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less to be cash and cash equivalents.
Accounts Receivable and Work in Progress
Work in progress consists of costs recorded and revenue earned on projects recognized on the percentage of completion method for work performed on contracts in progress at September 30, 2017, and December 31, 2016. The Company records revenue based on contractual agreements entered into at the inception of construction contracts. Amounts are payable from customers based on milestones established in each contract. Amounts are billed at milestone completion and are reflected as accounts receivable when billed. Costs and estimated earnings are accumulated on projects in process and compared to amounts billed based on the percentage of completion method of accounting (cost to cost). Costs incurred in excess of amounts billed and related profit recognized are reflected as an asset on the balance sheet as costs and estimated earnings in excess of billings. Unearned billings are reflected in the balance sheet as a liability as billings in excess of costs and estimated earnings on projects in process (See Note 6).
Inventories
Inventory consists primarily of raw materials and packaging materials and is valued at the lower of cost or market. Cost is determined using the weighted average method and the average cost is recomputed after each inventory purchase or sale. Inventory is periodically reviewed to identify obsolete or damaged inventory and impaired values. Inventory is comprised of raw materials such as steel for our framing systems and packaging materials such as boxes and pallets valued at $2,360 at both September 30, 2017, and December 31, 2016.
Revenue Recognition
The Company recognizes revenue on arrangements in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 605, Revenue Recognition. In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. The Company will generate revenue from the design and installation of the equipment and licensing of technology.
Revenue from construction contracts are reported under the percentage of completion method for financial statement purposes. The estimated revenue for each contract reflected in the financial statements represent that percentage of estimated total revenue that costs incurred to date bear to estimated total costs, based on the Company’s current estimates. With respect to contracts that extend over one or more accounting periods, revisions in costs and revenue estimates during the work are reflected in the period the revisions become known. When current estimates of total contract costs indicate a loss, provision is made for the entire estimated loss.
The asset, “costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed. The liability, “Estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.
Billing practices for these projects are governed by the contract terms of each project based upon actual costs incurred, achievement of milestones, or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized under the percentage of completion method of accounting. Except for claims and change orders that are in the process of being negotiated with customers, unbilled work is usually billed during normal billing processes following achievement of the contractual requirements.
Stock Based
Compensation
The Company recognizes stock-based compensation in accordance with ASC 718-10, Stock Compensation. ASC 718-10 focuses on transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus in which an entity obtains employee services in stock-based payment transactions. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exceptions).
Basic Loss per Share
Basic loss per share amounts are calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is based on the weighted average numbers of shares of common stock outstanding for the periods, including dilutive effects of stock options, warrants granted and convertible preferred stock. Dilutive options and warrants that are issued during a period or that expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported. Since the Company has incurred losses for all periods, the impact of the common stock equivalents would be antidilutive and therefore are not included in the calculation.
The Company has the following common stock equivalents for the nine months ended September 30, 2017 and 2016, respectively:
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Convertible debt (exercise price - $0.07/share)
|
|
|
-
|
|
|
|
1,307,190
|
|
Convertible debt (exercise price - $0.30/share)
|
|
|
916,667
|
|
|
|
-
|
|
Series A convertible preferred shares (exercise price - $0.08/share)
|
|
|
-
|
|
|
|
3,267,974
|
|
|
|
|
916,667
|
|
|
|
4,575,164
|
|
Fair Value of Financial Instruments
The Company adopted ASC 820 Fair Value Measurements for financial and non-financial assets and liabilities. The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value and provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
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·
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
|
|
·
|
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
|
|
|
·
|
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
|
Carrying amounts reported on the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to their relatively short maturity. Debt classified as Level 2 in the fair value hierarchy represent note payable, net of debt discount, of $0 and $209,786 at September 30, 2017 and December 31, 2016, respectively, and convertible notes payable of $247,986 and $122,383 at September 30, 2017 and December 31, 2016, respectively.
Income Taxes
The Company accounts for income taxes pursuant to ASC 740 Income Taxes. This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more likely than not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all the deferred tax asset will not be realized.
ASC 740 implements a process for measuring those tax positions that meet the recognition threshold of being ultimately sustained upon examination by the taxing authorities. There are no uncertain tax positions taken by the Company on its tax returns. The Company files tax returns in the U.S. and states in which it has operations and is subject to taxation.
Tax years 2016, 2015, 2014, 2013, 2012 and 2011, remain subject to examination by the Internal Revenue Service (“IRS”) and respective states.
Property and Equipment
Property and equipment is recorded at cost and depreciated or amortized using the straight-line method over the estimated useful life of the asset or the underlying lease term for leasehold improvements, whichever is shorter. The estimated useful life by asset description is noted in the following table:
Asset Description
|
|
Estimated Useful Life (Years)
|
|
Furniture and equipment
|
|
3 - 5
|
|
Tooling equipment
|
|
|
10
|
|
Leasehold improvements
|
|
*
|
|
__________
* The shorter of 5 years or the life of the lease.
Additions are capitalized and maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions of equipment are reflected in other income.
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized but are evaluated for impairment annually or more often if indicators of a potential impairment are present. In connection with the merger with Alamo CBD LLC (“Alamo CBD”), the Company has subsumed into goodwill all intangible assets acquired in the transaction. Indefinite-lived intangible assets consist of the Company’s domain name. Finite-lived intangible assets include software and is amortized over a 3 to 5 year period.
In accordance with ASC 350 Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible assets are reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no impairment charges taken during the nine months ended September 30, 2017 and 2016.
Intangible assets consist of the following at September 30, 2017 and December 31, 2016:
Classification
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Domain name
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
Facilities Manager's Package Online (software)
|
|
|
1,022
|
|
|
|
1,022
|
|
MLC CD Systems (software)
|
|
|
7,560
|
|
|
|
7,560
|
|
Total
|
|
|
10,582
|
|
|
|
10,582
|
|
Less: Accumulated amortization
|
|
|
(4,261
|
)
|
|
|
(2,978
|
)
|
Intangible assets, net
|
|
$
|
6,321
|
|
|
$
|
7,604
|
|
Patent and Patent Application Expenses
Although the Company believes that its patent and underlying technology will have continuing value, the amount of future benefits to be derived from the patent is uncertain. Therefore, patent costs are expensed as incurred.
Research and Development
Research and development expenditures are charged to expense as incurred. Research and development expense for the three and nine months ended September 30, 2017 and 2016 are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Research and development expense
|
|
$
|
-
|
|
|
$
|
6,376
|
|
|
$
|
1,625
|
|
|
$
|
15,047
|
|
Advertising Expense
Advertising and promotional costs are expensed as incurred. Advertising expense for the three and nine months ended September 30, 2017 and 2016, are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Advertising expense
|
|
$
|
3,298
|
|
|
$
|
5,418
|
|
|
$
|
16,185
|
|
|
$
|
67,079
|
|
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect as of the date of the issuance of these financial statements. The following pronouncements may impact future reporting of financial position and results of operations. Management is currently assessing implementation.
The FASB issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805) clarifying the definition of a business. The amendment affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. For public companies, the amendment is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.
The FASB issued ASU No. 2016-02, Leases (Topic 842) providing new lease accounting guidance. The standard requires the recognition of right-of-use assets and lease liabilities for all long-term leases, including operating leases, on the balance sheet. The standard also provides additional guidance on the measurement of the right-of-use assets and lease liabilities and will require enhanced disclosures about the Company’s leasing arrangements. Under current accounting standards, substantially all the Company’s leases are considered operating leases and, as such, are not recognized on the Consolidated Balance Sheet. This standard is effective for the Company beginning on January 1, 2019, with early adoption permitted.
The FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) providing improved accounting for employee share-based payments. The standard affects all organizations that issue share-based payment awards to their employees. For public companies, the amendment is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
The FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). This standard requires an entity to recognize the amount of revenue to which it expects to be entitled to for the transfer of promised goods or services to customers. The new standard was originally effective on January 1, 2017; however, in July 2015 the FASB decided to defer the effective date by one year. Early application is not permitted, but reporting entities may choose to adopt the standard as of the original effective date. The standard permits the use of either the retrospective or cumulative effect transition method.
Derivative Liability
The Company accounts for derivative instruments in accordance with ASC 815 Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At September 30, 2017 and December 31, 2016, the Company did not have any derivative instruments that were designated as hedges.
Beneficial Conversion Feature
For conventional convertible debt where the rate of conversion is below market value, the Company records a beneficial conversion feature (“BCF”) and related debt discount. When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The discount is amortized to interest expense over the life of the debt.
NOTE 2 - GOING CONCERN
As reflected in the accompanying unaudited financial statements, the Company had a net loss of $2,000,196, net cash used in operations of $1,040,864 and has an accumulated deficit of $5,996,968 for the nine months ended September 30, 2017. These factors raise substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on Management's plans which include potential asset acquisitions, mergers or business combinations with other entities, further implementation of its business plan and continuing to raise funds through debt or equity financings. The Company will likely rely upon related party debt or equity financing to ensure the continuing existence of the business.
The Company’s business plan is to engage in the design and development of commercial grade aeroponics fixtures and supporting systems for use in CEA and BIA cannabis production and to develop personalized cannabis medicines, as a provider of advanced cultivation technology, methods and processes. The Company provides the cannabis industry production platforms for CEA and BIA production. During the next twelve months, the Company's strategy is to:
|
·
|
complete ongoing product development;
|
|
·
|
advance product assembly;
|
|
·
|
construct a demonstration cannabis CEA and BIA farm for marketing purposes;
|
|
·
|
offer design-build services to partners; and
|
|
·
|
establish its long-term strategy to directly sell, license and franchise its patent-pending cannabis cultivation technologies and methods.
|
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 2017 and December 31, 2016:
Classification
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Furniture and equipment
|
|
$
|
124,379
|
|
|
$
|
123,827
|
|
Tooling equipment
|
|
|
27,015
|
|
|
|
27,015
|
|
Leasehold improvements
|
|
|
57,780
|
|
|
|
57,780
|
|
Computer equipment
|
|
|
6,169
|
|
|
|
6,169
|
|
Research and development lab
|
|
|
63,177
|
|
|
|
63,177
|
|
Total
|
|
|
278,520
|
|
|
|
277,968
|
|
Less: Accumulated depreciation
|
|
|
(157,315
|
)
|
|
|
(119,550
|
)
|
Property and equipment, net
|
|
$
|
121,205
|
|
|
$
|
158,418
|
|
Depreciation expense for the nine months ended September 30, 2017, totaled $37,765.
NOTE 4 - COMMITMENTS & CONTINGENCIES
Alamo CBD
On January 3, 2017, the Company signed a binding letter of intent with Alamo CBD to enter discussions to combine and create a medical cannabinoids pharmaceutical group. On August 3, 2017, the Company formed Alamo Acquisition, LLC, a Texas limited liability company, in which the Company owns 100% of Alamo Acquisition, LLC member interests.
On August 4, 2017, the Company entered into an Agreement and Plan of Merger and Reorganization, by and among the Company, Alamo Acquisition LLC, and Alamo CBD (the “Agreement”). On August 8, 2017, Chad Sykes, Founder and Chief Cultivation Officer of the Company, returned 2,500,000 shares of common stock to the Company in anticipation of the merger of the Company and Alamo CBD (the “Merger”) to be consummated pursuant to the Agreement. The Company recorded the return of shares at a fair value of $550,000 ($0.22 per share) based upon the most recent trading price per share of the Company’s stock. The return of common stock by Chad Sykes was a non-cash transaction and has been recorded as a reduction of goodwill related to the Merger. On September 6, 2017, the Company issued an aggregate of 7,584,008 shares of common stock to the members of Alamo CBD related to the Merger. The Company recorded fair value of $1,440,961 ($0.19 per share) based upon the most recent trading price per share. The Company subsumed into goodwill all intangible assets acquired in the transaction. The aggregate value of goodwill at September 30, 2017 is $890,961.
Vyripharm Joint Venture
On March 23, 2017, the Company entered into a Contractual Joint Venture Agreement with Vyripharm Enterprises, LLC (“Vyripharm”) and Alamo CBD, pursuant to which the parties agreed to participate in an unincorporated joint venture (the “Joint Venture”). The intent of the Joint Venture was for the Parties to work together to enhance the ability of Alamo CBD to apply for and obtain licensure, or a permit, to grow and/or dispense marijuana products for medical and/or consumer use through the Texas Compassionate Use Program. As of March 31, 2017, the Company paid Vyripharm $250,000 that was recorded as an Investment in Joint Venture on the balance sheet. Subsequently, the Joint Venture failed to receive licensure in Texas. However, the Joint Venture placed 16 out of 43 applicants and its application is currently considered pending by the Department of Public Safety (“DPS”).
On August 7, 2017, after negotiations, the Company advised Vyripharm that it intended to voluntarily default on the Contractual Joint Venture. Company management determined that without a license to produce cannabis, the Company would not be able to fully utilize the intent of the Joint Venture partnership and the Company would be financially burdened by the ongoing Joint Venture terms. Both parties agreed that this decision would not impair either party’s ability to pursue a Joint Venture in the future after the Company, or Alamo CBD, obtained license to produce cannabis. As such, Indoor Harvest recorded a loss on investment of the Joint Venture for the nine months ending September 30, 2017 of $250,000 as presented in the Condensed Statements of Operations.
Deferred Rent
Deferred rent payable at September 30, 2017 was $6,808. Deferred rent payable is the sum of the difference between the monthly rent payment and the straight-line monthly rent expense of an operating lease that contains escalated payments in future periods.
Rent expense for the three and nine months ended September 30, 2017 and 2016, were:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Rent expense
|
|
$
|
12,788
|
|
|
$
|
12,788
|
|
|
$
|
39,763
|
|
|
$
|
38,616
|
|
NOTE 5 - CONCENTRATIONS
At September 30, 2017 and December 31, 2016, the Company had concentrations of accounts receivable of:
Customer
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Tweed, Inc.
|
|
|
-
|
%
|
|
|
100
|
%
|
For the three months ended September 30, 2017 and 2016, the Company had a concentration of sales of:
|
|
Three Months Ended
|
|
Customer
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Bright Orchard
|
|
|
66
|
%
|
|
|
-
|
%
|
Tweed
|
|
|
34
|
%
|
|
|
-
|
%
|
University of Arizona CEAC
|
|
|
-
|
%
|
|
|
24
|
%
|
ER Michigan
|
|
|
-
|
%
|
|
|
76
|
%
|
For the nine months ended September 30, 2017 and 2016, the Company had a concentration of sales of:
|
|
Nine Months Ended
|
|
Customer
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Bright Orchard
|
|
|
66
|
%
|
|
|
-%
|
|
Tweed
|
|
|
34
|
%
|
|
|
-%
|
|
University of Arizona CEAC
|
|
|
-%
|
|
|
|
22
|
%
|
GSS Colorado
|
|
|
-%
|
|
|
|
6
|
%
|
ER Michigan
|
|
|
-%
|
|
|
|
34
|
%
|
PH Research Platform
|
|
|
-%
|
|
|
|
5
|
%
|
UB Poland
|
|
|
-%
|
|
|
|
33
|
%
|
NOTE 6 - WORK IN PROCESS
Work in progress as of September 30, 2017 and December 31, 2016, consisted of the following:
Description
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Costs incurred on uncompleted contracts
|
|
$
|
-
|
|
|
$
|
80,620
|
|
Estimated earnings
|
|
|
-
|
|
|
|
-
|
|
Less: Billings to date
|
|
|
-
|
|
|
|
(100,775
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
(20,155
|
)
|
|
|
|
|
|
|
|
|
|
Reflected in balance sheet as:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on contracts in process
|
|
$
|
-
|
|
|
$
|
-
|
|
Billings in excess of costs and estimated earnings on contracts in process
|
|
|
-
|
|
|
|
20,155
|
|
Total
|
|
$
|
-
|
|
|
$
|
20,155
|
|
NOTE 7 - NOTE PAYABLE
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
On June 5, 2015, the Company entered into a five-year loan agreement totaling $36,100. The loan carries interest at a rate of 10.25%.
|
|
$
|
22,105
|
|
|
$
|
27,132
|
|
Less: current portion
|
|
|
7,330
|
|
|
|
6,790
|
|
Long-term note payable, net
|
|
$
|
14,775
|
|
|
$
|
20,342
|
|
NOTE 8 - DEBT AND CONVERTIBLE LOAN PAYABLE
Convertible Note Payable
On March 20, 2017, the Company entered into a settlement agreement relating to a promissory note with Chuck Rifici Holdings, Inc originally dated September 26, 2016 (“Rifici Note”). The Company settled the amount owed by paying $269,498 in cash. The Company was released from any further liability under this Rifici Note upon payment of this amount.
On March 20, 2017, the Company entered into a settlement agreement relating to two (2) promissory notes with FirstFire Global Opportunities Fund, LLC dated October 19, 2016 and December 12, 2016. Pursuant to the settlement, the Company paid the holder an aggregate of $252,917 in cash and issued 333,333 shares of common stock with a fair value of $100,000 based upon the conversion price of $0.30 per share. The Company was released from any further liability under this FirstFire Global Opportunities Fund, LLC note upon payment of this amount.
On March 24, 2017, the Company entered into a securities purchase agreement with Tangiers Global, LLC (“Tangiers”) relating to the issuance and sale of notes (“Tangiers Note”) in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. The Tangiers Note is convertible into shares of common stock at a price equal to $0.30 per share. The Tangiers Note carries interest on the unpaid principal amount at the rate of 8% per annum and is due and payable eight months from the effective date of each payment. For the nine months ended September 30, 2017, the Company received an initial $250,000 payment under the Tangiers Note, which when added to the 10% original issuance discount fee of $25,000, represents a $275,000 face amount outstanding (the “First Draw”).
On October 10, 2017, the Company executed Amendment #1 (“Amedment #1”) to the Tangiers Note for a final draw of $250,000 payment plus a 10% original issue discount (the “Final Draw”). Amendment #1 modified the maturity date of the Tangiers Note from eight months to six months from the effective date of each payment. In addition, Amendment #1 included use of proceeds for the $250,000 received from Tangiers. All other terms and conditions of the Tangiers Note remain effective and were not amended
The execution of Amendment #1 caused the Company to default on the First Draw due to the acceleration of the maturity date. The default caused an increase in the interest rate on the First Draw from 8% to 18% and allows Tangiers to demand payment in cash equal to 150% of the outstanding principal and interest, which is automatically added to the outstanding principle, and convert all or a portion of the outstanding principal into shares of common stock of the Company. The default conversion rate of the Tangiers Note is the lower of the conversion rate then in effect or 65% of the lowest trading price for the 15 days prior to Tangiers’ notice of conversion.
On October 17, 2017, the Company converted debt and accrued interest, totaling $30,000 into 329,670 shares of common stock. (See also Note 11).
For the three and nine months ended September 30, 2017, the Company accrued $5,545 and $11,874, respectively, in accrued interest related to outstanding the note.
Debt Discount and Original Issuance Costs for Convertible Note
During the nine months ended September 30, 2017 and 2016, the Company recorded debt discounts and original issuance costs totaling $120,333 and $380,267, respectively.
The debt discounts recorded in 2017 and 2016, pertain to beneficial conversion feature on the convertible notes. The notes are required to be bifurcated and reported at fair value on the date of grant. (see Note 1 Fair Value Measurements).
The Company amortized $294,888 and $331,034 to interest expense during the nine months ended September 30, 2017 and 2016, respectively.
|
|
Nine Months
Ended
|
|
|
Year Ended
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Debt discount, beginning of period
|
|
$
|
152,617
|
|
|
$
|
-
|
|
Additional debt discount and debt issue cost
|
|
|
120,333
|
|
|
|
417,834
|
|
Amortization of debt discount and debt issue cost
|
|
|
(245,937
|
)
|
|
|
(265,217
|
)
|
Debt discount, end of period
|
|
$
|
27,013
|
|
|
$
|
152,617
|
|
Debt Issuance Costs for Convertible Note
During the nine months ended September 30, 2017 and 2016, the Company did not pay debt issuance costs.
During the nine months ended September 30, 2017 and 2016, the Company amortized $7,473 and $0 of debt issue costs, respectively.
|
|
Nine Months
Ended
|
|
|
Year Ended
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Debt discount, beginning of period
|
|
$
|
7,473
|
|
|
$
|
-
|
|
Additional debt discount
|
|
|
-
|
|
|
|
10,000
|
|
Amortization of debt discount
|
|
|
(7,473
|
)
|
|
|
(2,527
|
)
|
Debt discount, end of period
|
|
$
|
-
|
|
|
$
|
7,473
|
|
Debt Discount for Promissory Note
During the nine months ended September 30, 2017 and 2016, the Company recorded debt discount of $0 and $34,112, respectively.
The Company amortized $15,715 and $767 to interest expense during the nine months ended September 30, 2017 and 2016, respectively.
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Debt discount, beginning of period
|
|
$
|
15,715
|
|
|
$
|
-
|
|
Additional debt discount
|
|
|
|
|
|
|
34,112
|
|
Amortization of debt discount
|
|
|
(15,715
|
)
|
|
|
(18,398
|
)
|
Debt discount, end of period
|
|
$
|
-
|
|
|
$
|
15,715
|
|
NOTE 9 - RELATED PARTY TRANSACTIONS
On August 8, 2017, Chad Sykes, Founder and Chief Cultivation Officer, returned 2,500,000 shares of common stock to the Company related to the merger of the Company and Alamo CBD. The Company recorded fair value of $550,000 ($0.22 per share) based upon the most recent trading price per share of the Company’s stock.
On September 6, 2017, the Company issued 2,957,763 shares of common stock to Dr. Lang Coleman, Director, related to the merger of the Company and Alamo CBD.
On September 6, 2017, the Company issued 758,401 shares of common stock Rick Gutshall, Interim-Chief Executive Office, Chief Financial Officer and Director, related to the merger of the Company and Alamo CBD.
On September 15, 2017, the Company issued 250,000 shares of common stock related to an Employment Agreement with Annette Knebel, Chief Accounting Officer and Director.
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
Series A Convertible Preferred Stock
During the third quarter of fiscal 2016, the Company initiated a subscription agreement to offer accredited investors up to 1,000,000 units (“Units”) of securities, each Unit consists of one (1) share of Series A Convertible Preferred Stock and one (1) Series A Warrant (“Warrant”). The price per Unit was $0.50 for a maximum aggregate proceeds of $500,000. There are no dividends on the Series A Convertible Preferred Stock. The Warrants were exercisable at $0.50 per share for a period of one year. As of September 30, 2017, the warrants were not exercised. Therefore, the Company has disclosed the expiration of the Warrants.
From August 15 to August 29, 2016, the Company sold an aggregate of 250,000 Units to three (3) investors for total proceeds of $125,000. During the nine months ended September 30, 2017 and 2016, the Company amortized $33,238 and $0 of debt discount related to the warrants, respectively. The remaining debt discount related to the warrants is $0.
On March 20, 2017, the Company's Series A Preferred Convertible Stock shareholders ("Series A Holders") each voted to waive and remove the provisions of Section 5(iii) of the Certificate of Designations of the Series A Preferred Stock. Series A Holders have each agreed individually and also as a group to convert their Series A Convertible Preferred Stock into common stock at a conversion price equal to $0.30 per share. A total of 250,000 shares of the Company's Series A Preferred Convertible Stock were converted into an aggregate of 416,667 shares of common stock.
From April 26, 2017 through May 3, 2017, the Company sold an aggregate of 750,000 shares of Series A Preferred Common Stock to thirteen (13) U.S. accredited investors at $0.40 per share for proceeds of $300,000.
Common Stock
January 16, 2017, the Company issued 145,740 shares of common stock related to a Director Agreement with Pawel Hardej. The Company recorded fair value of $64,126 ($0.44/share) based upon the most recent trading price per share of the Company's stock.
January 16, 2017, the Company issued 41,640 shares of common stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $18,322 ($0.44/share) based upon the most recent trading price per share of the Company's stock.
January 16, 2017, the Company issued 62,460 shares of common stock related to a Director Agreement with John Choo. The Company recorded fair value of $27,482 ($0.44/share) based upon the most recent trading price per share of the Company's stock.
January 17, 2017, the Company issued 800,000 shares of common stock to Lyons Capital, LLC for a six-month consulting and road show services agreement. The Company recorded fair value of $352,000 ($0.44/share) based upon the most recent trading price per share of the Company's stock.
From February 22, 2017 through March 15, 2017, the Company sold, in reliance upon Regulation D Rule 506, a total of 2,060,000 shares of common stock to seventeen (17) U.S. accredited investors at $0.40 per share for cash totaling $824,000.
On March 20, 2017, the Company settled the amount owed to FirstFire Global Opportunities Fund LLC by paying $252,917 in cash and issuing 333,333 shares of common stock with a fair value of $100,000 based upon the conversion price of $0.30/share (See Note 8).
On March 20, 2017, a total of 250,000 shares of the Company's Series A Preferred Convertible Stock were converted into 416,667 shares of Common Stock. The Company recorded fair value of $175,000 ($0.42/share) based upon the most recent trading price per share of the Company’s stock.
On June 1, 2017, the Company issued 250,000 shares of common stock for a 12-month investor relations consulting agreement. The Company recorded fair value of $55,000 ($0.22/share) based upon the most recent trading price per share of the Company's stock.
On August 8, 2017, Chad Sykes, Founder and Chief Cultivation Officer, returned 2,500,000 shares of common stock to the Company in anticipation of the Merger. The Company recorded the return of shares at a fair value of $550,000 ($0.22 per share) based upon the most recent trading price per share of the Company’s stock. The return of common stock by Chad Sykes was a non-cash transaction and has been recorded as a reduction of goodwill related to the Merger.
On September 6, 2017, the Company issued an aggregate of 7,584,008 shares of common stock to Alamo CBD, in connection with the Merger The Company recorded fair value of $1,440,961 ($0.19 per share) based upon the most current trading price of the Company’s stock.
On September 15, 2017, the Company issued 250,000 shares of common stock related to an Employment Agreement with Annette Knebel, Chief Accounting Officer and Director. The Company recorded fair value of $50,000 ($0.20 per share) based upon the most current trading price of the Company’s stock.
Common Stock Warrants
On September 26, 2016, the Company issued the Rifici Note to Chuck Rifici Holdings, Inc, relating to the issuance of $225,500 in aggregate principal including a $204,000 actual payment of purchase price plus a 10% original issue discount. In conjunction with the issuance of the Rifici Note, the Company issued a one-year warrant to purchase 250,000 shares of common stock at an exercise price of $0.30 per share (See Note 8). The warrant expired September 26, 2017 and was not exercised.
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
(in Years)
|
|
Balance, December 31, 2016
|
|
|
500,000
|
|
|
|
0.40
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Forfeited
|
|
|
250,000
|
|
|
|
0.50
|
|
|
|
-
|
|
Expired
|
|
|
250,000
|
|
|
|
0.30
|
|
|
|
-
|
|
Balance September 30, 2017
|
|
|
-
|
|
|
$
|
|
|
$
|
-
|
|
For the nine months ended September 30, 2017, no warrants were outstanding.
For the year ended December 31, 2016, the following warrants were outstanding:
Exercise Price Warrants Outstanding
|
|
Warrants Exercisable
|
|
|
Weighted Average
Remaining Contractual Life
|
|
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.30-0.50
|
|
|
500,000
|
|
|
|
0.69
|
|
|
|
32,500
|
|
Lattice Binomial model was used to value aggregate intrinsic value.
NOTE 11 - SUBSEQUENT EVENTS
On October 10, 2017, the Company executed Amendment #1 to the March 24, 2017 Tangiers Note for $250,000 payment plus a 10% original issue discount. The maturity date is six months from the effective date. All other terms and conditions of the Tangiers Note remain effective.
On October 12, 2017, the Company entered into an Investment Agreement with Tangiers Global, LLC (“Tangiers Global”) pursuant to which the Company may issue and sell to Tangiers Global up to $2,000,000 of the Company’s common stock. Concurrently, on October 12, 2017, the Company entered into a Registration Rights Agreement with Tangiers Global. The Investment Agreement shall terminate upon the earlier of: (i) the issuance of $2,000,000 of shares, (ii) 36 months after the Effective Date (as defined in the Investment Agreement), (iii) at such time the Registration Statement (as defined in the Investment Agreement) is no longer effective, or (iv) by the Company at any time by providing 15 days written notice to Tangiers Global.
On October 12, 2017, the Company issued a promissory note to Tangiers Global, in the principal amount of $50,000 in order to induce Tangiers Global to enter into the Investment Agreement. The note bears interest at a rate of 10% per annum and matures on May 12, 2018. Tangiers Global may, at any time, convert the unpaid principal amount of the note into shares of the Company’s common stock at a conversion price of $0.1666 per share.
On October 17, 2017, the Company converted debt and accrued interest, totaling $30,000 into 329,670 shares of common stock.