NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations and Organization
Indoor
Harvest Corp. (the “Company,”) is a Texas corporation formed on November 23, 2011. Our principal executive office
is located at 5300 East Freeway Suite A, Houston, Texas 77020. On August 3, 2017, we formed Alamo Acquisition, LLC, a wholly owned
Texas limited liability company (“Alamo Acquisition Sub”). On August 4, 2017, we consummated a business acquisition
(the “Alamo Acquisition”) pursuant to which Alamo Acquisition Sub acquired all of the outstanding member
interests of Alamo CBD, LLC. (“Alamo CBD”), a Texas limited Liability Company. Upon closing of the Alamo Acquisition,
the member interests (“Alamo Surviver Members”) of Alamo CBD were exchanged for 7,584,008 shares of Indoor Harvest’s
common stock, the parent company of Alamo Acquisition Sub, and Alamo CBD continued as our surviving wholly-owned subsidiary, and
Alamo Acquisition Sub ceased to exist.
From
inception until August 4, 2017, the Company provided full service, state of the art design-build, engineering, procurement and
construction services to the indoor and vertical farming industry. The Company provided production platforms, mechanical systems
and complete custom designed build outs for both Controlled Environment Agriculture (“CEA”) and Building Integrated
Agriculture (“BIA”), for two unique industries, produce and cannabis. In mid-2016, the Company began efforts to separate
its produce and cannabis related operations due to ongoing feedback from both clients and potential institutional investors. It
was determined that the Company’s involvement in the cannabis industry was creating conflicts for clients and potential
institutional investors wishing to work with the Company from the produce industry due to the public perception and political
issues surrounding the cannabis industry. By late-2016, the Company had decided to cease actively selling its products and services
to the vertical farming industry and to focus on utilizing the Company’s developed technology and methods for the cannabis
industry. On August 4, 2017, the Company ceased actively supporting business development of vertical farms for produce production.
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.
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.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Indoor Harvest Corp. and its wholly-owned subsidiary, Alamo CBD. All
significant inter-company accounts and transactions have been eliminated in consolidation.
Reclassification
Certain
expense items have been reclassified in the statement of operations for the six months ended June 30, 2017, to conform to the
reporting format adopted for the six months ended June 30, 2018.
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.
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).
Loss
per Share
Basic
earnings 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 Indoor Harvest has incurred losses for all periods, the impact of the
common stock equivalents would be anti- dilutive and therefore are not included in the calculation.
Fair
Value of Financial Instruments
We
adopted accounting guidance for financial and non-financial assets and liabilities (ASC 820). The adoption did not have a material
impact on our results of operations, financial position or liquidity. This standard defines fair value, 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. This guidance discusses valuation techniques, such as the market approach (comparable
market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the
service capacity of an asset or replacement cost). 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:
●
|
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.
|
Income
Taxes
The
Company accounts for income taxes pursuant to FASB ASC 740—Income Taxes, which requires recognition of deferred income tax
liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements
or tax returns. The Company provides for deferred taxes on temporary differences between the financial statements and tax basis
of assets using the enacted tax rates that are expected to apply to taxable income when the temporary differences are expected
to reverse.
ASB
ASC 740 establishes a more-likely-than-not threshold for recognizing the benefits of tax return positions in the financial statements.
Also, the statement 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 2017, 2016, 2015, 2014, and 2013, remain subject to examination by the IRS and respective states.
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “Tax Reform Act”). We recognize the impact of tax legislation in the period in which the law is enacted. In December
2017, the SEC staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when
a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail
to complete its accounting for the effect of the changes in the Tax Reform Act. Consistent with that guidance, we recognized provisional
amounts based upon our interpretation of the tax laws and estimates which require significant judgments. The actual impact of
these tax laws may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis,
changes in our interpretations and assumptions, additional guidance that may be issued by the government and actions we may take
as a result of these enacted tax laws. Any adjustments recorded to the provisional amounts will be included in income from operations
as an adjustment to tax expense.
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
In
accordance with ASC 350 Goodwill is not amortized but evaluated for impairment annually or more often if indicators of a potential
impairment are present.
Intangible
Assets
In
accordance with ASC 350 Goodwill and Other Intangible Assets, indefinite-lived intangible assets are not amortized but are evaluated
for impairment annually or more often if indicators of a potential impairment are present. 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.
Derivative
Liability
The
Company accounts for derivative instruments in accordance with ASC 815, 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 June 30, 2018 and December
31, 2017, 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.
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 six months ended June
30, 2018 and 2017 are as follows:
|
|
June
30,
2018
|
|
|
June
30, 2017
|
|
Research
and development expense
|
|
$
|
-
|
|
|
$
|
1,625
|
|
Advertising
Expense
Advertising
and promotional costs are expensed as incurred. Advertising expense for the Six months ended June 30, 2018 and 2017 are as follows:
|
|
June
30,
2018
|
|
|
June
30, 2017
|
|
Advertising
expense
|
|
$
|
739
|
|
|
$
|
12,887
|
|
Recent
Accounting Pronouncements
Management
has evaluated subsequent events through the date these financial statements were available to be issued. Based on our evaluation
no material events have occurred that require disclosure.
NOTE
2 - GOING CONCERN
As
reflected in the accompanying financial statements, the Company had a net loss of $1,180,541, net cash used in operations of $378,629
and has an accumulated deficit of $9,589,363, for the six months ended June 30, 2018. 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 in order to ensure
the continuing existence of the business.
The
business plan of the Company is to engage in the 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”). During the next twelve months, the Company’s strategy is to: complete ongoing product development;
commence product marketing, product assembly and sales; construct a demonstration CEA and BIA farm; and offer design-build services.
The Company’s long-term strategy is to direct sale, license and franchise their patented 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 as of June 30, 2018 and December 31, 2017:
Classification
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Furniture
and equipment
|
|
$
|
11,666
|
|
|
$
|
11,666
|
|
Leasehold
improvements
|
|
|
38,717
|
|
|
|
38,717
|
|
Computer
equipment
|
|
|
3,019
|
|
|
|
3,019
|
|
Total
|
|
|
53,402
|
|
|
|
53,402
|
|
Less:
Accumulated depreciation
|
|
|
(33,976
|
)
|
|
|
(28,779
|
)
|
Property
and equipment, net
|
|
$
|
19,426
|
|
|
$
|
24,623
|
|
Depreciation
expense for the six months ended June 30, 2018 and 2017, totaled $5,197 and $25,402, respectively.
NOTE
4 – INTANGIBLE ASSETS
There were no impairment charges taken for
the domain name during the six months ended June 30, 2018 and 2017.
Intangible
assets consist of the following as of June 30, 2018 and December 31, 2017:
Classification
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Domain
name
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
Facilities
Manager’s Package Online
|
|
|
1,022
|
|
|
|
1,022
|
|
MLC
CD Systems (software)
|
|
|
7,560
|
|
|
|
7,560
|
|
Total
|
|
|
10,582
|
|
|
|
10,582
|
|
Less:
Accumulated amortization
|
|
|
(5,548
|
)
|
|
|
(4,690
|
)
|
Intangible
assets, net
|
|
$
|
5,034
|
|
|
$
|
5,892
|
|
Amortization
expense for the six months ended June 30, 2018 and 2017, totaled $858 and $854, respectively.
NOTE
5 - COMMITMENTS & CONTINGENCIES
On
February 20, 2014, the Company signed a 60-month lease on a 10,000 sq. ft. office/warehouse facility and paid a deposit of $12,600.
The monthly base rent is $4,200 increasing 6% every two years for the term of the lease. The property is adequate for all of the
Company’s currently planned activities. On January 22, 2018, the Company entered into a 6-month sublease agreement for a
portion of the 10,000 sq. ft. office/warehouse facility. The term of the sublease is February 1, 2018 through July 31, 2018 at
$2,000 per month. The Company records the sublease income as a reduction of rent expense in the Consolidated Statements of Operations
within general and administrative expenses.
Deferred
rent payable at June 30, 2018 was $4,568. 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, net of sublease payments received, for the six months ended June 30, 2018 and 2017 were as follows:
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
Rent
expense
|
|
$
|
21,308
|
|
|
$
|
26,975
|
|
NOTE
6 - FAIR VALUE MEASUREMENTS
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
convertible notes payable of $732,119 and $455,459 at June 30, 2018 and December 31, 2017, respectively. Financial instruments
classified as Level 3 in the fair value hierarchy represents derivative liability of $550,374 and $554,917 June 30, 2018 and December
31, 2017, respectively.
NOTE
7 - NOTE PAYABLE
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%.
|
|
June
30,
2018
|
|
|
December
31, 2017
|
|
Balance
as of period ended
|
|
$
|
16,680
|
|
|
$
|
20,343
|
|
Less:
current portion
|
|
|
8,768
|
|
|
|
7,520
|
|
Long-term
note payable, net
|
|
$
|
7,912
|
|
|
$
|
12,823
|
|
NOTE
8 - CONVERTIBLE NOTES PAYABLE
Convertible
notes payable at June 30, 2018 and December 31, 2017 are as follows:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Note
1
|
|
$
|
250,000
|
|
|
$
|
475,000
|
|
Note 2
|
|
|
50,000
|
|
|
|
50,000
|
|
Note
3
|
|
|
448,250
|
|
|
|
-
|
|
Total
convertible notes payable
|
|
|
748,250
|
|
|
|
525,000
|
|
|
|
|
|
|
|
|
|
|
Less:
Unamortized debt discount
|
|
|
(16,131
|
)
|
|
|
(69,541
|
)
|
Total
convertible notes
|
|
|
732,119
|
|
|
|
455,459
|
|
|
|
|
|
|
|
|
|
|
Less:
current portion of convertible notes
|
|
|
732,119
|
|
|
|
455,459
|
|
Long-term
convertible notes
|
|
$
|
-
|
|
|
$
|
-
|
|
Note
1
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 (“Note 1”) in the aggregate principal amount of up to $550,000, which includes a
10% original issue discount. Note 1 is convertible into shares of common stock at a price equal to $0.30 per share; provided,
however that if Note 1 is not retired on or before the maturity date, defined in Note 1 as a “Maturity Default” the
conversion price shall be adjusted to be equal to the lower of: (i) $0.30 or (ii) 65% multiplied by the lowest trading price of
the Company’s common stock in the fifteen (15) consecutive trading day period immediately preceding the date that the Company
receives a notice of conversion. The Tangiers Note 1 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. As of June 30, 2018, the balance under Note 1 is
$294,000, which includes $44,000 guaranteed interest. As of June 30, 2018, Note 1 can be converted into 4,184,615 shares of the
Company’s common stock.
On
October 12, 2017, the Company entered into an Investment Agreement with Tangiers. Pursuant to the terms of the Investment Agreement,
Tangiers committed to purchase up to $2,000,000 of our common stock over a period of up to 36 months. From time to time during
the 36-month period commencing from the effectiveness of the registration statement, we may deliver a put notice to Tangiers which
states the dollar amount that we intend to sell to Tangiers on a date specified in the put notice. The maximum investment amount
per notice must be no more than 200% of the average daily trading dollar volume of our common stock for the eight (8) consecutive
trading days immediately prior to date of the applicable put notice and such amount must not exceed an accumulative amount of
$250,000. The minimum put amount is $5,000. The purchase price per share to be paid by Tangiers will be the 80% of the of the
average of the two lowest closing bid prices of the common stock during the pricing period applicable to the put notice, provided,
however, an additional 10% will be added to the discount of each put if (i) we are not DWAC eligible and (ii) an additional 15%
will be added to the discount of each put if we are under DTC “chill” status on the applicable date of the put notice.
On
October 10, 2017, the Company executed Amendment #1 to the Tangiers Note 1 for a final draw of $250,000 payment plus a 10% original
issue discount. Amendment #1 modified the maturity date for the Tangier Note from eight months to six months from the effective
date of each payment. All other terms and conditions of the Tangiers Note 1 remain effective.
The
execution of Amendment #1 to Note 1 on October 10, 2017 caused the Company to default on the first draw due under Note 1 due to
the acceleration of the maturity date. The default 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 Note 1 is now 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. As of May
1, 2018, Tangiers has informed the Company that they have elected at this time not to enforce the default interest rate of 18%
under Note 1 and also not to enforce the fees, reserving its rights to enforce the foregoing in their discretion.
Note
2
The
Company issued a fixed convertible promissory note to Tangiers for the principal sum of $50,000 as a commitment fee for the Investment
Agreement. The promissory note (“Note 2”) maturity date is May 12, 2018. The principal amount due under Note 2 can
be converted by Tangiers any time, into shares of the Company’s common stock at a conversion price of $0.1666 per share.
The promissory note is in a “Maturity Default,” which is defined in Note 2 as the event in which Note 2 is not retired
prior to its maturity date, Tangiers’ conversion rights under Note 2 would be adjusted such that the conversion price would
be the lower of (i) $0.1666 or (ii) b) 65% of the average of the two lowest trading prices of the Company’s common stock
during the 10 consecutive trading days prior to the date on which Tangiers elects to convert all or part of the note. The default
interest rate is 20%. As of June 30, 2018, the balance under Note 2 is $55,000, which includes $5,000 guaranteed interest. As
of June 30, 2018, Note 2 can be converted into 769,231 shares of the Company’s common stock.
Note
3
On
January 16, 2018, the Company issued and sold an 8% Fixed Convertible Promissory Note (“Note 3”) to Tangiers (the
“Buyer”), in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. Note
3 is convertible into shares of the Company’s common stock at a conversion price of $0.30 per share. However, if Note 3
is not paid back on or before the maturity date, defined in Note 3 as a “Maturity Default”, the conversion price of
Note 3 shall then be adjusted to be equal to the lower of: (i) $0.30 or (ii) 65% multiplied by the lowest trading price of the
Company’s common stock in the fifteen (15) consecutive trading day period immediately preceding the trading day that the
Company receives a notice of conversion of Note 3.
On
February 13, 2018, April 17, 2018, and June 13, 2018, the Company executed Amendments #1, #2, and #3 to the Tangiers Note 3 for
draws of $132,000, $132,000, and $101,750, respectively. All other terms and conditions of the Tangiers Note 3 remain effective.
As of June 30, 2018, the balance under Note 3 is $484,110, which includes $35,860 guaranteed interest.
As
of June 30, 2018, the Company accrued $96,226 in interest expense related to the outstanding the notes.
Debt
Discount and Original Issuance Costs for Convertible Note
The
debt discount amount consists of debt discount due to beneficial conversion features, warrant, original issue costs, and debt
issue costs. The debt discounts recorded in 2018 and 2017, 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.
During
the six months ended June 30, 2018 and for the year ended December 31, 2017, the Company amortized $109,910 and $466,862 to interest
expense, respectively.
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Debt
discount, beginning of period
|
|
$
|
69,541
|
|
|
$
|
152,617
|
|
Additional
debt discount and debt issue cost
|
|
|
56,500
|
|
|
|
383,786
|
|
Amortization
of debt discount and debt issue cost
|
|
|
(109,910
|
)
|
|
|
(466,862
|
)
|
Debt
discount, end of period
|
|
$
|
16,131
|
|
|
$
|
69,541
|
|
Debt
Issuance Costs for Convertible Note
During
the six months ended June 30, 2018 and for the year ended December 31, 2017, the Company did not pay any debt issue costs.
NOTE
9 - DERIVATIVE LIABILITIES
The
Company identified the conversion features embedded within its convertible debts as financial derivatives. The Company has determined
that the embedded conversion option should be accounted for at fair value.
The
following schedule shows the change in fair value of the derivative liabilities for the six months ended June 30, 2018:
Balance
- December 31, 2017
|
|
$
|
554,916
|
|
Addition
of new derivatives recognized as loss on derivatives
|
|
|
643,915
|
|
Settled
on issuance of common stock
|
|
|
(442,863
|
)
|
Gain
on change in fair value of the derivative
|
|
|
(205,594
|
)
|
Balance
- June 30, 2017
|
|
|
550,374
|
|
Less:
current portion
|
|
|
(550,374
|
)
|
Long-term
derivative liabilities
|
|
$
|
-
|
|
The
following schedule shows the change in fair value of the derivative liabilities for the year ended December 31, 2017:
Derivative
liabilities - December 31, 2016
|
|
$
|
-
|
|
Add
fair value at the commitment date for convertible notes issued during the current year
|
|
|
213,453
|
|
Less
derivatives due to conversion
|
|
|
(18,800
|
)
|
Fair
value mark to market adjustment for derivatives
|
|
|
360,263
|
|
Derivative
liabilities - December 31, 2017
|
|
|
554,916
|
|
Less
: current portion
|
|
|
(554,916
|
)
|
Long-term
derivative liabilities
|
|
$
|
-
|
|
NOTE
10 - RELATED PARTY TRANSACTIONS
On
January 15, 2018 Ms. Sandra Fowler, was appointed as the Chief Marketing Officer of the Company. Pursuant to the terms of the
Fowler Employment Agreement, Ms. Fowler shall serve as Chief Marketing Officer of the Company. The initial term of the agreement
will expire on January 15, 2019 and commencing on January 15, 2019 and on each anniversary of such date thereafter, the term of
the Fowler Employment Agreement shall automatically renew for a one-year period, unless earlier terminated by either party pursuant
to the terms of the Fowler Employment Agreement. In consideration for Ms. Fowler’s services, under the Fowler Employment
Agreement, Ms. Fowler shall receive (i) an annual base salary of $48,000 and (ii) 200,000 shares of restricted common stock of
the Company. Further, pursuant to the Fowler Employment Agreement, the Company agreed to revise the annual base compensation for
Ms. Fowler to $65,000, after 90 days of the execution of the Fowler Employment Agreement, or after the Company raises not less
than $1,000,000 from sales of its equity securities subsequent to the execution of the Fowler Employment Agreement, whichever
may come first. In addition, Ms. Fowler shall be eligible to participate in any equity-based incentive compensation plan or programs
adopted by the Company’s board of directors.
On
February 5, 2018, Dr. Coleman and Benjamin Coleman voluntarily returned and canceled an aggregate of 3,280,470 common shares in
order to prevent dilution to the shareholders during the Company’s efforts to secure new senior management, provide additional
incentive equity and to form an advisory board. The return of common stock by Dr. Coleman and Benjamin Coleman was a non-cash
transaction.
On
February 20, 2018, Mr. Daniel Weadock was appointed Chief Executive Officer and Director of the Company. On February 20, 2018,
the Company entered into an executive employment agreement with Mr. Weadock (the “Weadock Employment Agreement”),
pursuant to which Mr. Weadock agreed to act as the Company’s chief executive officer. Pursuant to the terms of the Weadock
Employment Agreement, Mr. Weadock initial will not receive a salary. However, effective on the business day after the date on
which the Company achieves Capitalization (as hereinafter defined) of $2,000,000 or more, Mr. Weadock’s annual base salary
will be $100,000. For purposes of the Weadock Employment Agreement, “Capitalization” means aggregate net cash proceeds
received by the Company from (a) the Company’s sale of common stock pursuant to Puts (as such term is defined in the Investment
Agreement dated as of October 12, 2017 by and between the Company and Tangiers Global, LLC (the “Investment Agreement”))
under the Investment Agreement, and/or (b) any other sale by the Company of common stock or preferred stock, whether in a public
offering or a private placement. In addition, pursuant to the terms of the Weadock Employment Agreement, the Company agreed to
grant Mr. Weadock (i) 300,000 shares of restricted stock as soon as administratively practicable following execution of the Weadock
Employment Agreement, and (ii) 1,584,202 shares of restricted common stock, consistent with the grant and vesting schedule set
forth in the agreement; provided, however, that no grant will be made and no shares will be issued with respect to any grant if
Mr. Weadock is not employed by the Company as an executive on the respective Date of Grant as set forth in the agreement. The
Weadock Employment Agreement has a term of one year, unless Mr. Weadock’s employment is terminated sooner by the board of
directors, and the term will be extended for additional one-year periods unless the Company or Mr. Weadock gives the other party
at least 30 days’ prior written notice of its intent not to renew. On February 20, 2018, the Company also entered into a
compensation agreement with Mr. Weadock (the “Director Compensation Agreement”).Pursuant to the terms of the Director
Compensation Agreement, the Company agreed to grant Mr. Weadock an aggregate of 240,000 shares of restricted common stock, consistent
with the grant and vesting schedule set forth in the agreement; provided, however, that no grant will be made and no shares will
be issued with respect to any grant, if Mr. Weadock is not a member of the Company’s board of directors on the respective
Date of Grant as set forth in the agreement. If the Company is acquired by, or merged into and with, another entity prior to the
last Date of Vesting set forth in the agreement (i.e. February 23, 2022), all shares issuable to Mr. Weadock under the Director
Compensation Agreement will become fully vested and non-forfeitable. The Company also agreed to reimburse Mr. Weadock for all
reasonable travel and incidental expenses incurred by Mr. Weadock in performing his services and attending meetings as approved
in advance by the Company. Also, on February 20, 2018, the Company also entered into an indemnity agreement with Mr. Weadock (the
“Weadock Indemnity Agreement”). Pursuant to the terms of the Indemnity Agreement, the Company agreed to use reasonable
efforts to obtain and maintain in full force and effect directors’ and officers’ liability insurance (“D&O
Insurance”) in reasonable amounts from established and reputable insurers; provided, however, the Company shall have no
obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably
available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage is reduced
by exclusions so as to provide an insufficient benefit, or Mr. Weadock is covered by similar insurance maintained by a subsidiary
of the Company. In addition the foregoing, the Company will indemnify Mr. Weadock from certain third party actions, derivative
actions and actions where Mr. Weadock is decreased; provided, however, the Company shall not be obligated to indemnify Mr. Weadock
for actions including, but not limited to, actions initiated by Mr. Weadock, for any action in which it is determined that the
material assertions made by Mr. Weadock in such proceeding were not made in good faith or were frivolous, for any settlements
not authorized by the Company, for any actions on the account of Mr. Weadock’s willful misconduct, and for any expenses
and the payment of profits arising from the purchase and sale Mr. Weadock of securities in violation of Section 16(b) of the Securities
Exchange Act, or any similar successor statute; provided, further that, that the Company shall not be obligated to indemnify Mr.
Weadock for expenses or liabilities of any type whatsoever which have been paid directly to Mr. Weadock pursuant to the Company’s
D&O Insurance policy.
NOTE
11 - STOCKHOLDERS’ DEFICIT
Series
A Convertible Preferred Stock
As
at June 30, 2018 and December 31, 2017, there were 750,000 shares of Series A Convertible Preferred Stock issued and outstanding.
Common
Stock
On
January 9, 2018, the Company issued 899,685 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of $100,000
of Note 1 at a conversion price of $0.11.
On
January 15, 2018, the Company issued 200,000 shares of common stock related to an Employment Agreement with Sandra Fowler, Chief
Marketing Officer. The Company recorded a fair value of $66,000 ($0.33 per share) based upon the most current trading price of
the Company’s stock.
On
February 5, 2018, Dr. Coleman and Benjamin Coleman voluntarily returned and canceled an aggregate of 3,280,470 common shares in
order to prevent dilution to the shareholders during the Company’s efforts to secure new senior management, provide additional
incentive equity and to form an advisory board. The return of common stock by Dr. Coleman and Benjamin Coleman was a non-cash
transaction and reduces the common stock outstanding as of March 31, 2018.
On
February 20, 2018, the Company issued 43,387 shares of common stock related to an Employment Agreement with Daniel Weadock, Chief
Executive Officer. The Company recorded a fair value of $7,810 ($0.18 per share) based upon the most current trading price of
the Company’s stock.
On
February 23, 2018, the Company issued 12,135 shares of common stock related to an Director Agreement with Daniel Weadock, Chief
Executive Officer. The Company recorded a fair value of $2,063 ($0.17 per share) based upon the most current trading price of
the Company’s stock.
On
March 5, 2018, the Company issued 269,716 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $25,000
of Note 1 at a conversion price of $0.09.
On
March 20, 2018, the Company issued 30,000 shares of its common stock to members of the Company’s Advisory Board. The Company
recorded a fair value of $4,200 ($0.14 per share) based upon the most recent trading price of the Company’s stock.
On
March 21, 2018, the Company issued 295,631 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $25,000
of Note 1 at a conversion price of $0.08 per share.
On
April 13, 2018, the Company issued 769,231 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $50,000
of Note 1 at a conversion price of $0.065 per share.
On
April 17, 2018, the Company issued 300,000 shares of common stock related to an Employment Agreement with Daniel Weadock, Chief
Executive Officer. The Company recorded a fair value of $51,000 ($0.17 per share) based upon the most current trading price of
the Company’s stock.
On
May 20, 2018, the Company issued 99,012 shares of common stock related to an Employment Agreement with Daniel Weadock, Chief Executive
Officer. The Company recorded a fair value of $16,832 ($0.17 per share) based upon the most current trading price of the Company’s
stock.
On
May 23, 2018, the Company issued 30,000 shares of common stock related to an Director Agreement with Daniel Weadock, Chief Executive
Officer. The Company recorded a fair value of $5,100 ($0.17 per share) based upon the most current trading price of the Company’s
stock.
On
June 21, 2018, the Company issued 295,858 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $25,000
of Note 1 at a conversion price of $0.0845 per share.
On
June 6, 2018, the Company issued 30,000 shares of its common stock to members of the Company’s Advisory Board. The Company
recorded a fair value of $2,550 ($0.085 per share) based upon the most recent trading price of the Company’s stock.
On
June 27, 2018, the Company issued 424,500 shares of common stock related to an advisory agreement with Electrum Partners, LLC.
The Company recorded a fair value of $50,940 ($0.12 per share) based upon the most current trading price of the Company’s
stock.
Common
Stock Warrants
For
the six months ended June 30, 2018 and the year ended December 31, 2017, no warrants were outstanding.
NOTE
12 - SUBSEQUENT EVENTS
On
July 2, 2018, the Company issued 244,755 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $17,500
of Note 1 at a conversion price of $.07.
On
June 27, 2018, the Board of Directors of the Company approved the termination of Annette Knebel from her position as Chief Financial
Officer of the Company pursuant to the terms of Mr. Knebel’s employment agreement with the Company effective immediately
and further on the same date, the Board of Directors of the Company approved the termination of Mr. Knebel from her position as
a member of the Company’s Board of Directors consistent with the Company’s Amended and Restated Bylaws, effective
immediately.
On
July 3, 2018, Chad Sykes was appointed to act as the Company’s principal financial officer and principal accounting officer.
On
July 12, 2018, the Company issued 269,231 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $17,500
of Note 1 at a conversion price of $.07.
On
July 27, 2018, the Company and Tangiers entered into Amendment #4 to the January 16, 2018 promissory note (“Amendment #4”),
pursuant to which Tangiers agreed to make a payment to the Company in the amount of $101,750 ($92,500 in cash and $9,250 in OID)
under the note. The Company agreed that within one and a half months of the payment it will use the proceeds as follows: $54,000
for general and administrative expenses, $25,000 for accounting and legal and $13,500 for miscellaneous expenses.
On
August 1, 2018, the Company issued 50,000 shares of its common stock to Electrum Partners pursuant to an advisory agreement. The
Company recorded fair value of $4,500 ($0.09 per share) based upon the most recent trading price per share of the Company’s
stock.
On
August 2, 2018, the Company issued 1,307,846 shares of its common stock to Tangiers pursuant to Tangier’s conversion of
$42,590 of Note 1 at a conversion price of $.033.
On
August 13, 2018, the Company issued 460,617 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $15,000
of Note 1 at a conversion price of $.033.