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
reverse triangular merger (the “Alamo Merger”) 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 Merger,
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.
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 March 31, 2018 and December 31, 2017. 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.
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.
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 months ended March
31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Research and development expense
|
|
$
|
-
|
|
|
$
|
737
|
|
Advertising
Expense
Advertising
and promotional costs are expensed as incurred. Advertising expense for the three months ended March 31, 2018 and 2017 are as
follows:
|
|
2018
|
|
|
2017
|
|
Advertising expense
|
|
$
|
112
|
|
|
$
|
9,852
|
|
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 significantly impact future reporting of financial position and results of operations.
Management is currently assessing implementation.
The
FASB has issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).
Under
the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases)
at the commencement date:
|
●
|
A
lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis; and
|
|
●
|
A
right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified
asset for the lease term.
|
|
●
|
Under
the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary,
lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.
|
|
●
|
The
new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize
lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.
|
Public
business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). The FASB has issued Accounting Standards
Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue
share-based payment awards to their employees.
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 March 31, 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.
Reclassification
Certain
expense items have been reclassified in the statement of operations for the three months ended March 31, 2017, to conform to the
reporting format adopted for the three months ended March 31, 2018.
NOTE
2 - GOING CONCERN
As reflected in the accompanying financial statements, the Company had a net loss of $127,216, net cash used
in operations of $185,663 and has an accumulated deficit of $8,536,038, for the three months ended March 31, 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:
Classification
|
|
March 31, 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
|
|
|
(31,388
|
)
|
|
|
(28,779
|
)
|
Property and equipment, net
|
|
$
|
22,014
|
|
|
$
|
24,623
|
|
Depreciation
expense for the three months ended March 31, 2018, totaled $2,609.
NOTE
4 – INTANGIBLE ASSETS
There
were no impairment charges taken for the domain name during the three months ended March 31, 2018 and 2017.
Intangible
assets consist of the following as of March 31, 2018 and December 31, 2017:
Classification
|
|
2018
|
|
|
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
|
|
|
(5,119
|
)
|
|
|
(4,690
|
)
|
Intangible assets, net
|
|
$
|
5,463
|
|
|
$
|
5,892
|
|
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 March 31, 2018 was $5,667. 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 three months ended March 31, 2018 and 2017 were as follows:
|
|
2018
|
|
|
2017
|
|
Rent expense
|
|
$
|
13,240
|
|
|
$
|
18,639
|
|
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 $778,725 and $122,383 at March 31, 2018 and December 31, 2017, respectively.
Financial instruments classified as Level 3 in the fair value hierarchy represents derivative liability of $25,006 and $554,916
March 31, 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%.
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Balance as of period end
|
|
$
|
18,535
|
|
|
$
|
20,343
|
|
Less: current portion
|
|
|
7,714
|
|
|
|
7,520
|
|
Long-term note payable, net
|
|
$
|
10,821
|
|
|
$
|
12,823
|
|
NOTE
8 - DEBT AND CONVERTIBLE LOAN PAYABLE
Convertible
Note Payable
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) $.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 March 31, 2018, the balance under Note 1 is $369,000, which includes $44,000 guaranteed interest. As of March 31, 2018,
Note 1 can be converted into 1,768,738 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.
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 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. Upon a “Maturity Default,”
which is defined in Note 2 as the event in which Note 2 is not retied 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. As of March 31, 2018, the balance under Note 2 is $55,000, which
includes $5,000 guaranteed interest. As of March 31, 2018, Note 2 can be converted into 300,120 shares of the Company’s
common stock.
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 (“Note 2”). 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 under
Note 1 and also not to enforce the fees, reserving its rights to enforce the foregoing in their discretion. Other than the foregoing,
none of the above listed notes are currently in default.
On
October 17, 2017, the Company issued 329,670 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of
$30,000 of Note 1 at a conversion price of $0.09.
On
December 18, 2017, the Company issued 516,648 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of
$45,000 of Note 1 at a conversion price of $0.09.
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 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. As of March 31, 2018, the balance under Note 3 is $231,660, which includes
$17,160 guaranteed interest. As of March 31, 2018, Note 3 can be converted into 650,000 shares of the Company’s common stock.
Note 3 Amendment #1 has a maturity date of August 13, 2018.
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 $.09.
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 $.08.
For
the three months ended March 31, 2018, the Company accrued $17,160 in guaranteed interest related to the outstanding the notes.
Debt
Discount and Original Issuance Costs for Convertible Note
During the three months ended March 31, 2018 and for the year ended December 31, 2017, the Company recorded
debt discounts totaling $24,228 and $69,541, respectively. 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 three months ended March 31, 2018 and for the year ended December 31, 2017, the Company amortized $80,563 and $466,862 to
interest expense, respectively.
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Debt discount, beginning of period
|
|
$
|
69,541
|
|
|
$
|
152,617
|
|
Additional debt discount and debt issue cost
|
|
|
35,320
|
|
|
|
383,786
|
|
Amortization of debt discount and debt issue cost
|
|
|
(80,563
|
)
|
|
|
(466,862
|
)
|
Debt discount, end of period
|
|
$
|
24,298
|
|
|
$
|
69,541
|
|
Debt
Issuance Costs for Convertible Note
During
the three months ended March 31, 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 three months ended March 31, 2018:
Derivative liabilities - December 31, 2017
|
|
$
|
554,916
|
|
Add fair value at the commitment date for convertible notes issued during the current year
|
|
|
-
|
|
Less derivatives due to conversion
|
|
|
(286,296
|
)
|
Fair value mark to market adjustment for derivatives
|
|
|
(243,615
|
)
|
Derivative liabilities - March 31, 2018
|
|
|
25,005
|
|
Less : current portion
|
|
|
(25,005
|
)
|
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
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 March 31, 2018, the warrants were not exercised. Therefore, the Company has disclosed the expiration
of the Warrants.
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 Designation.
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. As a result of this action, there currently
are no 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 $.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 $.08.
Common
Stock Warrants
For
the three months ended March 31, 2018 and the year ended December 31, 2017, no warrants were outstanding.
NOTE
12 - SUBSEQUENT EVENTS
On
April 10, 2018, the Company defaulted on Amendment #1, the second draw due under Note 1, as the maturity date expired. As
of May 1, 2018, Tangiers has informed the Company that they have elected at this time not to enforce the default interest rate
under Note 1 and also not to enforce the fees, reserving its rights to enforce the foregoing in their discretion. 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.
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 $.07.
On
April 17, 2018, the Company executed Amendment #2 to the Tangiers Note 3 for a draw of $120,00 payment plus a 10% original issue
discount. All terms and conditions of the Tangiers Note 3 remain effective. As of May 15, 2018, the balance under Note
3 is $374,220, which includes $27,720 guaranteed interest. As of May 15, 2018, Note 3 can be converted into 1,155,000 shares
of the Company’s common stock. Note 3 Amendment #2 has a maturity date of October 13, 2018.