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 statements presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.
Indoor Harvest Corp., or the "Company," is a Texas corporation formed on November 23, 2011. Indoor Harvest Corp., through its brand name Indoor Harvest™, is a company specializing 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").
Indoor Harvest Corp is a Design-Build contractor for the vertical farming and indoor farming industry. The Company’s principal lines of business are engineering, procurement and construction services as well as manufactures a variety of indoor farming fixtures and equipment. The Company provides its products and services worldwide for controlled environment and building integrated agricultural operators.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 30, 2015
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("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 estimated useful lives of equipment for purposes of depreciation and the valuation of common shares issued for services, equipment and the liquidation of liabilities.
Accounts Receivable and Work in progress
Work in process 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, 2016 and December 31, 2015. The company records revenue recognition 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 in the balance sheet as costs and estimated earnings in excess of billings. Unearning billings are reflected in the balance sheet as a liability as billings in excess of costs and estimated earnings on projects in process.
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.
The Company has the following common stock equivalents for the three months ended March 31, 2016 and 2015, respectively:
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March 31, 2016
|
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March 31, 2015
|
|
Convertible Debt (Exercise price - $0.30/share)
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|
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908,333
|
|
|
|
-
|
|
Total
|
|
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908,333
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|
|
|
-
|
|
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:
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·
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Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
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·
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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.
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·
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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.
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Reclassifications
Certain expense items have been reclassified in the statement of operations for the three months ended March 31, 2015, to conform to the reporting format adopted for the three month ended March 31, 2016.
Recent Accounting Pronouncements
We do not believe any other recent pronouncements will have any impact on our presentation of financial position or results of operations.
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 $321,675, net cash used in operations of $130,730 and has an accumulated deficit of $2,243,447, for the three months ended March 31, 2016. 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 – CONCENTRATIONS
At March 31, 2016 and December 31, 2015, the Company had a concentration of accounts receivable of:
Customer
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March 31, 2016
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December 31, 2015
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AQ Maryland
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23%
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0%
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MF Microgreen Farm
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32%
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100%
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PH Research Platform
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46%
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0%
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For the three months ended March 31, 2016 and March 31, 2015, the Company had a concentration of sales of :
Customer
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March 31, 2016
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December 31, 2015
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University of Arizona CEAC
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6%
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0%
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GSS Colorado
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22%
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0%
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ER Michigan
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55%
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0%
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PH Research Platform
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17%
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0%
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NOTE 4 – WORK IN PROCESS
Work in progress as of March 31, 2016 and December 31, 2015 consists of the following:
Description
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March 31, 2016
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|
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December 31, 2015
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Costs incurred on uncompleted contracts
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$
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6,029
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$
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92,379
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Estimated earnings
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-
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|
|
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-
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|
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|
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-
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Less billings to date
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94,346
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|
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112,310
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Total
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$
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88,317
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$
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19,931
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|
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Reflected in the balance sheet as:
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Costs and estimated earnings in excess of billings on contracts in process
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$
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-
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$
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-
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Billings in excess of costs and estimated earnings on contracts in process
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88,317
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|
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19,931
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Total
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$
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88,317
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|
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$
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19,931
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NOTE 5 – DEBT AND CONVERTIBLE LOAN PAYABLE
Convertible Note Payable
On March 22, 2016 the Company entered into a securities purchase agreement with Firstfire Global Opportunities Fund, LLC, and Rockwell Capital Partners Inc, relating to the issuance and sale of notes of $272,500 in aggregate principal amount including $250,000 actual payment of purchase price plus a 9% original issue discount, and an aggregate total of 50,000 shares of common stock valued at $23,500 ($0.47/share).
The notes carry an interest on the unpaid principal amount at the rate of 3% per annum. Any Principal Amount or Interest which is not paid when due shall bear interest at the rate of 15% per annum from the due date until the same is paid. The notes mature on September 22, 2016 and may be prepaid in whole or in part except otherwise explicitly set forth in the Note. If the Company exercises its right to prepay or repay the Note, the Company shall make payment to the note holders of an amount in cash equal to the sum of 125% multiplied by the Principal Amount plus accrued and unpaid interest on the Principal Amount to the Optional Prepayment Date plus Default Interest, if any.
The notes convert into shares of Common Stock at a price equal to $0.30; provided, however that from and after the occurrence of any Event of Default hereunder, the Conversion Price shall be the lower of: (i) the Fixed Conversion Price or (ii) 45% multiplied by the lowest sales price of the Common Stock in a public market during the ten (10) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a Notice of Conversion (as defined in the Note). For the three months ended March 31, 2016, the Company received $272,500 proceeds less the $20,000 in debt issue costs and $22,501 in original issuance discount fee pursuant to the terms of this convertible note. For convertible debt, the convertible feature indicated a rate of conversion that was not below market value. As a result, the Company will record a BCF and related debt discount. For the three months ended March 31, 2016, the Company accrued $202 in accrued interest related to the notes.
Debt Discount and Original Issuance Costs
During the three months March 31, 2016 and 2016, the Company recorded debt discounts and original issuance costs totaling $176,916 and $0, respectively.
The debt discounts recorded in 2016 and 2015, 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.
The Company amortized $8,654 and $0 to interest expense in the three months ended march 31, 2016 and 2015 as follows:
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Three Months Ended
March 31, 2016
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Year Ended
December 31, 2015
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Debt discount - December 31, 2016
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$
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-
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|
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-
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Additional debt discount - Three months ended March 31, 2016
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176,916
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|
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-
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Amortization of debt discount - Three months ended March 31, 2016
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(8,654
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)
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-
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Debt discount March 31, 2016
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$
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168,262
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|
|
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-
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Debt Issuance Costs
During the three months ended March 31, 2016, the Company paid debt issue costs totaling $20,000.
During the three months ended March 31, 2016 and 2015, the Company amortized $978 and $0 of debt issue costs, respectively.
The following is a summary of the Company’s debt issue costs:
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Three Months Ended
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Three Months Ended
|
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March 31, 2016
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March 31, 2015
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Debt Issue Costs
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$
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-
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|
|
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-
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Additional debt issue costs - Three months ended March 31, 2016
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20,000
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-
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Amortization of debt issue costs - Three months ended March 31, 2016
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(978
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)
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-
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Debt issue costs - net
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$
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19,022
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|
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-
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NOTE 6 - RELATED PARTY TRANSACTIONS
On March 1, 2015, the Company entered into a Director Agreement with William Jamieson. The Company will reimburse the Director for reasonable travel and other incidental expenses incurred by the Director in performing his services and attending meetings as approved in advance by the Company. The Company shall award to the Director 166,560 shares of common stock pursuant to the Company's 2015 Stock Incentive over a two year period as directed in the Director Agreement. As of March 31, 2016, the Company issued 83,280 shares of common stock having a fair value of $36,435 ($0.30 - $0.55/share) based upon the most recent trading price per share of the Company’s common stock (See Note 8).
On August 14, 2015, the Company entered into an employment agreement with John Choo, the executive to serve as a Company President. The term of the agreement will continue until August 14, 2016, unless the employment is sooner terminated by the Board of Directors. As compensation for services, the employee will receive annual compensation of $60,000. In addition, the employee will receive 355,060 shares of common stock. In addition, the Company shall award to the Director 166,560 shares of common stock pursuant to the Company's 2015 Stock Incentive over a two year period as directed in the Director Agreement. As of March 31, 2016, the Company issued 355,060 shares in common stock having a fair value of $164,393 ($0.46/share) and 83,280 shares of common stock having a fair value of $36,435 ($0.30 - $0.55/share) based upon the most recent trading price per share of the Company’s common stock (See Note 8).
In May 2015, the Company issued 50,000 shares of Common stock to Chad Sykes, our CEO having a fair value of $25,500 ($0.51/share) based upon the most recent trading price per share of the Company’s common stock (See Note 8).
In November 17, 2015 the Company issued 125,000 shares of Common stock to the Company's legal counsel as part of legal fees having a fair value of $56,250 ($0.45/share) based upon the most recent trading price per share of the Company’s common stock (See Note 8).
NOTE 7 - SHAREHOLDERS' EQUITY
For the year ended December 31, 2015, none of the preferred stock was issued and outstanding.
Common Stock
On January 17, 2016, the Company issued 20,820 shares of Common Stock related to a Director Agreement with John Zimmerman, of common stock with a fair value of $9,369 ($0.45/share) based upon the most recent trading price per share of the Company’s stock.
On January 19, 2016, we issued 300,000 shares of Common Stock to Kodiak Capital Group, LLC as a commitment fee for a Two Million Dollar Equity Financing Agreement. The Company a fair value of $120,000 ($0.40/share) based upon the most recent trading price per share of the Company’s stock. The Company is subject to a Registration Rights Agreement which requires the Company to file a S1 Registration Statement with the SEC by March 31, 2016 and must receive a notice of effectiveness from the SEC prior to executing a Put Notice. The Purchase Price of the security is based on 80% of the Market Price based on the Put Date. Market price is calculated on the lowest daily volume weight average price for any trading day during the valuation period, which is the five days from the Put Notice to the Put Date.
On January 22, 2016, we issued 125,000 shares of Common Stock to Emerging Growth, LLC, to provide investor and public relations services. The Company recorded a fair value of $43,750 ($0.35/share) based upon the most recent trading price per share of the Company’s stock.
On February 29, 2016, we issued 41,640 shares of Common Stock related to a Director Agreement with John Choo and William Jamieson. The Company recorded fair value of $14,574 ($0.35/share) based upon the most recent trading price per share of the Company’s stock.
On March 14, 2016, we issued 11,330 shares to a consultant for services rendered, of common stock with a fair value of $4,986 ($0.44/share) based upon the most recent trading price per share of the Company’s stock.
On March 25, 2016, we issued 5,000 shares to a consultant for services rendered, of common stock with a fair value of $1,800 ($0.36/share) based upon the most recent trading price per share of the Company’s stock.
On March 22, 2016 the Company entered into a securities purchase agreement with Firstfire Global Opportunities Fund, LLC, and Rockwell Capital Partners Inc, relating to the issuance and sale of notes of $272,500 in aggregate principal amount including $250,000 actual payment of purchase price plus a 9% original issue discount, and an aggregate total of 50,000 shares of common stock valued at $23,500 ($0.47/share).
On March 23, 2016 the Company issued 100,000 shares of common stock to one U.S. accredited investor at $0.50 per share for cash totaling $50,000.
NOTE 8 - SUBSEQUENT EVENTS
On April 8, 2016 the Company entered into an employment agreement with John Zimmerman, the executive to serve as a Vice President of Business Development. The term of the agreement will continue until April 8, 2017, unless the employment is sooner terminated by the Board of Directors. As compensation for services, the employee will receive 100,000 shares of common stock and a percentage of closed projects as follows:
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·
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5% on Purchase Orders (facilities and production finishing hardware) minus taxes, fees and shipping for sole sourced projects that lead to a signed Design Build Agreement.
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·
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5% of Facilities portion of Purchase Order only on signed Design Build agreements brought in from Authorized Dealers.
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·
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Discretionary % split agreed to by Executive on a case-by-case basis for supporting services he chooses to bring into closing an agreement.
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·
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Compensation payments dispersed at the same % rate as the contractually agreed client payments schedule is received from the client/finance group (ie: 5% down, 50% at Purchase Order, 45% at shipping etc..)
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On April 14, 2016, we issued 100,000 shares of Common Stock related to an Executive Employment Agreement with John Zimmerman. The Company recorded fair value of $66,000 ($0.66/share) based upon the most recent trading price per share of the Company’s stock.
On April 18, 2016, we issued 20,820 shares of Common Stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $14,782 ($0.71/share) based upon the most recent trading price per share of the Company’s stock.
On May 9, 2016, the Company entered into a Director Agreement with Pawel Hardej. The Company will reimburse the Director for reasonable travel and other incidental expenses incurred by the Director in performing his services and attending meetings as approved in advance by the Company. The Company shall award to the Director 166,560 shares of common stock over a two year period as directed in the Director Agreement.
On May 9, 2016, Mr. William Jamieson resigned as a Director in the Company. Mr. Jamieson's resignation was not the result of any disagreement with us on any matter relating to our operations, policies (including accounting or financial policies) or practices. A majority of the Board of Directors decided to restructure the Board of Directors to better reflect the Company's current business direction and Mr. Jamieson voluntarily agreed to resign as part of that restructuring effort. Mr. Jamieson was issued 83,280 shares of common stock as part of an agreement with the Company and the Company recorded a fair value of $54,132 ($0.65/share) based upon the most recent trading price per share of the Company's comment stock.