Our common stock is quoted on the OTCQB
under the symbol “INQD”. The following table sets forth the quarterly high and low sale prices for our common shares
for the last two completed fiscal years and the subsequent interim periods. The prices set forth below represent interdealer quotations,
without retail markup, markdown or commission and may not be reflective of actual transactions. The following table sets forth,
for the periods indicated, the high and low closing sales prices of our common stock:
At January 26, 2018, we had 26,403,363
outstanding shares of common stock and approximately 73 shareholders of record. The number of record holders was determined from
the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of
bank, brokers and other nominees.
We have not paid any cash dividends
on our common stock to date. Any future decisions regarding dividends will be made by our Board of
Directors. We do not anticipate paying dividends in the foreseeable future but expect to retain earnings to
finance the growth of our business. Our Board of Directors has complete discretion on whether to pay
dividends. Even if our Board of Directors decides to pay dividends, the form, frequency and amount will depend upon our
future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and
other factors that the Board of Directors may deem relevant.
We do not have in effect any compensation
plans under which our equity securities are authorized for issuance.
We have not paid any cash dividends to
our shareholders. The declaration of any future cash dividends is at the discretion of our Board and depends upon our earnings,
if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is
our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our
business operations. Dividend rights of both our common and preferred shareholders will entitle them to the same dividend that
other shareholders of the same class receive.
The SEC has adopted regulations which generally
define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our common stock,
when and if a trading market develops, may fall within the definition of penny stock and be subject to rules that impose additional
sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 individually, or $300,000,
together with their spouse).
For transactions covered by these rules,
the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s
prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny
stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to
the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must
disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing
recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently,
the penny stock rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors
to sell their common stock in the secondary market.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Operations and Organization
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.
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).
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 estimate of percentage of complete on construction contracts in progress at each reporting period which
we rely on as a primary basis of revenue recognition, estimated useful lives of equipment for purposes of depreciation and the
valuation of common shares issued for services, equipment and the liquidation of liabilities.
Cash and Cash Equivalents
The Company considers all highly liquid instruments
with a maturity of three months or less to be cash and cash equivalents.
Accounts Receivable and Work in Process
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 December 31, 2016 and December 31, 2015. 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 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 (See Note 6).
Inventories
Inventory consists primarily of raw materials and packaging
materials and is valued at the lower of cost or market. Cost is determined using the weighted average method and average cost is
recomputed after each inventory purchase or sale. Inventory is periodically reviewed in order to identify obsolete or damaged inventory
and impaired values. Inventory is comprised of raw materials such as steel for our framing systems and packaging materials such
as boxes and pallets valued at $2,360 and $7,001 at December 31, 2016 and December 31, 2015, respectively.
Revenue Recognition
The Company will recognize revenue
on arrangements in accordance with FASB ASC No. 605, “Revenue Recognition”. In all cases, revenue is recognized only
when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability
of the resulting receivable is reasonably assured. The Company will generate revenue from the design and installation of the equipment.
Revenue from construction contracts
are reported under the percentage-of-completion method for financial statement purposes. The estimated revenue for each contract
reflected in the financial statements represent that percentage of estimated total revenue that costs incurred to date bear to
estimated total costs, based on the Company’s current estimates. With respect to contracts that extend over one or more accounting
periods, revisions in costs and revenue estimates during the course of the work are reflected in the period the revisions become
known. When current estimates of total contract costs indicate a loss, provision is made for the entire estimated loss.
The asset,
“Costs and
estimated earnings in excess of billings on uncompleted contracts,”
represents revenues recognized in excess of amounts
billed. The liability,
“Estimated earnings on uncompleted contracts,”
represents billings in excess of revenues
recognized.
Billing practices for these projects
are governed by the contract terms of each project based upon actual costs incurred, achievement of milestones, or pre-agreed schedules.
Billings do not necessarily correlate with revenue recognized under the percentage-of-completion method of accounting. With the
exception of claims and change orders that are in the process of being negotiated with customers, unbilled work is usually billed
during normal billing processes following achievement of the contractual requirements.
Stock-based Compensation
The Company follows ASC 718-10,
Stock Compensation, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods
or services, with a primary focus on transactions in which an entity obtains employee services in share-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).
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Convertible debt (exercise price - $0.30/share)
|
|
|
916,667
|
|
|
|
—
|
|
Series A convertible preferred shares (exercise price - $0.08/share)
|
|
|
1,633,987
|
|
|
|
—
|
|
|
|
|
2,550,654
|
|
|
|
—
|
|
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.
|
No assets, liabilities or equity instruments
were presented at fair value as of December 31, 2015, and as of December 31, 2016, the only liabilities presented at fair value
were notes payable of $209,786 and convertible notes payable of $122,383 which have been discounted for embedded derivatives using
the binomial lattice model and as such are treated as level II in the hierarchy of fair value measures.
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.
FASB 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 subsequent to 2008 remain open to examination
by U.S. federal and state tax jurisdictions.
Tax years 2016, 2015, 2014, 2013, 2012
and 2011, remain subject to examination by the IRS and respective states.
Property and Equipment
Property and equipment is recorded
at cost and depreciated or amortized using the straight-line method over the estimated useful life of the asset or the underlying
lease term for leasehold improvements, whichever is shorter. The estimated useful life by asset description is noted in the following
table:
Asset description
|
|
Estimated Useful Life (Years)
|
|
Furniture and equipment
|
|
3 - 5
|
|
Tooling equipment
|
|
10
|
|
Leasehold improvements
|
|
*
|
|
______________
|
|
|
|
* The shorter of 5 years or the life of the lease.
|
|
|
|
Additions are capitalized and maintenance
and repairs are charged to expense as incurred. Gains and losses on dispositions of equipment are reflected in other income.
Intangible Asset
The Company’s intangible assets
consist of domain names and is accounted for as an indefinite lived intangible asset in accordance with ASC 350 “Goodwill
and Other Intangible Assets” (“ASC 350”). It also includes software and is amortized over a 3-5-year period.
Domain names are not being amortized as
they are determined to have indefinite lives.
Intangible assets are reviewed
annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
There were no impairment charges taken during the years ended December 31, 2016 and 2015.
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 years ended December 31, 2016 and 2015 were:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Research and development expense
|
|
$
|
16,184
|
|
|
$
|
20,518
|
|
Advertising Expense
Advertising and promotional
costs are expensed as incurred. Advertising expense for the years ended December 31, 2016 and 2015, were:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Advertising expense
|
|
$
|
3,298
|
|
|
$
|
5,418
|
|
Reclassifications
Certain expense items have been
reclassified in the statement of operations for the year ended December 31, 2015, to conform to the reporting format adopted for
the year ended December 31, 2016.
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
will significantly impact future reporting of financial position and results of operations. Management is currently assessing implementation.
The FASB has issued Accounting
Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, clarifying the
definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they
have acquired or sold a business.
For public companies, the amendments
are effective for annual periods beginning after December 15, 2017, including interim periods within those periods.
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.
Several aspects of the accounting
for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards
as either equity or liabilities; and (c) classification on the statement of cash flows.
For public companies, the amendments
are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private
companies, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual
periods beginning after December 15, 2018. Early adoption is permitted for any organization in any interim or annual period.
The FASB has issued Accounting
Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.
The amendments clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation
guidance. The amendments do not change the core principle of the guidance in Topic 606.
The effective date and transition
requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should
apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein
(i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The effective date
for nonpublic entities is deferred by one year.
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 December 31, 2016 and December 31, 2015, the Company did not have any derivative
instruments that were designated as hedges.
Beneficial Conversion Feature
For conventional convertible
debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”)
and related debt discount.
When the Company records a BCF,
the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The
discount is amortized to interest expense over the life of the debt.
NOTE 2 - GOING CONCERN
As reflected in the accompanying
financial statements, the Company had a net loss of $2,075,000, net cash used in operations of $662,170 and has an accumulated
deficit of $3,996,772, for the year ended December 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 - PROPERTY
AND EQUIPMENT
Property and equipment consist
of the following at December 31, 2016 and 2015:
Classification
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Furniture and equipment
|
|
$
|
123,827
|
|
|
$
|
113,308
|
|
Tooling equipment
|
|
|
27,015
|
|
|
|
27,015
|
|
Leasehold improvements
|
|
|
57,780
|
|
|
|
57,780
|
|
Computer equipment
|
|
|
6,169
|
|
|
|
5,914
|
|
Research and development lab
|
|
|
63,177
|
|
|
|
59,482
|
|
Total
|
|
|
277,968
|
|
|
|
263,499
|
|
Less: Accumulated depreciation
|
|
|
(119,550
|
)
|
|
|
(69,762
|
)
|
Property and equipment, net
|
|
$
|
158,418
|
|
|
$
|
193,737
|
|
Depreciation expense for the years ended December 31, 2016 and
2015, totaled $51,484 and $46,444, respectively.
During the year ended December
31, 2016 the Company sold $46,626 of other assets which were equipment in exchange for $10,000 and recorded a loss on the sale
of equipment of $36,626. The Company also placed in service $2,157 from other assets. During the year ended December 31, 2015,
the Company sold $19,300 of other assets in exchange for $9,300 and recorded a loss on the sale of equipment of $10,050. The remaining
balance of Other Assets as of December 31, 2016 is $0.
NOTE 4 - COMMITMENTS &
CONTINGENCIES
A Cannabis Production Pilot Agreement
(“Agreement”) was entered into as of the 18th day of December 2014 by and between Indoor Harvest Corp. (“Indoor
Harvest”), a Texas Corporation, and Tweed Marijuana Inc. (“Tweed”), a Canadian company.
Tweed Marijuana Inc. is a TSX
Venture Exchange listed company. Its wholly owned subsidiaries Tweed Inc. and Tweed Farms Inc. (formerly Prime1 Construction Services
Corp.) are licensed producers of medical cannabis in Canada. The principal activities of Tweed are the production and sale of cannabis
through its wholly owned subsidiaries out of Tweed Inc.’s facility in Smiths Falls, Ontario and Tweed Farms Inc.’s facility in
Niagara-on-the-Lake, Ontario as regulated by the Marihuana for Medical Purposes Regulations.
Indoor Harvest will be provided
exclusive manufacturing rights for a period of 10 years on the New IP developed under the Agreement. All equipment manufactured
by Indoor Harvest will be provided to Tweed by way of a “cost plus agreement” not to exceed 15% allowable for profit.
Both parties are responsible for
the costs associated with meeting their obligations outlined in this Agreement. Under no circumstance, do Tweed’s costs exceed
those associated with the cost of plants, labor and general costs of production including water and electricity. However, any costs
related to third party laboratory analysis and testing of phytocannabinoids will be shared equally by both parties.
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.
Deferred rent payable at December
31, 2016 was $8,513. Deferred rent payable is the sum of the difference between the monthly rent payment and the straight-line
monthly rent expense of an operating lease that contains escalated payments in future periods.
Rent expense for the years ended
December 31, 2016 and 2015, were:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Rent expense
|
|
$
|
51,403
|
|
|
$
|
50,952
|
|
At December 31, 2016, rental commitments are as follows:
Years Ending December 31,
|
|
Amount
|
|
2017
|
|
$
|
53,424
|
|
2018
|
|
|
55,560
|
|
2019
|
|
|
18,876
|
|
Total
|
|
|
127,860
|
|
NOTE 5 - LOAN PAYABLE
On June 5, 2015, the Company
entered into a five-year loan agreement totaling $36,100. The loan carries an interest rate of 10.25%. During the year ended December
31, 2016 the Company repaid $6,130 of the principal and the remaining balance is $27,132.
NOTE 6 - CONCENTRATIONS
At December 31, 2016 and December 31, 2015, the Company
had concentrations of accounts receivable of:
Customer
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Tweed, Inc.
|
|
|
100
|
%
|
|
|
—
|
%
|
For the years ended December 31, 2016 and December
31, 2015, the Company had a concentration of sales of:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Customer
|
|
Revenue ($)
|
|
|
Percentage
|
|
|
Revenue ($)
|
|
|
Percentage
|
|
Tweed (Canopy Growth Corporation)
|
|
$
|
80,620
|
|
|
|
49
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
ER Michigan (Michigan State University)
|
|
$
|
28,385
|
|
|
|
17
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
Urbanika Farms
|
|
$
|
27,600
|
|
|
|
17
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
University of Arizona CEAC
|
|
$
|
18,626
|
|
|
|
11
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
GSS Colorado
|
|
$
|
5,000
|
|
|
|
3
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
PH Research Platform
|
|
$
|
3,765
|
|
|
|
2
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
Moon Flowers Farms
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
89,200
|
|
|
|
100
|
%
|
Total
|
|
$
|
163,996
|
|
|
|
100
|
%
|
|
$
|
89,200
|
|
|
|
100
|
%
|
For the year ended December 31,
2016, the Company had a purchasing concentration of $29,500 with 3 rd Coast Pump & Equipment, LLC, a manufacturer of custom
specialty pump and control packages totaling 37%.
For the year ended December 31, 2015, the
Company had a purchasing concentration of $44,970 with Illumitex, a manufacturer of LED lighting totaling 71%.
NOTE 7 - WORK IN PROCESS
Work in progress as of December 31, 2016 and December 31, 2015,
consisted of the following:
Description
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Costs incurred on uncompleted contracts
|
|
$
|
80,620
|
|
|
$
|
92,379
|
|
Estimated earnings
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
80,620
|
|
|
|
92,379
|
|
Less: Billings to date
|
|
|
(100,775
|
)
|
|
|
(112,310
|
)
|
Total
|
|
$
|
(20,155
|
)
|
|
$
|
(19,931
|
)
|
|
|
|
|
|
|
|
|
|
Reflected in balance sheet as:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on contracts in process
|
|
$
|
—
|
|
|
$
|
—
|
|
Billings in excess of costs and estimated earnings on contracts in process
|
|
|
20,155
|
|
|
|
19,931
|
|
Total
|
|
$
|
20,155
|
|
|
$
|
19,931
|
|
NOTE 8 - DEBT AND CONVERTIBLE LOAN 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 year ended December 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.
On September 22, 2016 the Company
identified the embedded derivatives related to the FirstFire Global Opportunities note. Due to the default provisions, the principal
was increased by 125% and interest to 15% per annum. During the year ended December 31, 2016, the Company converted debt and accrued
interest, totaling $203,351 into 2,581,561 shares of common stock. The remaining outstanding principal balance as of December 31,
2016 is $0.
On September 22, 2016 the Company
entered into a default provision with Rockwell Capital Partners, Inc. Due to the default provisions, the principal was increased
by 125% and interest to 15% per annum. During the year ended December 31, 2016, the Company repaid debt and accrued interest, totaling
$203,441. As of December 31, 2016, the loan is fully repaid.
On September 26, 2016 the Company
entered into a promissory note with Chuck Rifici Holdings, Inc., relating to the issuance of $225,500 in aggregate principal amount
including $204,000 actual payment of purchase price plus a 10% original issue discount. In conjunction with the issuance of the
Note, the Company also issued one-year warrants to purchase 250,000 shares of common stock at an exercise price of $0.30 per share,
the warrants were fair valued at $12,612 based upon the fair value of the proceeds received and allocated as debt discount to the
total proceeds. During the year ended the Company amortized $18,398 of debt discount related to the warrants (See Note 8). The
note bears an interest on the unpaid principal amount at the rate of 8% per annum. The note matures on March 23, 2017 and may be
prepaid in whole or in part at any time prior to the due date. 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 115% multiplied by the Principal Amount
plus accrued and unpaid interest on the Principal Amount to the Optional Prepayment Date plus Default Interest, if any. In the
event of the default the note is convertible into shares of common stock. The conversion price equals to 65% multiplied by the
lowest sales price of the common stock during the ten consecutive trading days period immediately preceding the trading day that
the Company receives a notice of conversion.
On October 19, 2016 and December
12, 2016, the Company entered into securities purchase agreements with FirstFire Global Opportunities Fund, LLC, and Rockwell Capital
Partners Inc, relating to the issuance and sale of notes of $275,000 in aggregate principal amount including $240,000 actual payment
of purchase price plus a 10% original issue discount.
The notes carry an interest
on the unpaid principal amount at the rate of 8% 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 October 19, 2016 note matures on April 19,
2017 and the December 12, 2016 note matures on June 12, 2017 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) 55% 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 year ended December 31, 2016, the Company received
$240,000 proceeds less the $10,000 in debt issue costs and $25,000 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 year ended December 31, 2016, the Company
accrued $10,334 in accrued interest related to outstanding the notes.
Debt Discount and Original Issuance Costs
During the year end December
31, 2016 and 2015, the Company recorded debt discounts totaling $451,946 and $0, 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
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 $283,615 and $0 to interest expense during
the years ended December 31, 2016 and 2015, as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Debt discount, beginning of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Additional debt discount and debt issue cost
|
|
|
417,834
|
|
|
|
—
|
|
Amortization of debt discount and debt issue cost
|
|
|
(265,217
|
)
|
|
|
—
|
|
Debt discount, end of period
|
|
$
|
152,617
|
|
|
$
|
—
|
|
Debt Issuance Costs
During the year ended December
31, 2016, the Company paid debt issue costs totaling $20,000. During the years ended December 31, 2016 and 2015, the Company amortized
$20,000 and $0 of debt issue costs, respectively. The following is a summary of the Company’s debt issue costs for the years
ended December 31, 2016 and 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Debt discount, beginning of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Additional debt discount
|
|
|
20,000
|
|
|
|
—
|
|
Amortization of debt discount
|
|
|
(20,000
|
)
|
|
|
—
|
|
Debt discount, end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
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.
Description
|
|
Amount
|
|
Derivative liabilities - December 31, 2015
|
|
$
|
—
|
|
Add fair value at the commitment date for convertible notes issued during the current year
|
|
|
270,331
|
|
Less derivatives due to conversion
|
|
|
(412,086
|
)
|
Fair value mark to market adjustment for derivatives
|
|
|
141,756
|
|
Derivative liabilities - December 31, 2016
|
|
$
|
—
|
|
The Company recorded the debt
discount to the extent of the gross proceeds raised, and expensed immediately the remaining value of the derivative as it exceeded
the gross proceeds of the note. The Company recorded derivative interest expenses for the year ended December 31, 2016 of $66,980.
The fair value at the commitment
and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions during
the current quarter:
Assumption
|
|
Commitment Date
|
|
|
Re-measurement Date
|
|
Expected dividends
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected volatility
|
|
|
210
|
%
|
|
|
219% - 286
|
%
|
Expected term in years
|
|
|
0.08
|
|
|
|
0.03 - 0.07
|
|
Risk free interest rate
|
|
|
0.09
|
%
|
|
|
0.12% - 0.27
|
%
|
NOTE 10 - RELATED PARTY
TRANSACTIONS
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.
As of December 31, 2016, the Company issued 20,820 shares of common stock having a fair value of $13,512 ($0.65/share) based upon
the most recent trading price per share of the Company’s common stock (See Note 11).
On April 8, 2016 the Company
entered into an employment agreement with John Zimmerman, 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:
|
●
|
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.
|
|
●
|
5% of Facilities portion of Purchase Order only on signed Design Build agreements brought in from Authorized Dealers.
|
|
●
|
Discretionary % split agreed to by Executive on a case-by-case basis for supporting services
he chooses to bring into closing an agreement.
|
|
●
|
Compensation payments dispersed at the same % rate as the contractually agreed client payments schedule
is received from the client/finance group (i.e.: 5% down, 50% at Purchase Order, 45% at shipping, etc.)
|
On April 8, 2016, we issued
100,000 shares of common stock related to an Executive Employment Agreement with John Zimmerman. The Company recorded fair value
of $54,500 ($0.545/share) based upon the most recent trading price per share of the Company’s stock (See Note 11).
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 December 31, 2016, the Company issued 83,280 shares of common stock having
a fair value of $36,435 ($0.30 - $0.5/share) based upon the most recent trading price per share of the Company’s common stock (See
Note 11).
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 $54,049($0.649/share) based upon the most recent trading price per share
of the Company’s common stock (See Note 11).
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. The Company is currently
in process extending the agreement. 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 December 31, 2016, the Company issued 355,060 shares in common stock having a fair value of $164,393 ($0.46/share) and 104,100
shares of common stock having a fair value of $48,723 ($0.30 - $0.59/share) based upon the most recent trading price per share
of the Company’s common stock (See Note 11).
In May 2015, the Company
issued 50,000 shares of common stock to Chad Sykes, our former 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 11).
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 11).
NOTE 11 - SHAREHOLDERS’ EQUITY
Convertible Series A Preferred Stock
On August 3, 2015, the Company’s Board of Directors signed a
written action that included the following:
|
●
|
The Board of Directors have approved the creation of 5,000,000 shares of
Series A Convertible Preferred Stock and to take the required steps to amend the Company’s articles of incorporation and
any other such SEC filings, or Company records as needed
|
|
●
|
The Board of Directors have approved a Certificate of Designation, Preferences
and Rights of the Series A Convertible Preferred Stock.
|
|
●
|
The stated value of each issued share of Series A Convertible Preferred Stock is $0.50.
|
During the third quarter, the
Company initiated a subscription agreement to offer to accredited investors up to 1,000,000 units of security. Each unit consists
one share of Series A Convertible Preferred Stock and one Series A warrant. The price per unit is $0.50 for a maximum aggregate
1,000,000 units and maximum aggregate proceeds of $500,000. The stated value of each preferred stock is $0.50 and there are no
dividends on the preferred stock. Each warrant excise price is $0.50 per share and shall be exercisable for a period of one year.
From August 15 to August 29,
2016, the Company subscribed 250,000 units to three investors for total proceeds of $125,000. Based on fair value of issued 250,000
warrants, $33,238 proceeds allocated as discount to the total $125,000 preferred stock.
The fair value of warrant calculation
based upon the following management assumption during the current quarter.
Assumption
|
|
|
Issue Date
|
|
|
Expected dividends:
|
|
|
—
|
%
|
|
Expected volatility:
|
|
|
153% - 156
|
%
|
|
Expected term (years):
|
|
|
1.00
|
|
|
Risk free interest rate:
|
|
|
0.56% - 0.62
|
%
|
|
Common Stock
On March 1, 2015, we 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. On May 31, 2015, the Company issued a total 20,820 shares of common stock with a
fair value of $10,618 ($0.51/share) based upon the most recent trading price per share of the Company’s stock. On August
31, 2015, the Company issued a total 20,820 shares of common stock with a fair value of $11,451 ($0.55/share) based upon the most
recent trading price per share of the Company’s stock. On November 30, 2015, the Company issued a total 20,820 shares of
common stock with a fair value of $6,246 ($0.30/share) based upon the most recent trading price per share of the Company’s
common stock.
On March 13, 2015, we entered
into a Director Agreement with John Choo. 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. On May 31, 2015, the Company issued a total 20,820 shares of common stock with a fair value of $10,618
($0.51/share) at the most recent trading price per share of the Company’s stock. On August 31, 2015, the Company issued a
total 20,820 shares of common stock with a fair value of $11,451 ($0.55/share) based upon the most recent trading price per share
of the Company’s stock. On November 30, 2015, the Company issued a total 20,820 shares of common stock with a fair value
of $6,246 ($0.30/share) based upon the most recent trading price per share of the Company’s stock. Effective August 14, 2015,
the Company entered into an employment agreement and the Company issued 355,060 shares of common stock to John Choo, our President
with fair value of $164,393 ($0.46/share) based upon the most recent trading price per share of the Company’s stock (See
Note 10).
On March 23, 2015, we entered
into a consulting agreement with Smallcapvoice.com to provide public and investor relations services for a period of 30 days starting
on March 31, 2015. The Company paid $25,000 in cash plus issued 25,000 shares with a fair value of $12,500 ($0.50/share) based
on the most recent closing price per share of our common stock traded on the OTCQB. For the three months ended March 31, 2015,
the Company recorded $25,000 paid in cash and 25,000 shares of common stock as a prepaid expense. As of June 30, 2015, the services
have been completed and the Company expensed the prepaid expense.
On April 15, 2015, we entered
into a Director Agreement with John Zimmerman. 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. On July 15, 2015, the Company issued 20,820 shares, 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 October 16, 2015, the Company
issued 20,820 shares, of common stock with a fair value of $9,992 ($0.48/share) based upon the recent trading price per share of
the Company’s stock
In May 2015, the Company issued
106,500 shares of common stock to various employees and consultants with a fair value of $54,315 ($0.51/share) based upon the most
recent trading price per share of the Company’s stock.
In May 2015, the Company
issued 50,000 shares of common stock to Chad Sykes, our former CEO with a fair value of $25,500 ($0.51/share) at the most
recent trading price per share of the Company’s stock (See Note 10).
On August 31, 2015, the Company
issued 12,000 shares of common stock for consulting expense with a fair value $6,600 ($0.55/share) based upon the most recent trading
price per share of the Company’s stock.
In November 17, 2015 the Company
issued 125,000 shares of common stock to the Company’s legal counsel as part of legal fees with a fair value of $56,250 ($0.45/share)
based upon the most recent trading price per share of the Company’s stock.
On December 1, 2015, the Company
issued 7,063 shares of common stock for consulting expense with a fair value of $3,178 ($0.45/share) based upon the most recent
trading price per share of the Company’s stock.
On December 7, 2015, the Company
issued 125,000 shares of common stock to FMW Media Works, Inc. in order to provide investor and public relations services. The
Company recorded a fair value of $47,500 ($0.38/share) based upon the most recent trading price per share of the Company’s
stock.
During the year ended December
31, 2015, the Company issued a total of 836,000 shares of common stock at $0.50 per share for cash totaling $418,000.
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 shares had 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.
The Company did not move forward with this Equity Financing Agreement and the commitment fee was expensed in the third quarter
as share-based compensation expense.
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.
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, 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 May 9, 2016, the Company
issued 83,280 shares of common stock related to a resignation of its Director Agreement William Jamieson. The Company recorded
fair value of $54,049 ($0.649/share) based upon the most recent trading price per share of the Company’s stock (See Note 11).
On June 29, 2016 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 $68,738 ($0.549/share)
based upon the most recent trading price per share of the Company’s common stock.
On July 11, 2016, we issued
50,403 shares of common stock to a consultant for services rendered having a fair value of $25,000 ($0.496044/share) based upon
the three-day average price prior to the issuance date of the Company’s stock.
On July 19, 2016, we issued 20,820
shares of common stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $14,366 ($0.6946/share)
based upon the most recent trading price per share of the Company’s stock.
On August 9, 2016 we issued 20,820
shares of common stock related to a Director Agreement with Paul Hardej. The Company recorded fair value of $13,512 ($0.64950/share)
based upon the most recent trading price per share of the Company’s stock.
On August 11, 2016, we issued 48,704 shares
of common stock to a consultant for services rendered having a fair value of $25,000 ($0.513355/share) based upon the three-day
average price prior to the issuance date of the Company’s stock.
On August 31, 2016 we issued
20,820 shares of common stock related to a Director Agreement with John Choo. The Company recorded fair value of $12,287 ($0.590246/share)
based upon the most recent trading price per share of the Company’s stock.
September 11, 2016, we issued 62,846 shares
of common stock to a consultant for services rendered having a fair value of $25,000 ($0.3978/share) based upon the three-day average
price prior to the issuance date of the Company’s stock.
October 11, 2016, we issued 89,928
shares of common stock to a consultant for services rendered having a fair value of $25,000 ($0.27/share) based upon the three-day
average price prior to the issuance date of the Company’s stock.
November 11, 2016, we issued 41,118 shares
of common stock to a consultant for services rendered having a fair value of $25,000 ($0.6080/share) based upon the three-day average
price prior to the issuance date of the Company’s stock.
December 11, 2016, we issued 58,411 shares
of common stock to a consultant for services rendered having a fair value of $25,000 ($0.4280/share) based upon the three-day average
price prior to the issuance date of the Company’s stock.
On October 17, 2016, we issued 9,800 shares
of common stock to a consultant for services rendered having a fair value of $2,940 ($0.30/share) based upon the most recent trading
price per share of the Company’s stock.
On October 20, 2016, we issued 20,820 shares
of common stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $9,577 ($0.46/share) based
upon the most recent trading price per share of the Company’s stock.
During the year ended December 31, 2016,
the Company converted debt and accrued interest, totaling $203,319 into 2,581,561 shares of common stock.
Common Stock Warrants
On September 26, 2016 the Company
entered into a promissory note with Chuck Rifici Holdings, Inc., relating to the issuance of $225,500 in aggregate principal amount
including $204,000 actual payment of purchase price plus a 10% original issue discount. In conjunction with the issuance of the
Note, the Company issued one-year warrants to purchase 250,000 shares of common stock at an exercise price of $0.30 per share
(See Note 8).
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
(in Years)
|
|
Balance, December 31, 2015
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Canceled/Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance September 30, 2017
|
|
|
|
500,000
|
|
|
$
|
0.40
|
|
|
$
|
0.94
|
|
For the year ended December 31,
2016, the following warrants were outstanding:
Exercise Price
Warrants Outstanding
|
|
Warrants Exercisable
|
|
Weighted Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value
|
$
|
0.30 - $0.50
|
|
|
|
500,000
|
|
|
|
0.69
|
|
|
$
|
32,500
|
|
Lattice Binomial model was used to value aggregate intrinsic
value.
NOTE 12 - INCOME TAXES
Indoor Harvest operates in the
United States; accordingly, federal and state income taxes have been provided based upon the tax laws and rates of the US. Deferred
taxes are determined based on the temporary differences between the financial statement and income tax bases of assets and liabilities
as measured by the enacted tax rates, which will be in effect when these differences reverse.
The components of deferred income tax assets and liabilities
as of December 31, 2016 and 2015 are as follows:
|
|
2016
|
|
2015
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
1,005,468
|
|
|
$
|
458,202
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Accelerated tax depreciation
|
|
|
19,183
|
|
|
|
16,911
|
|
Net deferred tax assets
|
|
|
986,285
|
|
|
|
441,291
|
|
Less: valuation allowance
|
|
|
(986,285
|
)
|
|
|
(441,291
|
)
|
Net
|
|
$
|
—
|
|
|
$
|
—
|
|
At December 31, 2016 and 2015, the Company has provided a full
valuation allowance for the deferred tax assets. The Company’s accumulated net operating loss as of December 31, 2016 of
$2,957,258, if not used, will begin to expire in 2036.
This loss carryforward expires according to the following schedule:
Year Ending December 31,
|
|
Amount
|
2033
|
|
|
$
|
217,074
|
|
2034
|
|
|
|
368,378
|
|
2035
|
|
|
|
761,615
|
|
2036
|
|
|
|
1,610,192
|
|
Total
|
|
|
$
|
2,957,258
|
|
NOTE 13 - SUBSEQUENT EVENTS
On January 2, 2017, Mr. Chad
Sykes resigned as Chief Executive Officer and was appointed Chief Innovation Officer by the Company’s Board of Directors.
On January 2, 2017, Mr. John Choo,
who is currently our acting President was appointed Chief Executive Officer and President by the Company’s Board of Directors.
On January 3, 2017, the Company
signed a binding LOI with Alamo CBD, LLC (“Alamo CBD”) to enter into discussions to combine and create
a medical cannabinoids pharmaceutical group. Pursuant to the terms, the Company was required as a precondition, to raise, as necessary,
up to $1,000,000 in capital by February 15, 2017, to pay off all existing debt, including convertible notes, owed by the Company
and to complete a spin-off of the Company’s produce related operations. On February 15, 2017, the Company and Alamo CBD extended
the terms of the preconditions until March 15, 2017.
January 16, 2017, we issued 145,740
shares of common stock related to a Director Agreement with Pawel Hardej. The Company recorded fair value of $64,126 ($0.44/share)
based upon the most recent trading price per share of the Company’s stock.
January 16, 2017, we issued 41,640
shares of common stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $18,322 ($0.44/share)
based upon the most recent trading price per share of the Company’s stock.
January 16, 2017, we issued 62,460
shares of common stock related to a Director Agreement with John Choo. The Company recorded fair value of $27,482 ($0.44/share)
based upon the most recent trading price per share of the Company’s stock.
January 17, 2017, we issued 800,000
shares of common stock to Lyons Capital, LLC for a six month consulting and road show services agreement. The Company recorded
fair value of $352,000 ($0.44/share) based upon the most recent trading price per share of the Company’s stock.
From February 22, 2017 through
March 15, 2017, the Company sold, in reliance upon Regulation D Rule 506, a total of 2,060,000 shares of common stock to 17 U.S.
accredited investors at $0.40 per share for cash totaling $824,000.
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 Series A Preferred Stock Designation. This waives and removes what is known as “full ratchet protection”
provisions for adjustments in the Conversion Price and formula. 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 416,667 shares of common stock. As
a result of this action, there currently are no Series A Convertible Preferred Stock issued and outstanding.
On March 20, 2017, the Company
settled $177,604 in principal and interest, plus 125% multiplied by the Principal Amount of $137,500 plus accrued interest of $4,583
on the Principal Amount of a Promissory note with FirstFire Global Opportunities Fund, LLC (“FirstFire”) originally dated
October 19, 2016. The Company settled the amount owed by paying $77,604 in cash and by issuing 333,333 shares of common stock at
the fixed conversion price of $0.30 per share for a total value of $100,000. The Company was released from any further liability
under the FirstFire Note upon delivery of these amounts of cash and stock.
On March 20, 2017, the Company
settled $175,313 in principal and interest, plus 125% multiplied by the Principal Amount of $137,500 plus accrued interest of $2,750
on the Principal Amount of a Promissory note with FirstFire originally dated December 14, 2016. The Company settled the amount
owed by paying $175,313 in cash. The Company was released from any further liability under this FirstFire Note upon payment of
this amount.
On March 20, 2017, the Company
settled $269,498 in principal and interest, plus 115% multiplied by the Principal Amount of $225,500 plus accrued interest of $8,846
on the Principal Amount of a Promissory note with Chuck Rifici Holdings, Inc. originally dated September 26, 2016. The Company
settled the amount owed by paying $269,498 in cash. The Company was released from any further liability under this Rifici Note
upon payment of this amount.
On
March 23, 2017, the Company entered into a Contractual Joint Venture Agreement by and between Vyripharm Enterprises, LLC (“Vyripharm”)
and Alamo CBD, collectively the Parties, pursuant to which the parties agreed to participate in an unincorporated joint venture
(the “Joint Venture”) for the following business purposes:
The
parties will work together to enhance the ability of Alamo CBD to apply for and obtain licensure, or a permit, to grow and/or
dispense marijuana products for medical and/or consumer use, as the case may be:
|
●
|
In
Texas, pursuant to the Texas Compassionate Use Act, as may be amended;
|
|
●
|
In
Colorado, pursuant to recent Colorado legislation permitting foreign ownership of entities
that grow and/or dispense marijuana products for medical and/or consumer use; and
|
|
●
|
Pursuant
to recent United States Drug Enforcement Administration regulations which expand the
opportunities for entities providing research involving marijuana and its chemical constituents,
as referenced in 21 U.S.C. 822(a)(1) and 21 U.S.C. 823(a), et. seq.
|
To
establish Alamo CBD as a supplier of a variety of medical use cannabis oil to Vyripharm for Vyripharm’s use in conducting
research and development to create novel pharmaceutical and radiopharmaceutical compounds designed to image and treat certain
debilitating diseases including, but not limited to epilepsy, post-traumatic stress disorder, Alzheimer’s, ALS, and other
neurodegenerative diseases; and to establish Indoor Harvest as the project developer and engineering, procurement and construction
group, in which Indoor Harvest is responsible for costs and efforts related to Alamo CBD’s efforts to become licensed under the
Texas Compassionate Use Act and to meet its obligations under this Joint Venture agreement.
The
initial term of the Joint Venture shall be five (5) years following the Effective Date, and the Agreement may be extended beyond
the Initial Term by mutual consent of the Parties.
On
March 24, 2017, the Company issued and sold an 8% Fixed Convertible Promissory Note to Tangiers Global, LLC (“Tangiers”),
a Wyoming limited liability Company, in the aggregate principal amount of up to $550,000, with an initial consideration of $275,000
in aggregate principal amount including $250,000 actual payment of purchase price plus a 10% original issue discount.
SUPPLEMENTARY
DATA
The
Company is a smaller reporting Company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information
required under this item.
INDOOR
HARVEST CORP
|
BALANCE
SHEETS
|
(UNAUDITED)
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,279
|
|
|
$
|
78,219
|
|
Accounts receivable
|
|
|
—
|
|
|
|
34,853
|
|
Other receivable
|
|
|
—
|
|
|
|
7,323
|
|
Inventory
|
|
|
2,360
|
|
|
|
2,360
|
|
Total current assets
|
|
|
7,639
|
|
|
|
122,755
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment, net
|
|
|
121,205
|
|
|
|
158,418
|
|
Security deposit
|
|
|
12,600
|
|
|
|
12,600
|
|
Intangible asset, net
|
|
|
6,321
|
|
|
|
7,604
|
|
Goodwill
|
|
|
890,961
|
|
|
|
—
|
|
Total assets
|
|
$
|
1,038,726
|
|
|
$
|
301,377
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
97,369
|
|
|
$
|
55,797
|
|
Convertible note payable, net of debt discount of $27,013 and $152,617, respectively
|
|
|
247,986
|
|
|
|
122,383
|
|
Note payable, net of discount of $0 and $15,714, respectively
|
|
|
—
|
|
|
|
209,786
|
|
Accrued payroll
|
|
|
3,722
|
|
|
|
7,142
|
|
Deferred rent
|
|
|
6,808
|
|
|
|
8,513
|
|
Note payable - current portion
|
|
|
7,330
|
|
|
|
6,790
|
|
Billing in excess of costs and estimated earnings
|
|
|
—
|
|
|
|
20,155
|
|
Total current liabilities
|
|
|
363,215
|
|
|
|
430,566
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
14,775
|
|
|
|
20,342
|
|
Total liabilities
|
|
|
377,990
|
|
|
|
450,908
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit):
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred stock: $0.01 par value, 5,000,000 shares authorized; 750,000 and 250,000 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
7,500
|
|
|
|
2,500
|
|
Common stock: $0.001 par value, 50,000,000 shares authorized; 24,657,360 and 15,213,512 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
24,657
|
|
|
|
15,213
|
|
Additional paid-in capital
|
|
|
6,625,547
|
|
|
|
3,829,528
|
|
Accumulated deficit
|
|
|
(5,996,968
|
)
|
|
|
(3,996,772
|
)
|
Total stockholders’ equity (deficit)
|
|
|
660,736
|
|
|
|
(149,531
|
)
|
Total liabilities and stockholders’ equity (deficit)
|
|
$
|
1,038,726
|
|
|
$
|
301,377
|
|
The
Accompanying Notes are an Integral Part of these Financial Statements
INDOOR
HARVEST CORP
|
STATEMENTS OF
OPERATIONS
|
(UNAUDITED)
|
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,245
|
|
|
$
|
21,210
|
|
|
$
|
4,245
|
|
|
|
83,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
1,165
|
|
|
|
11,278
|
|
|
|
15,594
|
|
|
|
55,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
3,080
|
|
|
|
9,932
|
|
|
|
(11,349
|
)
|
|
|
28,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
$
|
12,792
|
|
|
$
|
12,958
|
|
|
$
|
39,046
|
|
|
|
38,221
|
|
Research and development
|
|
|
—
|
|
|
|
6,376
|
|
|
|
1,625
|
|
|
|
15,047
|
|
Professional fees
|
|
|
8,107
|
|
|
|
11,355
|
|
|
|
374,707
|
|
|
|
87,277
|
|
General and administrative expenses
|
|
|
157,592
|
|
|
|
283,721
|
|
|
|
910,400
|
|
|
|
918,929
|
|
Total operating expenses
|
|
|
178,491
|
|
|
|
314,410
|
|
|
|
1,325,778
|
|
|
|
1,059,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(175,411
|
)
|
|
|
(304,478
|
)
|
|
|
(1,337,127
|
)
|
|
|
(1,031,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
7,177
|
|
|
|
52,324
|
|
|
|
7,192
|
|
|
|
52,347
|
|
Loss on investment in joint venture
|
|
|
—
|
|
|
|
—
|
|
|
|
(250,000
|
)
|
|
|
—
|
|
Interest expense
|
|
|
(6,141
|
)
|
|
|
(3,674
|
)
|
|
|
(125,373
|
)
|
|
|
(7,862
|
)
|
Derivative expense
|
|
|
—
|
|
|
|
(66,980
|
)
|
|
|
—
|
|
|
|
(66,980
|
)
|
Amortization of debt offering costs
|
|
|
—
|
|
|
|
(9,131
|
)
|
|
|
—
|
|
|
|
(20,000
|
)
|
Amortization of debt discount
|
|
|
(45,186
|
)
|
|
|
(234,883
|
)
|
|
|
(294,888
|
)
|
|
|
(331,034
|
)
|
Loss on debt settlement
|
|
|
—
|
|
|
|
(131,944
|
)
|
|
|
—
|
|
|
|
(131,944
|
)
|
Loss on sale of equipment
|
|
|
—
|
|
|
|
(36,626
|
)
|
|
|
—
|
|
|
|
(36,626
|
)
|
Change in fair value of embedded derivative liability
|
|
|
|
|
|
|
(44,661
|
)
|
|
|
—
|
|
|
|
(44,661
|
)
|
Total other income (expense)
|
|
|
(44,150
|
)
|
|
|
(475,575
|
)
|
|
|
(663,069
|
)
|
|
|
(586,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(219,561
|
)
|
|
$
|
(780,053
|
)
|
|
$
|
(2,000,196
|
)
|
|
|
(1,618,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.11
|
)
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
19,929,506
|
|
|
|
12,338,016
|
|
|
|
18,644,318
|
|
|
|
11,980,169
|
|
The
Accompanying Notes are an Integral Part of these Financial Statements
INDOOR
HARVEST CORP
|
STATEMENTS OF
STOCKHOLDERS’ EQUITY (DEFICIT)
|
(UNAUDITED)
|
|
|
Series A Convertible Preferred Stock, $0.01 Par Value
|
|
|
Common Stock, $0.001
Par
Value
|
|
|
Additional
Paid
in
|
|
|
Accumulated
|
|
|
Total Stockholders’ Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balances, December 31, 2016
|
|
|
250,000
|
|
|
$
|
2,500
|
|
|
|
15,213,512
|
|
|
$
|
15,213
|
|
|
$
|
3,829,528
|
|
|
$
|
(3,996,772
|
)
|
|
$
|
(149,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For cash
|
|
|
—
|
|
|
|
—
|
|
|
|
2,060,000
|
|
|
|
2,060
|
|
|
|
821,940
|
|
|
|
—
|
|
|
|
824,000
|
|
For services
|
|
|
—
|
|
|
|
—
|
|
|
|
1,549,840
|
|
|
|
1,550
|
|
|
|
565,380
|
|
|
|
—
|
|
|
|
566,930
|
|
Convertible debt converted into common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
333,333
|
|
|
|
333
|
|
|
|
99,667
|
|
|
|
—
|
|
|
|
100,000
|
|
Beneficial conversion feature
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
95,333
|
|
|
|
—
|
|
|
|
95,333
|
|
Conversion of preferred stock into common stock
|
|
|
(250,000
|
)
|
|
|
(2,500
|
)
|
|
|
416,667
|
|
|
|
417
|
|
|
|
35,321
|
|
|
|
—
|
|
|
|
33,238
|
|
For Alamo CBD merger
|
|
|
—
|
|
|
|
—
|
|
|
|
7,584,008
|
|
|
|
7,584
|
|
|
|
1,433,377
|
|
|
|
—
|
|
|
|
1,440,961
|
|
For Alamo CBD merger
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,500,000
|
)
|
|
|
(2,500
|
)
|
|
|
(547,500
|
)
|
|
|
—
|
|
|
|
(550,000
|
)
|
Issuance of preferred stock for cash
|
|
|
750,000
|
|
|
|
7,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
292,501
|
|
|
|
—
|
|
|
|
300,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the nine months ended September 30, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,000,196
|
)
|
|
|
(2,000,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2017
|
|
|
750,000
|
|
|
$
|
7,500
|
|
|
|
24,657,360
|
|
|
$
|
24,657
|
|
|
$
|
6,625,547
|
|
|
$
|
(5,996,968
|
)
|
|
$
|
660,736
|
|
The
Accompanying Notes are an Integral Part of these Financial Statements
INDOOR HARVEST
CORP
|
CONDENSED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
For the nine months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,000,196
|
)
|
|
$
|
(1,618,057
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
39,046
|
|
|
|
38,220
|
|
Loss on the sale of other assets
|
|
|
—
|
|
|
|
36,626
|
|
Loss on debt modifications
|
|
|
—
|
|
|
|
131,944
|
|
Amortization of original issue discount
|
|
|
—
|
|
|
|
22,500
|
|
Amortization of debt discount
|
|
|
294,888
|
|
|
|
308,534
|
|
Amortization of debt offering costs
|
|
|
—
|
|
|
|
20,000
|
|
Derivative expense
|
|
|
—
|
|
|
|
66,980
|
|
Stock issued for services - related party
|
|
|
159,930
|
|
|
|
183,693
|
|
Stock issued for services
|
|
|
407,000
|
|
|
|
194,215
|
|
Change in fair value of derivative liability
|
|
|
—
|
|
|
|
44,661
|
|
Change in operating liability:
|
|
|
|
|
|
|
|
|
Decrease in deferred rent
|
|
|
(1,705
|
)
|
|
|
(696
|
)
|
Decrease in accounts receivable
|
|
|
34,853
|
|
|
|
59,200
|
|
(Increase) decrease in other receivable
|
|
|
7,323
|
|
|
|
(7,323
|
)
|
Decrease in inventory
|
|
|
—
|
|
|
|
4,292
|
|
Decrease in prepaid expense
|
|
|
—
|
|
|
|
1,697
|
|
Increase in accounts payable and accrued expenses
|
|
|
41,572
|
|
|
|
24,669
|
|
Increase (decrease) in accrued payroll
|
|
|
(3,420
|
)
|
|
|
4,327
|
|
Increase (decrease) in costs and estimated earnings in excess of billings
|
|
|
(20,155
|
)
|
|
|
15,049
|
|
Decrease in accrued compensation
|
|
|
—
|
|
|
|
(3,470
|
)
|
Net cash used in operating activities
|
|
|
(1,040,864
|
)
|
|
|
(472,939
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of equipment
|
|
|
—
|
|
|
|
10,000
|
|
Purchase of equipment and software
|
|
|
(550
|
)
|
|
|
(6,988
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(550
|
)
|
|
|
3,012
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments of note payable
|
|
|
(230,526
|
)
|
|
|
(4,539
|
)
|
Proceeds from convertible note payable, less offerings costs and OID costs paid
|
|
|
—
|
|
|
|
230,000
|
|
Repayment of convertible note
|
|
|
(175,000
|
)
|
|
|
(201,093
|
)
|
Proceeds from demand note payable, less OID costs paid
|
|
|
250,000
|
|
|
|
204,000
|
|
Issuance of preferred stock for cash
|
|
|
300,001
|
|
|
|
125,000
|
|
Issuance of common stock for cash
|
|
|
824,000
|
|
|
|
50,000
|
|
Net cash provided by financing activities
|
|
|
968,474
|
|
|
|
403,368
|
|
|
|
|
|
|
|
|
|
|
Decrease cash and cash equivalents
|
|
|
(72,940
|
)
|
|
|
(66,559
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
78,219
|
|
|
|
100,906
|
|
Cash and cash equivalents at end of period
|
|
$
|
5,279
|
|
|
$
|
34,347
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,917
|
|
|
$
|
2,405
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Beneficial conversion feature
|
|
$
|
95,333
|
|
|
$
|
154,416
|
|
Shares issued for debt issuance costs
|
|
$
|
—
|
|
|
$
|
143,500
|
|
Shares issued on conversion of convertible debt
|
|
$
|
—
|
|
|
$
|
103,351
|
|
Reclass of promissory note to convertible note
|
|
|
—
|
|
|
|
203,351
|
|
Settlement of convertible note into common shares
|
|
$
|
100,000
|
|
|
$
|
—
|
|
Conversion of preferred shares into common shares
|
|
$
|
2,500
|
|
|
$
|
—
|
|
Shares issued due to merger with Alamo CBD
|
|
$
|
890,961
|
|
|
$
|
—
|
|
The
Accompanying Notes are an Integral Part of these Financial Statements
INDOOR
HARVEST CORP
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).
It
is management’s opinion, however, that all material adjustments (consisting of normal and recurring adjustments) have been made
which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative
of the results to be expected for the year.
Indoor
Harvest Corp. (the “Company,”) is a Texas corporation formed on November 23, 2011. From its inception, the Company,
through its brand name Indoor Harvest ®, specialized in equipment design, development, marketing and direct-selling of commercial
grade aeroponics fixtures and supporting systems for use in urban Controlled Environment Agriculture (“CEA”) and Building
Integrated Agriculture (“BIA”).
In
the first half of 2017, the Company transitioned from an engineering, procurement, and construction management company for the
vertical farming industry, into a developer of personalized cannabis medicines, and a provider of advanced cultivation technology,
methods, and processes for cannabis production. Through its historical and current business and its brand name, Indoor Harvest
®, the Company continues to be a full-service state of the art design-build engineering firm for the indoor farming industry.
These
unaudited interim condensed financial statements should be read in conjunction with the financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on April 17, 2017.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Significant
estimates include but are not limited to the estimate of percentage of completion on construction contracts in progress at each
reporting period which we rely on as a primary basis of revenue recognition, estimated useful lives of equipment for purposes
of depreciation and the valuation of common shares issued for services, equipment and the liquidation of liabilities.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with a maturity of three months or less to be cash and cash equivalents.
Accounts
Receivable and Work in Progress
Work
in progress consists of costs recorded and revenue earned on projects recognized on the percentage of completion method for work
performed on contracts in progress at September 30, 2017, and December 31, 2016. The Company records revenue based on contractual
agreements entered into at the inception of construction contracts. Amounts are payable from customers based on milestones established
in each contract. Amounts are billed at milestone completion and are reflected as accounts receivable when billed. Costs and estimated
earnings are accumulated on projects in process and compared to amounts billed based on the percentage of completion method of
accounting (cost to cost). Costs incurred in excess of amounts billed and related profit recognized are reflected as an asset
on the balance sheet as costs and estimated earnings in excess of billings. Unearned billings are reflected in the balance sheet
as a liability as billings in excess of costs and estimated earnings on projects in process (See Note 6).
Inventories
Inventory
consists primarily of raw materials and packaging materials and is valued at the lower of cost or market. Cost is determined using
the weighted average method and the average cost is recomputed after each inventory purchase or sale. Inventory is periodically
reviewed to identify obsolete or damaged inventory and impaired values. Inventory is comprised of raw materials such as steel
for our framing systems and packaging materials such as boxes and pallets valued at $2,360 at both September 30, 2017, and December
31, 2016.
Revenue
Recognition
The
Company recognizes revenue on arrangements in accordance with the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) No. 605, Revenue Recognition. In all cases, revenue is recognized only when the price
is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting
receivable is reasonably assured. The Company will generate revenue from the design and installation of the equipment and licensing
of technology.
Revenue
from construction contracts are reported under the percentage of completion method for financial statement purposes. The estimated
revenue for each contract reflected in the financial statements represent that percentage of estimated total revenue that costs
incurred to date bear to estimated total costs, based on the Company’s current estimates. With respect to contracts that
extend over one or more accounting periods, revisions in costs and revenue estimates during the work are reflected in the period
the revisions become known. When current estimates of total contract costs indicate a loss, provision is made for the entire estimated
loss.
The
asset, “costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized
in excess of amounts billed. The liability, “Estimated earnings on uncompleted contracts,” represents billings in
excess of revenues recognized.
Billing
practices for these projects are governed by the contract terms of each project based upon actual costs incurred, achievement
of milestones, or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized under the percentage of
completion method of accounting. Except for claims and change orders that are in the process of being negotiated with customers,
unbilled work is usually billed during normal billing processes following achievement of the contractual requirements.
Stock
Based Compensation
The
Company recognizes stock-based compensation in accordance with ASC 718-10, Stock Compensation. ASC 718-10 focuses on transactions
in which an entity exchanges its equity instruments for goods or services, with a primary focus in which an entity obtains employee
services in stock-based payment transactions. ASC 718-10 requires measurement of the cost of employee services received in exchange
for an award of equity instruments based on the grant date fair value of the award (with limited exceptions).
Basic
Loss per Share
Basic
loss per share amounts are calculated based on the weighted average number of shares of common stock outstanding during each period.
Diluted earnings per share is based on the weighted average numbers of shares of common stock outstanding for the periods, including
dilutive effects of stock options, warrants granted and convertible preferred stock. Dilutive options and warrants that are issued
during a period or that expire or are canceled during a period are reflected in the computations for the time they were outstanding
during the periods being reported. Since the Company has incurred losses for all periods, the impact of the common stock equivalents
would be antidilutive and therefore are not included in the calculation.
The
Company has the following common stock equivalents for the nine months ended September 30, 2017 and 2016, respectively:
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Convertible debt (exercise price - $0.07/share)
|
|
|
|
—
|
|
|
|
1,307,190
|
|
Convertible debt (exercise price - $0.30/share)
|
|
|
|
916,667
|
|
|
|
—
|
|
Series A convertible preferred shares (exercise price - $0.08/share)
|
|
|
|
—
|
|
|
|
3,267,974
|
|
|
|
|
|
916,667
|
|
|
|
4,575,164
|
|
Fair
Value of Financial Instruments
The
Company adopted ASC 820 Fair Value Measurements for financial and non-financial assets and liabilities. The adoption did not have
a material impact on our results of operations, financial position or liquidity. This standard defines fair value and provides
guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements,
but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not
apply to measurements related to share-based payments. The guidance utilizes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three
levels:
|
●
|
Level
1: Observable inputs such as quoted prices (unadjusted) in active markets for identical
assets or liabilities.
|
|
●
|
Level
2: Inputs other than quoted prices that are observable, either directly or indirectly.
These include quoted prices for similar assets or liabilities in active markets and quoted
prices for identical or similar assets or liabilities in markets that are not active.
|
|
●
|
Level
3: Unobservable inputs in which little or no market data exists, therefore developed
using estimates and assumptions developed by us, which reflect those that a market participant
would use.
|
Carrying
amounts reported on the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value due to their relatively short maturity. Debt classified as Level 2 in the fair value hierarchy represent
note payable, net of debt discount, of $0 and $209,786 at September 30, 2017 and December 31, 2016, respectively, and convertible
notes payable of $247,986 and $122,383 at September 30, 2017 and December 31, 2016, respectively.
Income
Taxes
The
Company accounts for income taxes pursuant to ASC 740 Income Taxes. This standard requires a company to determine whether it is
more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If
the more likely than not threshold is met, a company must measure the tax position to determine the amount to recognize in the
financial statements. Deferred income taxes are recorded for temporary differences between financial statement carrying amounts
and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect
for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not
that some or all the deferred tax asset will not be realized.
ASC
740 implements a process for measuring those tax positions that meet the recognition threshold of being ultimately sustained upon
examination by the taxing authorities. There are no uncertain tax positions taken by the Company on its tax returns. The Company
files tax returns in the U.S. and states in which it has operations and is subject to taxation.
Tax
years 2016, 2015, 2014, 2013, 2012 and 2011, remain subject to examination by the Internal Revenue Service (“IRS”)
and respective states.
Property
and Equipment
Property
and equipment is recorded at cost and depreciated or amortized using the straight-line method over the estimated useful life of
the asset or the underlying lease term for leasehold improvements, whichever is shorter. The estimated useful life by asset description
is noted in the following table:
Asset
Description
|
|
Estimated
Useful Life (Years)
|
|
Furniture and equipment
|
|
3 - 5
|
|
Tooling
equipment
|
|
10
|
|
Leasehold
improvements
|
|
*
|
|
*
The shorter of 5 years or the life of the lease.
Additions
are capitalized and maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions of equipment
are reflected in other income.
Goodwill
and Other Intangible Assets
Goodwill
and indefinite-lived intangible assets are not amortized but are evaluated for impairment annually or more often if indicators
of a potential impairment are present. In connection with the merger with Alamo CBD LLC, the Company has subsumed into goodwill
all intangible assets acquired in the transaction. Indefinite-lived intangible assets consist of the Company’s domain name.
Finite-lived intangible assets include software and is amortized over a 3 to 5 year period.
In
accordance with ASC 350 Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible assets are reviewed annually
for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There
were no impairment charges taken during the nine months ended September 30, 2017 and 2016.
Intangible
assets consist of the following at September 30, 2017 and December 31, 2016:
Classification
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Domain name
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
Facilities Manager’s Package Online (software)
|
|
|
1,022
|
|
|
|
1,022
|
|
MLC CD Systems (software)
|
|
|
7,560
|
|
|
|
7,560
|
|
Total
|
|
|
10,582
|
|
|
|
10,582
|
|
Less: Accumulated amortization
|
|
|
(4,261
|
)
|
|
|
(2,978
|
)
|
Intangible assets, net
|
|
$
|
6,321
|
|
|
$
|
7,604
|
|
Patent
and Patent Application Expenses
Although
the Company believes that its patent and underlying technology will have continuing value, the amount of future benefits to be
derived from the patent is uncertain. Therefore, patent costs are expensed as incurred.
Research
and Development
Research
and development expenditures are charged to expense as incurred. Research and development expense for the three and nine months
ended September 30, 2017 and 2016 are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Research and development expense
|
|
$
|
—
|
|
|
$
|
6,376
|
|
|
$
|
1,625
|
|
|
$
|
15,047
|
|
Advertising
Expense
Advertising
and promotional costs are expensed as incurred. Advertising expense for the three and nine months ended September 30, 2017 and
2016, are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Advertising expense
|
|
$
|
3,298
|
|
|
$
|
5,418
|
|
|
$
|
16,185
|
|
|
$
|
67,079
|
|
Recent
Accounting Pronouncements
The
Company has implemented all new accounting pronouncements that are in effect as of the date of the issuance of these financial
statements. The following pronouncements may impact future reporting of financial position and results of operations. Management
is currently assessing implementation.
The
FASB issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805) clarifying the definition of a business.
The amendment affects all companies and other reporting organizations that must determine whether they have acquired or sold a
business. For public companies, the amendment is effective for annual periods beginning after December 15, 2017, including interim
periods within those periods.
The
FASB issued ASU No. 2016-02, Leases (Topic 842) providing new lease accounting guidance. The standard requires the recognition
of right-of-use assets and lease liabilities for all long-term leases, including operating leases, on the balance sheet. The standard
also provides additional guidance on the measurement of the right-of-use assets and lease liabilities and will require enhanced
disclosures about the Company’s leasing arrangements. Under current accounting standards, substantially all the Company’s
leases are considered operating leases and, as such, are not recognized on the Consolidated Balance Sheet. This standard is effective
for the Company beginning on January 1, 2019, with early adoption permitted.
The
FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) providing improved accounting for employee share-based
payments. The standard affects all organizations that issue share-based payment awards to their employees. For public companies,
the amendment is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
The
FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). This standard requires an entity to recognize
the amount of revenue to which it expects to be entitled to for the transfer of promised goods or services to customers. The new
standard was originally effective on January 1, 2017; however, in July 2015 the FASB decided to defer the effective date by one
year. Early application is not permitted but reporting entities may choose to adopt the standard as of the original effective
date. The standard permits the use of either the retrospective or cumulative effect transition method.
Derivative
Liability
The
Company accounts for derivative instruments in accordance with ASC 815 Derivatives and Hedging, which establishes accounting and
reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other
financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless
of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the
derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At September
30, 2017 and December 31, 2016, the Company did not have any derivative instruments that were designated as hedges.
Beneficial
Conversion Feature
For
conventional convertible debt where the rate of conversion is below market value, the Company records a beneficial conversion
feature (“BCF”) and related debt discount. When the Company records a BCF, the relative fair value of the BCF is recorded
as a debt discount against the face amount of the respective debt instrument. The discount is amortized to interest expense over
the life of the debt.
NOTE
2 - GOING CONCERN
As
reflected in the accompanying unaudited financial statements, the Company had a net loss of $2,000,196, net cash used in operations
of $1,040,864 and has an accumulated deficit of $5,996,968 for the nine months ended September 30, 2017. These factors raise substantial
doubt about the Company’s ability to continue as a going concern.
The
ability of the Company to continue as a going concern is dependent on Management’s plans which include potential asset acquisitions,
mergers or business combinations with other entities, further implementation of its business plan and continuing to raise funds
through debt or equity financings. The Company will likely rely upon related party debt or equity financing to ensure the continuing
existence of the business.
The
Company’s business plan is to engage in the design and development of commercial grade aeroponics fixtures and supporting
systems for use in CEA and BIA cannabis production and to develop personalized cannabis medicines, as a provider of advanced cultivation
technology, methods and processes. The Company provides the cannabis industry production platforms for CEA and BIA production.
During the next twelve months, the Company’s strategy is to:
|
●
|
Complete
ongoing product development;
|
|
●
|
Advance
product assembly;
|
|
●
|
Construct
a research cultivation site for marketing and research and development purposes;
|
|
●
|
Off
design-build services to partners; and
|
|
●
|
Establish
its long-term strategy to directly sell, lease, and license its patent-pending cannabis
cultivation technologies and methods.
|
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating
to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be
unable to continue as a going concern.
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at September 30, 2017 and December 31, 2016:
Classification
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Furniture and equipment
|
|
$
|
124,379
|
|
|
$
|
123,827
|
|
Tooling equipment
|
|
|
27,015
|
|
|
|
27,015
|
|
Leasehold improvements
|
|
|
57,780
|
|
|
|
57,780
|
|
Computer equipment
|
|
|
6,169
|
|
|
|
6,169
|
|
Research and development lab
|
|
|
63,177
|
|
|
|
63,177
|
|
Total
|
|
|
278,520
|
|
|
|
277,968
|
|
Less: Accumulated depreciation
|
|
|
(157,315
|
)
|
|
|
(119,550
|
)
|
Property and equipment, net
|
|
$
|
121,205
|
|
|
$
|
158,418
|
|
Depreciation
expense for the nine months ended September 30, 2017, totaled $37,765.
NOTE
4 - COMMITMENTS & CONTINGENCIES
Alamo
CBD
On
January 3, 2017, the Company signed a binding LOI with Alamo CBD to enter discussions to combine and create a medical
cannabinoids pharmaceutical group. On August 3, 2017, the Company formed Alamo Acquisition, LLC, a Texas limited liability company,
in which the Company owns 100% of Alamo Acquisition, LLC member interests.
On
August 4, 2017, the Company entered into an Agreement and Plan of Merger and Reorganization, by and among the Company, Alamo
Acquisition LLC, and Alamo CBD (the “Agreement”). On August 8, 2017, Chad Sykes, Founder and Chief of Cultivation
of the Company, returned 2,500,000 shares of common stock to the Company in anticipation of the merger of the Company
and Alamo CBD (the “Merger”) to be consummated pursuant to the Agreement. The Company recorded the return of
shares at a fair value of $550,000 ($0.22 per share) based upon the most recent trading price per share of the
Company’s stock. The return of common stock by Chad Sykes was a non-cash transaction and has been recorded as a
reduction of goodwill related to the Merger. On September 6, 2017, the Company issued an aggregate of 7,584,008 shares of
common stock to the members of Alamo CBD related to the Merger. The Company recorded fair value of $1,440,961 ($0.19 per
share) based upon the most recent trading price per share. The Company subsumed into goodwill all intangible assets acquired
in the transaction. The aggregate value of goodwill at September 30, 2017 is $890,961.
Vyripharm
Joint Venture
On
March 23, 2017, the Company entered into a Contractual Joint Venture Agreement with Vyripharm and Alamo CBD, pursuant to which
the parties agreed to participate in an unincorporated joint venture (the “Joint Venture”). The intent of the Joint
Venture was for the Parties to work together to enhance the ability of Alamo CBD to apply for and obtain licensure, or a permit,
to grow and/or dispense marijuana products for medical and/or consumer use through the Texas Compassionate Use Program. As of
March 31, 2017, the Company paid Vyripharm $250,000 that was recorded as an Investment in Joint Venture on the balance sheet.
Subsequently, the Joint Venture failed to receive licensure in Texas. However, the Joint Venture placed 16 out of 43 applicants
and its application is currently considered pending by the Department of Public Safety (“DPS”).
On
August 7, 2017, after negotiations, the Company advised Vyripharm that it intended to voluntarily default on the Contractual Joint
Venture. Company management determined that without a license to produce cannabis, the Company would not be able to fully utilize
the intent of the Joint Venture partnership and the Company would be financially burdened by the ongoing Joint Venture terms.
Both parties agreed that this decision would not impair either party’s ability to pursue a Joint Venture in the future after
the Company, or Alamo CBD, obtained license to produce cannabis. As such, Indoor Harvest recorded a loss on investment of the
Joint Venture for the nine months ending September 30, 2017 of $250,000 as presented in the Condensed Statements of Operations.
Deferred
Rent
Deferred
rent payable at September 30, 2017 was $6,808. Deferred rent payable is the sum of the difference between the monthly rent payment
and the straight-line monthly rent expense of an operating lease that contains escalated payments in future periods.
Rent
expense for the three and nine months ended September 30, 2017 and 2016, were:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Rent expense
|
|
$
|
12,788
|
|
|
$
|
12,788
|
|
|
$
|
39,763
|
|
|
$
|
38,616
|
|
NOTE
5 - CONCENTRATIONS
At
September 30, 2017 and December 31, 2016, the Company had concentrations of accounts receivable of:
Customer
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Tweed, Inc.
|
|
|
—
|
%
|
|
|
100
|
%
|
For
the three months ended September 30, 2017 and 2016, the Company had a concentration of sales of:
|
|
Three Months Ended
|
|
Customer
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Bright Orchard
|
|
|
66
|
%
|
|
|
—
|
%
|
Tweed
|
|
|
34
|
%
|
|
|
—
|
%
|
University of Arizona CEAC
|
|
|
—
|
%
|
|
|
24
|
%
|
ER Michigan
|
|
|
—
|
%
|
|
|
76
|
%
|
For
the nine months ended September 30, 2017 and 2016, the Company had a concentration of sales of:
|
|
Nine Months Ended
|
|
Customer
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Bright Orchard
|
|
|
66
|
%
|
|
|
—
|
%
|
Tweed
|
|
|
34
|
%
|
|
|
—
|
%
|
University of Arizona CEAC
|
|
|
—
|
%
|
|
|
22
|
%
|
GSS Colorado
|
|
|
—
|
%
|
|
|
6
|
%
|
ER Michigan
|
|
|
—
|
%
|
|
|
34
|
%
|
PH Research Platform
|
|
|
—
|
%
|
|
|
5
|
%
|
UB Poland
|
|
|
—
|
%
|
|
|
33
|
%
|
NOTE
6 - WORK IN PROCESS
Work
in progress as of September 30, 2017 and December 31, 2016, consisted of the following:
Description
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Costs incurred on uncompleted contracts
|
|
$
|
—
|
|
|
$
|
80,620
|
|
Estimated earnings
|
|
|
—
|
|
|
|
—
|
|
Less: Billings to date
|
|
|
—
|
|
|
|
(100,775
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
(20,155
|
)
|
|
|
|
|
|
|
|
|
|
Reflected in balance sheet as:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on contracts in process
|
|
$
|
—
|
|
|
$
|
—
|
|
Billings in excess of costs and estimated earnings on contracts in process
|
|
|
—
|
|
|
|
20,155
|
|
Total
|
|
$
|
—
|
|
|
$
|
20,155
|
|
NOTE
7 - NOTE PAYABLE
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
On June 5, 2015, the Company entered into a five-year loan agreement totaling $36,100. The loan carries interest at a rate of 10.25%.
|
|
$
|
22,105
|
|
|
$
|
27,132
|
|
Less: current portion
|
|
|
7,330
|
|
|
|
6,790
|
|
Long-term note payable, net
|
|
$
|
14,775
|
|
|
$
|
20,342
|
|
NOTE
8 - DEBT AND CONVERTIBLE LOAN PAYABLE
Convertible
Note Payable
On
March 20, 2017, the Company entered into a settlement agreement relating to a promissory note with Chuck Rifici Holdings, Inc.
originally dated September 26, 2016 (“Rifici Note”). The Company settled the amount owed by paying $269,498 in cash.
The Company was released from any further liability under this Rifici Note upon payment of this amount.
On
March 20, 2017, the Company entered into a settlement agreement relating to two (2) promissory notes with FirstFire Global Opportunities
Fund, LLC dated October 19, 2016 and December 12, 2016. Pursuant to the settlement, the Company paid the holder an aggregate of
$252,917 in cash and issued 333,333 shares of common stock with a fair value of $100,000 based upon the conversion price of $0.30
per share. The Company was released from any further liability under this FirstFire Global Opportunities Fund, LLC note upon payment
of this amount.
On
March 24, 2017, the Company entered into a securities purchase agreement with Tangiers Global, LLC (“Tangiers”) relating
to the issuance and sale of notes (“Tangiers Note”) in the aggregate principal amount of up to $550,000, which includes
a 10% original issue discount. The Tangiers Note is convertible into shares of common stock at a price equal to $0.30 per share.
The Tangiers Note carries interest on the unpaid principal amount at the rate of 8% per annum and is due and payable eight months
from the effective date of each payment. For the nine months ended September 30, 2017, the Company received an initial $250,000
payment under the Tangiers Note, which when added to the 10% original issuance discount fee of $25,000, represents a $275,000
face amount outstanding (the “First Draw”).
On
October 10, 2017, the Company executed Amendment #1 (“Amendment #1”) to the Tangiers Note for a final draw of $250,000
payment plus a 10% original issue discount (the “Final Draw”). Amendment #1 modified the maturity date of the Tangiers
Note from eight months to six months from the effective date of each payment. In addition, Amendment #1 included use of proceeds
for the $250,000 received from Tangiers. All other terms and conditions of the Tangiers Note remain effective and were not amended.
The execution of Amendment #1 caused the
Company to default on the First Draw due to the acceleration of the maturity date. The default caused an increase in the interest
rate on the First Draw from 8% to 18% and allows Tangiers to demand payment in cash equal to 150% of the outstanding principal
and interest, which is automatically added to the outstanding principle, and convert all or a portion of the outstanding principal
into shares of common stock of the Company. The default conversion rate of the Tangiers Note is the lower of the conversion rate
then in effect or 65% of the lowest trading price for the 15 days prior to Tangiers’ notice of conversion.
On October 17, 2017, the Company converted
debt and accrued interest, totaling $30,000 into 329,670 shares of common stock. (See also Note 11).
For the three and nine months ended September
30, 2017, the Company accrued $5,545 and $11,874, respectively, in accrued interest related to outstanding the note.
Debt Discount and Original Issuance
Costs for Convertible Note
During the nine months ended September
30, 2017 and 2016, the Company recorded debt discounts and original issuance costs totaling $120,333 and $380,267, respectively.
The debt discounts recorded in 2017 and
2016, pertain to beneficial conversion feature on the convertible notes. The notes are required to be bifurcated and reported
at fair value on the date of grant. (see Note 1 Fair Value Measurements).
The Company amortized $294,888 and $331,034
to interest expense during the nine months ended September 30, 2017 and 2016, respectively.
|
|
Nine Months
Ended
September 30,
2017
|
|
|
Year Ended December 31,
2016
|
|
Debt discount, beginning of period
|
|
$
|
152,617
|
|
|
$
|
—
|
|
Additional debt discount and debt issue cost
|
|
|
120,333
|
|
|
|
417,834
|
|
Amortization of debt discount and debt issue cost
|
|
|
(245,937
|
)
|
|
|
(265,217
|
)
|
Debt discount, end of period
|
|
$
|
27,013
|
|
|
$
|
152,617
|
|
Debt Issuance Costs for Convertible
Note
During the nine months ended September
30, 2017 and 2016, the Company did not pay debt issuance costs.
During the nine months ended September
30, 2017 and 2016, the Company amortized $7,473 and $0 of debt issue costs, respectively.
|
|
Nine Months
Ended
September 30,
2017
|
|
|
Year Ended
December 31,
2016
|
|
Debt discount, beginning of period
|
|
$
|
7,473
|
|
|
$
|
—
|
|
Additional debt discount
|
|
|
—
|
|
|
|
10,000
|
|
Amortization of debt discount
|
|
|
(7,473
|
)
|
|
|
(2,527
|
)
|
Debt discount, end of period
|
|
$
|
—
|
|
|
$
|
7,473
|
|
Debt Discount for Promissory Note
During the nine months ended September
30, 2017 and 2016, the Company recorded debt discount of $0 and $34,112, respectively.
The Company amortized $15,715 and $767
to interest expense during the nine months ended September 30, 2017 and 2016, respectively.
|
|
Nine Months
Ended
September 30,
2017
|
|
|
Year
Ended
December 31,
2016
|
|
Debt discount, beginning of period
|
|
$
|
15,715
|
|
|
$
|
—
|
|
Additional debt discount
|
|
|
|
|
|
|
34,112
|
|
Amortization of debt discount
|
|
|
(15,715
|
)
|
|
|
(18,398
|
)
|
Debt discount, end of period
|
|
$
|
—
|
|
|
$
|
15,715
|
|
NOTE 9 - RELATED PARTY TRANSACTIONS
On August 8, 2017, Chad Sykes,
Founder and Chief of Cultivation, returned 2,500,000 shares of common stock to the Company related to the merger of
the Company and Alamo CBD. The Company recorded fair value of $550,000 ($0.22 per share) based upon the most recent trading
price per share of the Company’s stock.
On September 6, 2017, the Company issued
2,957,763 shares of common stock to Dr. Lang Coleman, Director, related to the merger of the Company and Alamo CBD.
On September 6, 2017, the Company issued
758,401 shares of common stock Rick Gutshall, Interim-Chief Executive Office, Chief Financial Officer and Director, related to
the merger of the Company and Alamo CBD.
On September 15, 2017, the Company issued
250,000 shares of common stock related to an Employment Agreement with Annette Knebel, Chief Accounting Officer and Director.
NOTE 10 - STOCKHOLDERS’ EQUITY (DEFICIT)
Series A Convertible Preferred Stock
During the third quarter of fiscal 2016,
the Company initiated a subscription agreement to offer accredited investors up to 1,000,000 units (“units”) of securities,
each unit consists of one (1) share of Series A Convertible Preferred Stock and one (1) Series A Warrant (“warrant”).
The price per unit was $0.50 for a maximum aggregate proceeds of $500,000. There are no dividends on the Series A Convertible Preferred
Stock. The warrants were exercisable at $0.50 per share for a period of one year. As of September 30, 2017, the warrants were not
exercised. Therefore, the Company has disclosed the expiration of the warrants.
From August 15 to August 29, 2016, the
Company sold an aggregate of 250,000 units to three (3) investors for total proceeds of $125,000. During the nine months ended
September 30, 2017 and 2016, the Company amortized $33,238 and $0 of debt discount related to the warrants, respectively. The remaining
debt discount related to the warrants is $0.
On March 20, 2017, the Company’s Series
A Preferred Convertible Stock shareholders (“Series A Holders”) each voted to waive and remove the provisions of Section
5(iii) of the Certificate of Designations of the Series A Preferred Stock. Series A Holders have each agreed individually and also
as a group to convert their Series A Convertible Preferred Stock into common stock at a conversion price equal to $0.30 per share.
A total of 250,000 shares of the Company’s Series A Preferred Convertible Stock were converted into an aggregate of 416,667 shares
of common stock.
From April 26, 2017 through May 3, 2017,
the Company sold an aggregate of 750,000 shares of Series A Preferred Common Stock to thirteen (13) U.S. accredited investors at
$0.40 per share for proceeds of $300,000.
Common Stock
January 16, 2017, the Company issued 145,740
shares of common stock related to a Director Agreement with Pawel Hardej. The Company recorded fair value of $64,126 ($0.44/share)
based upon the most recent trading price per share of the Company’s stock.
January 16, 2017, the Company issued 41,640
shares of common stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $18,322 ($0.44/share)
based upon the most recent trading price per share of the Company’s stock.
January 16, 2017, the Company issued 62,460
shares of common stock related to a Director Agreement with John Choo. The Company recorded fair value of $27,482 ($0.44/share)
based upon the most recent trading price per share of the Company’s stock.
January 17, 2017, the Company issued 800,000
shares of common stock to Lyons Capital, LLC for a six-month consulting and road show services agreement. The Company recorded
fair value of $352,000 ($0.44/share) based upon the most recent trading price per share of the Company’s stock.
From February 22, 2017 through March 15,
2017, the Company sold, in reliance upon Regulation D Rule 506, a total of 2,060,000 shares of common stock to seventeen (17) U.S.
accredited investors at $0.40 per share for cash totaling $824,000.
On March 20, 2017, the Company settled
the amount owed to FirstFire Global Opportunities Fund LLC by paying $252,917 in cash and issuing 333,333 shares of common stock
with a fair value of $100,000 based upon the conversion price of $0.30/share (See Note 8).
On March 20, 2017, a total of 250,000 shares
of the Company’s Series A Preferred Convertible Stock were converted into 416,667 shares of common stock. The Company recorded
fair value of $175,000 ($0.42/share) based upon the most recent trading price per share of the Company’s stock.
On June 1, 2017, the Company issued 250,000
shares of common stock for a 12-month investor relations consulting agreement. The Company recorded fair value of $55,000 ($0.22/share)
based upon the most recent trading price per share of the Company’s stock.
On August 8, 2017, Chad Sykes,
Founder and Chief of Cultivation, returned 2,500,000 shares of common stock to the Company in anticipation of the
Merger. The Company recorded the return of shares at a fair value of $550,000 ($0.22 per share) based upon the most recent
trading price per share of the Company’s stock. The return of common stock by Chad Sykes was a non-cash transaction and
has been recorded as a reduction of goodwill related to the Merger.
On September 6, 2017, the Company issued
an aggregate of 7,584,008 shares of common stock to Alamo CBD, in connection with the Merger the Company recorded fair value of
$1,440,961 ($0.19 per share) based upon the most current trading price of the Company’s stock.
On September 15, 2017, the Company issued
250,000 shares of common stock related to an Employment Agreement with Annette Knebel, Chief Accounting Officer and Director. The
Company recorded fair value of $50,000 ($0.20 per share) based upon the most current trading price of the Company’s stock.
Common Stock Warrants
On September 26, 2016, the Company issued
the Rifici Note to Chuck Rifici Holdings, Inc., relating to the issuance of $225,500 in aggregate principal including a $204,000
actual payment of purchase price plus a 10% original issue discount. In conjunction with the issuance of the Rifici Note, the Company
issued a one-year warrant to purchase 250,000 shares of common stock at an exercise price of $0.30 per share (See Note 8). The
warrant expired September 26, 2017 and was not exercised.
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual
Life
(in Years)
|
|
Balance, December 31, 2016
|
|
|
500,000
|
|
|
|
0.40
|
|
|
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Canceled/Forfeited
|
|
|
250,000
|
|
|
|
0.50
|
|
|
|
—
|
|
Expired
|
|
|
250,000
|
|
|
|
0.30
|
|
|
|
—
|
|
Balance September 30, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
For the nine months ended September 30,
2017, no warrants were outstanding.
For the year ended December 31, 2016, the
following warrants were outstanding:
Exercise Price Warrants Outstanding
|
|
Warrants Exercisable
|
|
|
Weighted Average
Remaining Contractual Life
|
|
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.30-0.50
|
|
|
500,000
|
|
|
|
0.69
|
|
|
|
32,500
|
|
Lattice Binomial model was used to value
aggregate intrinsic value.
NOTE 11 - SUBSEQUENT EVENTS
On October 10, 2017, the Company executed
Amendment #1 to the March 24, 2017 Tangiers Note for $250,000 payment plus a 10% original issue discount. The maturity date is
six months from the effective date. All other terms and conditions of the Tangiers Note remain effective.
On October 12, 2017, the Company entered
into an Investment Agreement with Tangiers Global, LLC (“Tangiers Global”) pursuant to which the Company may issue
and sell to Tangiers Global up to $2,000,000 of the Company’s common stock. Concurrently, on October 12, 2017, the Company
entered into a Registration Rights Agreement with Tangiers Global. The Investment Agreement shall terminate upon the earlier of:
(i) the issuance of $2,000,000 of shares, (ii) 36 months after the Effective Date (as defined in the Investment Agreement), (iii)
at such time the Registration Statement (as defined in the Investment Agreement) is no longer effective, or (iv) by the Company
at any time by providing 15 days written notice to Tangiers Global.
On October 12, 2017, the Company issued
a promissory note to Tangiers Global, in the principal amount of $50,000 in order to induce Tangiers Global to enter into the Investment
Agreement. The note bears interest at a rate of 10% per annum and matures on May 12, 2018. Tangiers Global may, at any time, convert
the unpaid principal amount of the note into shares of the Company’s common stock at a conversion price of $0.1666 per share.
On October 17, 2017, the Company converted
debt and accrued interest, totaling $30,000 into 329,670 shares of common stock.
On November 1, 2017, John Seckman resigned
as a Director and as a member of the board of directors of the Company, effective December 4, 2017. Mr. Seckman’s resignation
was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies (including
accounting or financial policies) or practices, the Company’s management or the Board. Mr. Seckman’s resignation was
due to time constraints based on new business and increasing demands of John Seckman and Associates, of which Mr. Seckman is principal.
On December 13, 2017, Mr. Rick Gutshall
resigned as Chief Financial Officer. Mr. Gutshall’s resignation was not the result of any disagreement with the Company on any
matter relating to the Company’s operations, policies (including accounting or financial policies) or practices. Mr. Gutshall
shall remain as Interim Chief Executive Officer and as a member of the Board of Directors, as described in the Company’s
Form 8-K filed with the SEC on August 14, 2017.
On December 13, 2017, Ms. Annette Knebel
resigned as Chief Accounting Officer and was appointed Chief Financial Officer by the Company’s Board of Directors. Ms. Knebel’s
resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies
(including accounting or financial policies) or practices. Ms. Knebel shall remain as a member of the Board of Directors, as described
in the Company’s Form 8-K filed with the SEC on August 14, 2017.
Furthermore, Ms. Knebel was appointed Chief
Financial Officer of the Company. There are no current arrangements or understandings between either Ms. Knebel or any other person
pursuant to which she was appointed as Chief Financial Officer. The Company and Ms. Knebel intend to address her employment agreement
in the near future, which agreement shall appropriately be disclosed at such time. There are no family relationships between Ms.
Knebel and any of our other officers and directors and no related party transactions required to be reported under Item 404(a)
of Regulation S-K of the Securities Exchange Act of 1934, as amended.
On December 13, 2017, Mr. John Zimmerman
resigned as Vice President of Business Development. Mr. Zimmerman’s resignation was not the result of any disagreement with the
Company on any matter relating to the Company’s operations, policies (including accounting or financial policies) or practices.
Mr. Zimmerman shall remain as a member of the Board of Directors.
On December 18, 2017, the Company converted
debt and accrued interest, totaling $45,000 into 516,648 shares of common stock.
On January 9, 2018, the Company converted
debt and accrued interest, totaling $100,000 into 899,685 shares of common stock.
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 January 16, 2018, the Company issued
and sold an 8% Fixed Convertible Promissory Note (the “Note”) to Tangiers (the “Buyer”), in the aggregate
principal amount of up to $550,000, with an initial consideration of $82,500 in aggregate principal amount including $75,000 actual
payment of purchase price plus a 10% original issue discount (the “principal amount”).
Convertible Note
On the Closing Date, the Company issued
a Note in the aggregate $550,000 in face value, which will, by the principal terms:
●
|
Bears guaranteed interest at 8% on the unpaid principal amount. Any principal amount or interest which is not paid when due shall bear interest at the rate of 18% per annum or the highest rate permitted by law per annum from the due date until the same is paid (the “default interest”);
|
|
|
●
|
Mature on July 15, 2018 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 Buyer of an amount in cash equal to the sum of 115% under 90 days, 120% within 91-135 days, 125% within 136-180 days from the effective date, multiplied by the principal amount plus accrued and unpaid interest on the principal amount to the optional prepayment date plus default interest, if any.
|
|
|
●
|
Convert into shares of common stock at a price equal to $0.30; provided, however that if the Note is not retired on or before the maturity date, the maturity default conversion price shall be equal to the lower of: (i) the fixed conversion price 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 (as defined in the Note).
|
Events of Default
Subject to applicable cure periods and
delivery of written notice to the Company if applicable, the Notes shall become immediately due and payable upon occurrence of
an event of default (as defined in the Note) and the conversion price shall be adjusted as set forth in the Notes if applicable.