UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

Amendment Number 1

 

(Mark One)

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended

December 31, 2017

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from_____to ____

 

INDOOR HARVEST CORP

 

(Exact name of registrant as specified in its charter)

 

Texas   3590   45-5577364
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial Classification Code Number)   (I.R.S. Employer
Identification Number)

 

Indoor Harvest Corp

5300 East Freeway Suite A

Houston, Texas 77020

(346) 310-3427

   
 (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)    

 

Daniel Weadock

Chief Executive Officer

5300 East Freeway Suite A

Houston, Texas 77020

(346) 310-3427

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Securities registered pursuant to
Section 12(b) of the Act: None

 

Securities registered pursuant to
Section 12(g) of the Act: Common Stock,
par value $0.001 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
       
Non-accelerated filer [  ] Smaller reporting company [X]
       
  Emerging growth company [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes[  ] No [X]

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed first fiscal quarter: The aggregate market value of the 11,194,612 shares of voting stock held by nonaffiliates of the registrant, computed by reference to the closing price as reported on the OTCQB, as of the last business day of Indoor Harvest’s most recently completed second fiscal quarter (June 30, 2017), was $2,238,922.

 

We have 24,957,471 shares of common stock outstanding as of April 17, 2018.

 

 

 

     
 

 

Explanatory Note

 

Indoor Harvest Corp (“we”, “our”, the “Company”) is filing this Amendment No. 1 on Form 10-K/A (the “Amendment”) to restate portions of the following items of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which we originally filed with the Securities and Exchange Commission on April 17, 2017 (the “Original Form 10-K”):

 

(i) Item 7 of Part II “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
   
(ii) Item 8 of Part II “Financial Statements”
   
(iii) Item 15 of Part IV “Exhibits”

 

We have also updated the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, 32.1, and 32.2 and our financial statements formatted in Extensible Business Reporting Language (XBRL).

 

On October 17, 2018, the Board of Directors (the “Board”) of the Company was notified by the Company’s independent registered public accounting firm, Thayer O’Neal Company, LLC (“Thayer”), that the audited consolidated financial statements included in the Original Form 10-K should not be relied upon. Thayer informed the Board that, in July 2018, information came to its attention that led it to investigate whether the Company’s acquisition of Alamo CBD LLC (“Alamo CBD”) was wrongly accounted for as a business combination. Thayer concluded this investigation on October 17, 2018 and notified the Board that the Company, pursuant to generally accepted accounting principles, should have accounted for the Alamo CBD transaction as an asset acquisition.

 

The Company noticed errors in accounting for the issuance of 7,584,008 shares of common stock for Alamo CBD and the cancellation of 2,500,000 shares of common stock by an officer of the Company.

 

In the Original Form 10-K, the Company’s management had decided to impair the goodwill created by the Alamo CBD acquisition, as there were doubts regarding when a license may be issued (the license is pending and may or may not ever be issued) and whether upon receipt of the license if it will lead to significant positive cash flows. The Company recorded an impairment of goodwill in the Statement of Operations in the audited consolidated financial statements included in the Original Form 10-K.

 

As discussed above, management is now accounting for the acquisition of Alamo CBD as an acquisition of assets (and not a business combination) and determined it should be impaired upon acquisition. Additionally, management determined that the cancellation of shares by the Company’s officer should be valued at $0 and not applied to the acquisition of assets from Alamo CBD. Therefore, there is now a $1,440,961 impairment loss of intangible assets rather than a $1,440,961 loss on impairment of goodwill.

 

This report on Form 10-K/A has been signed as of a current date and all certifications of the Company’s Chief Executive Officer and Chief Financial Officer are given as of a current date. Except as discussed above and as further described in Notes 1, 2, 6, and 9 to the audited consolidated financial statement, the Company has not modified, or updated disclosures presented in this Amendment. Accordingly, the Amendment does not reflect events occurring after the Original Form 10-K or modify or update those disclosures affected by subsequent events. Information not affected by the restatement is unchanged and reflects disclosures made at the time of the filing of the Original Form 10-K.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and other financial information included in this filing. Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

 

Forward-Looking Statements

 

The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial statements and the related notes, and other financial information included in this filing.

 

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rate; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

 

Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

 

Overview

 

We, under our brand name Indoor Harvest®, are a developer of personalized cannabis medicines and a provider of advanced cultivation methods and processes for the cannabis industry. We are seeking to use the relationships and technology we have developed to become a registered producer and seller under the CSA of pharmaceutical grade cannabis for research by third parties developing targeted treatment for specific medical symptoms.

 

We have developed a patent pending aeroponic process of growing cultivars in an air or mist environment without the use of soil or an aggregate growing medium. Aeroponic production differs from both conventional hydroponics and in-vitro (plant tissue culture) growing. Unlike hydroponics, which uses water as a growing medium and essential minerals to sustain plant growth, aeroponics is conducted by suspending plant roots in the air and spraying them with a nutrient-laden mist. Because water is used in aeroponics to transmit nutrients, it is sometimes considered a type of hydroponics. Our aeroponic process and production methods provide an ability to test the phenotypic plasticity of cannabis and to test and develop specific phenotypic response. Phenotypic plasticity refers to the changes in cannabis morphology and physiology due to its adaption to a unique environment and its impact on phytochemical production.

 

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We, through our wholly owned subsidiary Alamo CBD, have applied to produce and dispense low- THC cannabis under the TCUP. THC is a psychotropic cannabinoid and is the principal psychoactive constituent of cannabis. We have signed a binding LOI with Zoned Properties outlining three independent pending agreements to complete research and development projects for licensed medical cannabis facilities to be located in Tempe, Arizona, Parachute, Colorado and Stockdale, Texas or other location to be determined after approval of a provisional license under the TCUP. The Company intends to generate revenue from the manufacture and distribution of low-THC cannabis to treat intractable epilepsy under the TCUP, through related engineering, project management, equipment leasing and technology licensing from constructed facilities in Tempe, Arizona and Parachute, Colorado and through the development and licensing of related environmental and climate recipes.

 

We are an “emerging growth company” (“EGC”) that is exempt from certain financial disclosure and governance requirements for up to five years as defined in the Jumpstart Our Business Startups Act (“the JOBS Act”), that eases restrictions on the sale of securities; and increases the number of shareholders a company must have before becoming subject to the SEC’s reporting and disclosure rules. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. Because of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

 

Our operational expenditures are primarily related to developing our technology, sources and methods, developing research partnerships and collaborations and the costs related to being a fully reporting company with the SEC.

 

Current Projects

 

On May 31, 2017, the Company notified Canopy Growth that it had completed the majority of work under Phase Two of its Cannabis Pilot. The Company installed 13 HPA Table systems and 1 custom built Nutrient Pump Skid at Canopy Growth for an internal economic pilot. During Phase Two, the Company submitted proposals to Canopy Growth for three designs for potential New IP development. Canopy Growth did not pursue these proposals to develop New IP and chose to procure only the Company’s HPA Table system and a custom built Nutrient Pump Skid that was integrated into existing fertigation and mechanical systems at Canopy Growth. As a result of integration into existing facilities, the Company provided Canopy Growth with a limited warranty. The Company additionally informed Canopy Growth that it would not seek continued development under the Cannabis Pilot. As a result, the Cannabis Pilot expired on December 18, 2017.

 

On July 10, 2017, Indoor Harvest Corp entered into a Cultivation Design Agreement with Bright Orchard Developments, Ltd., for the design of an aeroponic cannabis production facility by a pending licensed producer in Canada.

 

On October 11, 2017, the Company entered into a binding LOI with Zoned Properties outlining three pending independent agreements to complete research and development projects for licensed medical cannabis facilities to be located in Tempe, Arizona, Parachute, Colorado and Stockdale, Texas or other location to be determined after approval of a provisional license under the TCUP. Zoned Properties is an OTCQX quoted Company and strategic real estate development firm whose primary mission is to identify, develop, and lease sophisticated, safe, and sustainable properties in emerging industries, including the licensed medical cannabis industry.

 

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Under the terms of the binding LOI, the two companies will work together to mutually agree upon terms, provisions and obligations of three simultaneous, independent agreements.

 

  Tempe Arizona Research Cultivation Site – an agreement for the development and installation of a research cultivation site utilizing Indoor Harvest’s cultivation technology and equipment within at most 2,500 square feet of space at Zoned Properties’ Tempe Medical Marijuana Business Park.
     
  Parachute Colorado Production Facility – an agreement for the development and operation of Zoned Properties’ Parachute Medical Marijuana Business Park and for Indoor Harvest to engage Zoned Properties as the exclusive Strategic Development Advisory.
     
  Texas Compassionate Use Program Applicant – an agreement for Indoor Harvest to engage Zoned Properties as the exclusive Strategic Development Advisory for Indoor Harvest’s anticipated future development located in Stockdale, Texas or at another location to be determined.

 

Execution of any of the three individual agreements is subject to, among other things, satisfactory due diligence and the negotiation and execution of definitive agreements, each of which will contain customary representations, warranties, covenants and closing conditions. There is no assurance that any or all of the agreements will be executed.

 

The binding LOI includes non-refundable payments totaling $50,000 by Indoor Harvest to Zoned Properties. The payments are consideration for entering into the binding LOI and represents a 20% deposit to be applied towards the assignment of the Parachute Development Rights which have been valued at $250,000 within the binding LOI.

 

On October 26, 2017, the Company entered into a LOI with Harvest Air and on November 1, 2017, entered into a LOI with BIOS Lighting. The three companies plan to collaborate with Indoor Harvest towards the development of a fully integrated platform designed to provide cannabis producers the ability to manage and record phenotypic plasticity in the cannabis plant. By combining Indoor Harvest’s proven aeroponic methods, Harvest Air’s HVAC designs, and customized lighting solutions from BIOS Lighting, the three Companies plan to demonstrate an ability to manipulate and control phenotypic expression in the cannabis plant for the purpose of research and production of pharmaceuticals.

 

In addition to collaborative research and development, the group plans to develop advanced automation strategies to control the growth of cultivars with high pressure aeroponics by integrating power generation, HVAC, LED lighting systems, phytometric devices, and near-infrared technologies, into a fully integrated facilities package. By using real time measurements of plant physiological processes and precision management of the production facility environment, the group intends to offer scalable solutions and production methods designed specifically for cannabis phytochemistry and precise phytochemical production.

 

Prototype development will take place in Tempe, Arizona, as part of Indoor Harvest’s planned cannabis technology development described below. In exchange for Harvest Air and BIOS Lighting support and services, Indoor Harvest has agreed to exclusively utilize any developed hardware or strategies provided by both companies in its future developments in Parachute, Colorado and Stockdale, Texas, or other location in Texas approved under the TCUP as described in more detail below.

 

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Tempe Arizona Research Cultivation Site

 

The Company plans to install 20 HPA Tables at an existing licensed medical cannabis production facility at Zoned Properties’ Tempe Medical Marijuana Business Park. The purpose of this project is to conduct a demonstration of the Company’s aeroponic technology while integrating LED and HVAC designs, provided by BIOS Lighting and Harvest Air, respectively. The resulting demonstration will be compared to traditional flood irrigation, HVAC and lighting methods. The Company plans to prepare a case study and white paper to showcase industry adoption value and to serve as a proof of concept for the construction of larger facilities in Parachute, Colorado and Stockdale, Texas, or other location in Texas approved under the TCUP.

 

Both Zoned Properties and Indoor Harvest will work together in good faith to mutually agree upon the terms, provisions and obligations of an agreement for the development, installation, and research of Indoor Harvest’s cultivation technology and equipment within at most 2,500 square feet of space at Zoned Properties’ Tempe Medical Marijuana Business Park located at 410 S. Madison Dr. Tempe, Arizona 85281. The Company expects to generate revenue from the Tempe, Arizona facility through future leasing and licensing agreements. The 20 HPA Table installation is expected to produce over 206 pounds of cannabis annually at under $150 per pound in cost of goods with an expected breakeven point of 430 pounds for the equipment. There is no assurance that any or all of the agreements will be executed.

 

Parachute Colorado Production Facility

 

The Company has secured rights to develop Zoned Properties Parachute Medical Marijuana Business Park. The Company intends to construct a 25,000 square foot facility based on the technology developed and tested at the Tempe Arizona Research Cultivation Site and to generate revenue through the leasing of the facility and licensing of the Company’s technology to either a medical or recreational licensee, which has yet to be determined. The Company would additionally conduct research and development towards creating specific environmental and climate recipes for the production of cannabis in order to produce and replicate a desired phenotypic response. The Company also expects to file an application with the DEA to register the facility under the CSA and to obtain rights to acquire the operating license from the licensee upon changes in Colorado law, which currently does not allow direct ownership by a publicly traded Company.

 

Both Zoned Properties and Indoor Harvest will work together in good faith to mutually agree upon the terms, provisions and obligations of an agreement for the assignment and/or sale of Zoned Properties’ Parachute Development Rights for the Parachute Marijuana Business Park located at Lot #7 N. Diamond Loop Rd, Parachute, Colorado 81635. The agreement would include: (a) the assignment and/or sale of the Parachute Development Rights from Zoned Properties to Indoor Harvest, and (b) the engagement by Indoor Harvest of Zoned Properties as the exclusive Strategic Development Advisor for the Parachute Property. The Company has paid a $25,000 deposit towards securing these rights. There is no assurance that any or all of the additional agreements will be executed or that the Company will be successful in registering the facility with the DEA.

 

Texas Compassionate Use Program Applicant

 

We, through our wholly owned subsidiary Alamo CBD, have applied to produce and dispense Low-THC cannabis under the TCUP to treat intractable. The Company plans to partner with Zoned Properties, Harvest Air and BIOS Lighting to develop a 50,000 square foot facility in Stockdale, Texas or other location to be determined after approval of a provisional license under the TCUP. Zoned Properties and Indoor Harvest will work together in good faith to mutually agree upon the terms, provisions and obligations of an Agreement for Indoor Harvest to engage Zoned Properties as the exclusive Strategic Development Advisory for Indoor Harvest’s development in Texas under the TCUP. The Company also expects to file an application with the DEA to register the facility under the CSA. The Company expects to generate revenue through the production and sale of cannabis under the TCUP. There is no assurance that any or all of the agreements will be executed or that the Company will be successful in obtaining a license to produce cannabis in Texas or in registering the completed facility with the DEA.

 

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As published in the Texas DPS Self-Evaluation Report, on page 543, question (D), dated September 29, 2017, the DPS originally interpreted the statute as requiring a market-based system by which the number and location of licensees are determined by market factors rather than by regulation – as not mandating or limiting the number of licensed distributors. It was originally understood that the applicants would be required to satisfy certain basic requirements prior to licensure, and the ability to maintain compliance with DPS guidelines will be evaluated through on-going audits and inspections.

 

In late 2016, the DPS modified its approach to restrict the number of licenses to three. This necessitated the development of a competitive review process, where three applicants were conditionally approved based on the review of the submitted application materials. Upon successful onsite inspection of their facilities, qualified applicants will be issued licenses. Because of this competitive review process, Alamo CBD placed 16th out of 43 applicants and its application is currently considered pending by the DPS. The Company and other pending applicants have questioned the last-minute modification in approach by the DPS and the lack of transparency in the reviewing process.

 

The Company is a member of and is working with the Medical Cannabis Association of Texas and expects both lobbying and legislative efforts currently being undertaken to result in the program being expanded, additional permits being awarded, and new legislation being introduced in 2019 to allow for a separate permitting process to conduct cannabis research in line with the CSA. There is no guarantee that these efforts will result in the Company obtaining a license or permit to produce cannabis in Texas or that legislation will be adopted allowing a separate licensing or permitting process for research purposes.

 

Results of Operations

 

Year ended December 31, 2017 compared to year ended December 31, 2016

 

The following table presents our operating results for the year ended December 31, 2017 compared to December 31, 2016:

 

    2017     2016     $ Change     % Change  
Revenue   $     $ 163,996     $ (163,996 )     (100 )%
Cost of Sales           111,581       (111,581 )     (100 )%
Gross profit (loss)           52,415       (52,415 )     (100 )%
Operating expenses                                
Depreciation and amortization expense     51,507       51,484       23       0 %
Research and development     1,625       16,184       (14,559 )     (90 )%
Professional fees     418,092       108,093       309,999       287 %
Impairment loss     1,440,961             1,440,961       100 %
Loss on investment in joint venture     250,000             250,000       100 %
General and administrative expenses     1,061,493       1,129,711       (68,218 )     (6 )%
Total operating expenses     3,223,678       1,305,472       1,918,206       147 %
Loss from operations     (3,223,678 )     (1,253,057 )     1,970,621       157 %
Other expense                                
Other income (expense)     7,196       52,323       (45,127 )     (86 )%
Interest expense     (163,047 )     (16,427 )     146,620       893 %
Derivatives interest expense           (66,980 )     (66,980 )     (100 )%
Amortization of debt discount     (515,814 )     (438,032 )     77,782       18 %
Amortization of debt issuance costs           (20,000 )     (20,000 )     (100 )%
Amortization of original issue discount           (22,500 )     (22,500 )     (100 )%
Loss on debt settlement           (131,944 )     (131,944 )     (100 )%
Loss on sale of equipment     (73,750 )     (36,627 )     37,123       101 %
Change in fair value of embedded derivative liability     (442,957 )     (141,756 )     301,201       212 %
Total other expense     (1,188,372 )     (821,943 )     366,429       45 %
Net loss   $ (4,412,050 )   $ (2,075,000 )   $ 2,337,050       113 %

 

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Revenues

 

Revenue for the year ended December 31, 2017 and December 31, 2016 were $0 and $163,996, respectively, for a decrease of $163,996 or 100%. The decrease is primarily due to the completion of the projects with ER Michigan, Urbanika Farms, University of Arizona CEAC, GSS Colorado and PH Research Platform during 2016. The Tweed pilot project was primarily performed during 2016 and completed during the first quarter 2017. In addition, revenues decreased due to the Company’s management’s decision in late-2016 to discontinue actively selling its products and services to the vertical farming industry and to focus on utilizing the Company’s developed technology and methods for the cannabis industry.

 

Cost of Sales

 

Cost of sales for the year ended December 31, 2017 and December 31, 2016 were $0 and $111,581, respectively, for a decrease of $111,581 or 100%. The decrease is primarily due to the completion of the projects with ER Michigan, Urbanika Farms, University of Arizona CEAC, GSS Colorado and PH Research Platform during 2016. The Tweed pilot project was primarily performed during 2016 and completed during the first quarter 2017. In addition, on August 4, 2017, the Company ceased actively supporting business development of vertical farms for produce production.

 

Gross Profit (Loss)

 

Gross profit (loss) for the year ended December 31, 2017 and December 31, 2016 were $0 and $52,415, respectively, for a decrease of $52,415 or -100%. The decrease is primarily the result of the completion of the projects as noted above as well as the incurrence of warranty expenses. On August 4, 2017, the Company ceased actively supporting business development of vertical farms for produce production.

 

Operating Expenses (Revised)

 

Total operating expenses for the year ended December 31, 2017 and December 31, 2016 were $3,223,678 and $1,305,472, respectively, for an aggregate increase of $1,918,206 or 147%. The aggregate increase is primarily related to the impairment loss of intangible assets of $1,440,961, or 100%, the loss on the investment in joint venture of $250,000, or 100% and an increase in professional fees of $309,999 or 287% associated with the TCUP application as well as the Alamo CBD merger.

 

Other Expense

 

Total other expense for the year ended December 31, 2017 and December 31, 2016 were $1,188,372 and $821,943, respectively, for an increase of $366,429 or 45%. The increase is primarily related to the change in the fair value of the embedded derivative liability of $301,201 related to the Tangiers convertible notes payable, and an increase in interest expenses of $146,620 or 9% related to the paydown of the FirstFire Notes and Chuck Rifici Notes and the addition of interest expense due to the Tangiers Notes. The increase is offset in part by the loss on debt settlement that was incurred in 2016 and not in 2017.

 

Net Loss

 

As a result of the factors discussed above, net loss for the year ended December 31, 2017 and December 31, 2016 was $4,412,050 and $2,075,000, respectively, for an increase of $2,337,050 or 113%.

 

Liquidity and Capital Resources

 

As of December 31, 2017, we had $89,905 in total current assets and current liabilities of $1,119,821. Accordingly, our working capital deficit at December 31, 2017 was $1,029,916. We have the ability to raise additional capital as needed through external equity financing transactions.

 

Operating Activities (Revised)

 

Net cash used in operating activities for the year ended December 31, 2017 and December 31, 2016 were $1,019,729 and $662,170, respectively, for an increase of $357,559 or 54%. The increase is primarily related to the increase in our net loss of $4,412,050, offset by the non-cash impairment loss of intangible assets of $1,440,961.

 

Investing Activities

 

Net cash used in investing activities for the year ended December 31, 2017 and December 31, 2016 were $239,750 and $2,294, respectively, for an increase of $237,456 or 10351%. The increase is primarily due to the investment in the Vyripharm joint venture of $250,000.

 

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Financing Activities

 

Net cash provided by financing activities for the year ended December 31, 2017 and December 31, 2016 were $1,216,713 and $641,777, respectively, for an increase of $574,936 or 90%. The increase is primarily related to year over year increases in the issuance of common stock of $774,000 and issuance of preferred stock for cash of $175,000, offset by the settlement of demand note payable, less OID costs paid during 2017 of $225,500 and a decrease in proceeds from convertible notes payable, less offering costs and OID costs paid year over year of $175,000.

 

Cash Requirements: Current Operational Activities

 

Our estimated minimum day-to-day operational costs, exclusive of those costs in our Potential Future Planned Operational Activities for the next 12 months, as set forth before, are estimated to be approximately $522,024 to maintain current operational activities during the next 12 months. Our minimal annual operating expenses includes $320,000 in payroll expenses, our lease agreement for our 10,000 sq. ft. facility of $53,424 per year, our estimated annual utility expenses of $10,800 and $12,800 in miscellaneous operating expenses. In addition, we will have $125,000 in costs related to maintaining our publicly traded status over the next 12 months.

 

Cash Requirements: Potential Future Planned Operational Activities

 

During the next 12 months, we anticipate engaging in the additional planned operational activities set forth in the table below, although we may vary our plans depending upon operational conditions and available funding.

 

Category   Estimated Time   Estimated Cost  
Development Rights, Parachute, Colorado   Q1 2018- Q4 2018   $ 225,000  
Facility Construction, Tempe, Arizona   Q1 2018- Q4 2018   $ 775,000  

 

Existing Cash and Operational Cash Flow

 

During the next twelve months, we anticipate that we will incur a minimum of approximately $560,000 of general and administrative expenses and $1,000,000 in development expenses in order to execute our current business plans. We also plan to incur significant sales, marketing, research and development expenses during the next 12 months. We must obtain additional financing to continue our operations. We may not be able to obtain additional funding on terms that are favorable to us or at all. We may not be able to obtain sufficient funding to continue our operations, or if we do receive funding, to generate adequate revenues in the future or to operate profitably in the future. These conditions raise substantial doubt about our ability to continue as a going concern.

 

Kodiak Capital Group LLC Investment Agreement for $2,000,000

 

On January 30, 2016, the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with Kodiak Capital Group, LLC (the “Purchaser”). On May 12, 2016, the SEC declared our registration statement effective. On June 28, 2016, we requested that the SEC withdraw the registration statement. No shares were issued under the Purchase Agreement. Pursuant to Rule 477(c), the Company advised the Commission that it may, upon consideration of its financing and strategic options under discussion, undertake a subsequent private offering in reliance on Rule 155(c) promulgated under the Securities Act.

 

  9  
 

 

FirstFire and Rockwell Bridge Financing for $250,000

 

On March 22, 2016, the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund, LLC (“FirstFire”), and Rockwell Capital Partners Inc. (“Rockwell”), 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 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 matured on September 22, 2016. The Company defaulted on the Notes on September 23, 2016.

 

On September 27, 2016, the Company paid $203,441 in cash to Rockwell to settle debts owed and issued 2,581,561 shares of common stock at $0.08 per share, pursuant to the terms of the Note, to FirstFire to settle $203,351 in debts owed. This share issuance was treated as a conversion of debt to equity.

 

Chuck Rifici Holdings Note for $204,000

 

On September 26, 2016, we entered into a promissory note and warrant purchase agreement with Chuck Rifici Holdings, Inc., a Canadian Corporation. The note consisted of $225,500 in aggregate principal amount including $204,000 actual payment of purchase price plus a 10% original issue discount. The warrant purchase agreement consisted of an aggregate total of 250,000 common stock warrants to purchase common stock for $0.30 for a period of 12 months, to the buyer, in accordance with and in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended and/or Regulation S of the Securities Act of 1933, as amended for the above issuances to non-US citizens or residents.

 

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.

 

FirstFire October Note for $125,000

 

On October 19, 2016, the Company entered into a securities purchase agreement with FirstFire relating to the issuance and sale of a promissory note of $137,500 in aggregate principal amount including $125,000 actual payment of purchase price plus a 10% original issue discount.

 

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 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.

 

FirstFire December Note for $125,000

 

On December 14, 2016, the Company entered into a securities purchase agreement with FirstFire relating to the issuance and sale of a promissory note of $137,500 in aggregate principal amount including $125,000 actual payment of purchase price plus a 10% original issue discount.

 

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.

 

  10  
 

 

Rule 506(b) Private Stock Offering

 

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.

 

Tangiers Promissory Notes

 

The Company has issued the following promissory notes to Tangiers:

 

  “Note 1”: $550,000 Promissory Note dated March 22, 2017 and amendment thereto dated October 10, 2017.
     
  “Note 2”: $50,000 Promissory Note dated October 12, 2017.
     
  “Note 3”: $550,000 Promissory Note dated January 16, 2018 and amendment thereto dated February 13, 2018.

 

As of December 31, 2017, the balance under Note 1 is $519,000, which includes $44,000 guaranteed interest. As of December 31, 2017, Note 1 can be converted into 3,280,255 shares of the Company’s common stock.

 

On January 9, 2018, the Company issued 899,685 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of $100,000 of Note 1 at a conversion price of $0.11. On March 5, 2018, the Company issued 269,716 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of $25,000 of Note 1 at a conversion price of $0.09. On March 21, 2018, the Company issued 295,631 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of $25,000 of Note 1 at a conversion price of $0.08. On April 10, 2018, the Company issued 307,692 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of $20,000 of Note 1 at a conversion price of $0.07.

 

As of April 17, 2018, the balance under Note 1 is $349,000, which includes $44,000 guaranteed interest. As of April 17, 2018, Note 1 can be converted into 1,378,205 shares of the Company’s common stock.

 

The Company issued a fixed convertible promissory note to Tangiers for the principal sum of $50,000 as a commitment fee. The promissory note maturity date is May 12, 2018. The principal amount due under Note 2 can be converted by Tangiers any time, into shares of the Company’s common stock at a conversion price of $0.1666 per share. Upon a “Maturity Default,” which is defined in Note 2 as the event in which Note 2 is not retied prior to its maturity date, Tangiers’ conversion rights under Note 2 would be adjusted such that the conversion price would be the lower of (i) $0.1666 or (ii) b) 65% of the average of the two lowest trading prices of the Company’s common stock during the 10 consecutive trading days prior to the date on which Tangiers elects to convert all or part of the note. As of December 31, 2017, the balance under Note 2 is $55,000, which includes $5,000 guaranteed interest. As of December 31, 2017, Note 2 can be converted into 300,120 shares of the Company’s common stock.

 

Note 3 is convertible into shares of the Company’s common stock at a conversion price of $0.30 per share. However, if Note is not paid back on or before the maturity date, defined in Note 3 as a “Maturity Default”, the conversion price of Note 3 shall then be adjusted to be equal to the lower of: (i) $0.30 or (ii) 65% multiplied by the lowest trading price of the Company’s common stock in the fifteen (15) consecutive trading day period immediately preceding the trading day that the Company receives a notice of conversion of Note 3. As of April 17, 2018, the balance under Note 3 is $231,660, which includes $17,160 guaranteed interest. As of April 17, 2018, Note 3 can be converted into 650,000 shares of the Company’s common stock.

 

  11  
 

 

Note 1 has a maturity date of April 10, 2018 and Note 2 has a maturity date of May 12, 2018. Note 3 has a maturity date of July 16, 2018.

 

Further, the amount of shares issuable upon conversion stated above are estimates only and any conversion of Note 1 or Note 2 or Note 3, by Tangiers is in solely at its discretion and the notes may never be converted, and further if a conversion does occur, the timing of such conversion would affect the potential number of common stock shares issued upon any such conversion based on the outstanding note amount and applicable conversion price at the time of any such conversion.

 

The execution of the amendment to Note 1 on October 10, 2017 caused the Company to default on the first draw due under Note 1 due to the acceleration of the maturity date. The default allows Tangiers to demand payment in cash equal to 150% of the outstanding principal and interest, which is automatically added to the outstanding principle, and convert all or a portion of the outstanding principal into shares of common stock of the Company. The default conversion rate of Note 1 is now the lower of the conversion rate then in effect or 65% of the lowest trading price for the 15 days prior to Tangiers’ notice of conversion. As of March 13, 2018, Tangiers has informed the Company that they have elected at this time not to enforce the default interest rate under Note 1 and also not to enforce the fees, reserving its rights to enforce the foregoing in their discretion. Other than the foregoing, none of the above listed notes are currently in default.

 

Investment Agreement with Tangiers

 

On October 12, 2017, we entered into an Investment Agreement with Tangiers. Pursuant to the terms of the Investment Agreement, Tangiers committed to purchase up to $2,000,000 of our common stock over a period of up to 36 months. From time to time during the 36-month period commencing from the effectiveness of the registration statement, we may deliver a put notice to Tangiers which states the dollar amount that we intend to sell to Tangiers on a date specified in the put notice. The maximum investment amount per notice must be no more than 200% of the average daily trading dollar volume of our common stock for the eight (8) consecutive trading days immediately prior to date of the applicable put notice and such amount must not exceed an accumulative amount of $250,000. The minimum put amount is $5,000. The purchase price per share to be paid by Tangiers will be the 80% of the of the average of the two lowest closing bid prices of the common stock during the pricing period applicable to the put notice, provided, however, an additional 10% will be added to the discount of each put if (i) we are not DWAC eligible and (ii) an additional 15% will be added to the discount of each put if we are under DTC “chill” status on the applicable date of the put notice.

 

In connection with the Investment Agreement with Tangiers, we also entered into a Registration Rights Agreement with Tangiers, pursuant to which we agreed to use our best efforts to, within 45 days of October 12, 2017, file with the SEC a registration statement, covering the resale of 5,000,000 shares of our common stock underlying the Investment Agreement with Tangiers.

 

Meeting Cash Requirements

 

Based upon the assumption of our monthly current operational burn rate remaining unchanged during the fiscal year, exclusive of those costs in our additional planned operations for the next 12, months as set forth above, the Company currently has sufficient funds through a combination of the sources of funding above to continue our current operations for the next 12 months. There is no assurance we will obtain the anticipated funds from our sources of funding. If we don’t obtain additional funding, and we don’t take other measures such as cutting back operational activities, we may not have sufficient funds to continue operations for the next 12 months. During March 2017, the Company laid-off two employees and as cost cutting measures in anticipation of our ultimate combination with Alamo CBD.

 

  12  
 

 

The ability to fund our Operational Activities is contingent upon us obtaining additional financing. If we don’t obtain the anticipated funds from our sources of funding beyond those needed for current operational activities, we may be able to finance our additional planned operations and continue growing our business.

 

We cannot guarantee we will be successful in our business operations, both current and potential future operations as described above.

 

We cannot guarantee that we will have sufficient financial resources to fund current operational activities and additional planned operational activities. Our business is subject to risks inherent in the establishment of a new business enterprise, including the financial risks associated with the limited capital resources currently available to us for the implementation of our business strategies. To become profitable and competitive, we must continue to execute our business plan as described above.

 

We have an accumulated deficit and have incurred operating losses since our inception and expect losses to continue during 2018. Our auditor has indicated in their Report that these conditions raise substantial doubt about our ability to continue as a going concern.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

For a discussion of our accounting policies and related items, please see the Notes to the Financial Statements, included in Item 8.

 

  13  
 

 

Item 8. FINANCIAL STATEMENTS

 

INDOOR HARVEST CORP

CONSOLIDATED FINANCIAL STATEMENTS

 

Table of Contents

 

  Page
Report of Independent Registered Public Accounting Firm 15
   
Consolidated Balance Sheets as of December 31, 2017 and 2016 16
   
Consolidated Statements of Operations for the Years Ended December 31, 2017 and 2016 1 7
   
Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended December 31, 2017 and 2016 18
   
Consolidated Statements of Cash Flow for the Years Ended December 31, 2017 and 2016 19
   
Notes to the Consolidated Financial Statements 20

 

  14  
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Indoor Harvest Corp

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Indoor Harvest Corp (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements). These consolidated financial statements are the responsibility of the Company’s management. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Emphasis of Matter

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Thayer O’Neal Company, LLC

 

Thayer O’Neal Company, LLC

 

We have served as the Company’s auditor since 2013.

 

Houston, Texas

 

April 17, 2018 except for Note 2 and Note 9, for which the date is January 31, 2019

 

  15  
 

 

INDOOR HARVEST CORP

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2017 AND 2016

 

    2017     2016  
ASSETS                
Current assets:                
Cash   $ 35,453     $ 78,219  
Accounts receivable           34,853  
Other receivable           7,323  
Inventory           2,360  
Prepaid rent     4,452        
Unused commitment fee     50,000        
Total current assets     89,905       122,755  
                 
Furniture and equipment, net     24,623       158,418  
Security deposit     12,600       12,600  
Intangible asset, net     5,892       7,604  
Total assets   $ 133,020     $ 301,377  
                 
LIABILITIES                
Current liabilities:                
Accounts payable and accrued expenses   $ 89,033     $ 55,797  
Convertible notes payable, net of debt discount of $27,014 and $152,617, respectively     668,912       122,383  
Derivatives liability, net of discount of $213,453 and $0, respectively     341,464        
Note payable, net of discount of $0 and $15,714, respectively           209,786  
Accrued payroll     6,653       7,142  
Deferred rent     6,239       8,513  
Note payable - current portion     7,520       6,790  
Billing in excess of costs and estimated earnings           20,155  
Total current liabilities     1,119,821       430,566  
                 
Long term liabilities:                
Note payable     12,823       20,342  
Total liabilities     1,132,644       450,908  
                 
Stockholders’ 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 December 31, 2017 and December 31, 2016, respectively     7,500       2,500  
Common stock: $0.001 par value, 50,000,000 shares authorized; 25,503,678 and 15,213,512 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively     25,502       15,213  
Additional paid-in capital     7,376,196       3,829,528  
Accumulated deficit     (8,408,822 )     (3,996,772 )
Total stockholders’ deficit     (999,624 )     (149,531 )
Total liabilities and stockholders’ deficit   $ 133,020     $ 301,377  

 

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements

 

  16  
 

 

INDOOR HARVEST CORP

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

 

    2017     2016  
Revenue   $     $ 163,996  
                 
Cost of sales           111,581  
                 
Gross profit           52,415  
                 
Operating expenses                
Depreciation and amortization expense   $ 51,507     $ 51,484  
Research and development     1,625       16,184  
Loss on investment in joint venture     250,000        
Impairment loss     1,440,961        
Professional fees     418,092       108,093  
General and administrative expenses     1,061,493       1,129,711  
Total operating expenses     3,223,678       1,305,472  
                 
Loss from operations     (3,223,678 )     (1,253,057 )
                 
Other income (expense)                
Other income (expense)     7,196       52,323  
                 
Interest expense     (163,047 )     (16,427 )
Derivatives interest expense           (66,980 )
Amortization of debt discount     (515,814 )     (438,032 )
Amortization of debt issuance costs           (20,000 )
Amortization of original issuance discount           (22,500 )
Loss on debt settlement           (131,944 )
Loss on sale of equipment     (73,750 )     (36,627 )
                 
Change in fair value of embedded derivative liability     (442,957 )     (141,756 )
Total other income (expense)     (1,183,372 )     (821,943 )
                 
Net loss   $ (4,412,050 )   $ (2,075,000 )
                 
Net loss from continuing operations per common share:                
Net loss from continuing operations per share, basic and diluted   $ (0.22 )   $ (0.16 )
                 
Weighted average number of common shares outstanding:                
Basic and diluted     20,234,995       12,742,137  

 

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements

 

  17  
 

 

INDOOR HARVEST CORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

 

    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, January 1, 2015                 11,204,571     $ 11,204     $ 2,233,663     $ (1,921,772 )   $ 323,095  
                                                         
Issuance of common stock                                                        
For cash                 100,000       100       49,900             50,000  
For services                 1,327,380       1,327       464,097             465,424  
Convertible debt converted into common stock                 2,581,561       2,582       200,737             203,319  
Beneficial conversion feature                             316,269             316,269  
Debt discount on warrants                             30,243             30,243  
Derivative liability                             412,119             412,119  
                                                         
Issuance of preferred stock for cash     250,000       2,500                   122,500             125,000  
                                                         
Net loss for the year ended December 31, 2016                                   (2,075,000 )     (2,075,000 )
                                                         
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                 1,179,651       1,178       173,823             175,001  
Beneficial conversion feature                             120,333             120,333  
Derivative liability                             101,493             101,493  
Conversion of preferred stock into common shares     (250,000 )     (2,500 )     416,667       417       35,321             33,238  
For Alamo CBD asset acquisition                 7,584,008       7,584       1,433,377             1,440,961  
                                                         
Issuance of preferred stock for cash     750,000       7,500                   292,501             300,001  
                                                         
Voluntary return of stock by related party                 (2,500,000 )     (2,500 )     2,500              
                                                         
Net loss for the year ended December 31, 2017                                   (4,412,050 )     (4,412,050 )
                                                         
Balances, December 31, 2017     750,000     $ 7,500       25,503,678     $ 25,502     $ 7,376,196     $ (8,408,822 )   $ (999,624 )

 

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements

 

  18  
 

 

INDOOR HARVEST CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2017 and 2016

 

    2017     2016  
Cash flows from operating activities:                
Net loss from continuing operations   $ (4,412,050 )   $ (2,075,000 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization expense     51,507       51,484  
Loss on sale of equipment     73,750       36,626  
Loss on debt settlements           131,944  
Amortization of original issue discount           22,500  
Amortization of debt discount     515,814       438,032  
Amortization of debt offering costs           20,000  
Impairment loss     1,440,961        
Loss on investment in joint venture     250,000        
Derivative interest expense           66,980  
Change in fair value of embedded derivative liability     442,957       141,756  
Stock issued for services - related party     159,930        
Stock issued for services     407,000       465,424  
Change in operating assets and liabilities:                
Accounts receivable     34,853       17,024  
Other receivable     7,323        
Inventory     2,360       4,641  
Prepaid expense     (4,452 )     1,697  
Accounts payable and accrued expenses     33,236       15,763  
Deferred rent     (2,274 )     (1,265 )
Accrued compensation - officers     (489 )      
Costs and estimated earnings in excess of billings     (20,155 )     224  
Net cash used in operating activities     (1,019,729 )     (662,170 )
                 
Cash flows from investing activities:                
Proceeds from the sale of equipment     10,800       10,000  
Investment in joint venture     (250,000 )      
Purchase of equipment and software     (550 )     (12,294 )
Net cash used in investing activities     (239,750 )     (2,294 )
                 
Cash flows from financing activities:                
Repayments of note payable     (6,787 )      
Proceeds from convertible notes payable, less offering costs and OID costs paid     500,000       675,000  
Repayment of convertible note     (175,000 )     (208,223 )
Settlement of demand note payable, less OID costs paid     (225,500 )      
Issuance of preferred stock for cash     300,000       125,000  
Issuance of common stock for cash     824,000       50,000  
Net cash provided by financing activities     1,216,713       641,777  
                 
Decrease cash and cash equivalents     (42,766 )     (22,687 )
Cash and cash equivalents at beginning of period     78,219       100,906  
Cash and cash equivalents at end of period   $ 35,453     $ 78,219  
                 
Supplementary disclosure of cash flow information:                
Cash paid during the period for:                
Interest   $ 2,469     $ 3,481  
Income taxes   $     $  
Supplemental disclosure of non-cash investing and financing activities:                
Beneficial conversion feature   $ 120,333     $ 333,900  
Shares issued for debt issuance costs   $     $ 143,500  
Shares issued on conversion of convertible debt   $     $ 203,351  
Unused commitment fee   $ 50,000     $  
Settlement of convertible note into common shares   $ 100,000     $  
Partial conversion of convertible note into common shares   $ 75,000        
Conversion of preferred shares into common shares   $ 2,500     $  
Stock issued for the Alamo CBD acquisition   $ 1,440,961     $  
Voluntary return of stock by related party   $ 2,500     $  

 

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements

 

  19  
 

 

INDOOR HARVEST CORP

Notes to Financial Statements

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (RESTATED)

 

Nature of Operations and Organization

 

Indoor Harvest Corp. (the “Company,”) is a Texas corporation formed on November 23, 2011. Our principal executive office is located at 5300 East Freeway Suite A, Houston, Texas 77020. On August 3, 2017, we formed Alamo Acquisition, LLC, a wholly owned Texas limited liability company (“Alamo Acquisition Sub”). On August 4, 2017, we consummated a reverse triangular merger pursuant to which Alamo Acquisition Sub acquired all of the outstanding member interests of Alamo CBD, LLC. (“Alamo CBD”), a Texas limited Liability Company. Upon closing of the Alamo Merger, the member interests (“Alamo Survivor Members”) of Alamo CBD were exchanged for 7,584,008 shares of Indoor Harvest’s common stock, the parent company of Alamo Acquisition Sub, and Alamo CBD continued as our surviving wholly-owned subsidiary, and Alamo Acquisition Sub ceased to exist.

 

On October 17, 2018, the Board of Directors (the “Board”) of the Company was notified by the Company’s independent registered public accounting firm, Thayer O’Neal Company, LLC (“Thayer”) that, in July 2018, information came to its attention that led it to investigate whether the Company’s acquisition of Alamo CBD was wrongly accounted for as a business combination. Thayer concluded this investigation on October 17, 2018 and notified the Board that the Company, pursuant to generally accepted accounting principles, should have accounted for the Alamo CBD transaction as an asset acquisition.

 

From inception until August 4, 2017, the Company provided full service, state of the art design-build, engineering, procurement and construction services to the indoor and vertical farming industry. The Company provided production platforms, mechanical systems and complete custom designed build outs for both Controlled Environment Agriculture (“CEA”) and Building Integrated Agriculture (“BIA”), for two unique industries, produce and cannabis. In mid-2016, the Company began efforts to separate its produce and cannabis related operations due to ongoing feedback from both clients and potential institutional investors. It was determined that the Company’s involvement in the cannabis industry was creating conflicts for clients and potential institutional investors wishing to work with the Company from the produce industry due to the public perception and political issues surrounding the cannabis industry. By late-2016, the Company had decided to cease actively selling its products and services to the vertical farming industry and to focus on utilizing the Company’s developed technology and methods for the cannabis industry. On August 4, 2017, the Company ceased actively supporting business development of vertical farms for produce production.

 

Basis of Presentation

 

The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

It is management’s opinion, however, that all material adjustments (consisting of normal and recurring adjustments) have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates include, but are not limited to, the estimate of percentage of completion on construction contracts in progress at each reporting period which we rely on as a primary basis of revenue recognition, estimated useful lives of equipment for purposes of depreciation and the valuation of common shares issued for services, equipment and the liquidation of liabilities.

 

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Principles of Consolidation

 

The consolidated financial statements include the accounts of Indoor Harvest Corp. and its wholly-owned subsidiary, Alamo CBD. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with a maturity of three months or less to be cash and cash equivalents.

 

Accounts Receivable and Work in Progress

 

Work in progress consists of costs recorded and revenue earned on projects recognized on the percentage of completion method for work performed on contracts in progress at 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 9).

 

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.

 

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.

 

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Stock Based Compensation

 

The Company recognizes stock-based compensation in accordance with ASC 718-10, Stock Compensation. ASC 718-10 focuses on transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus in which an entity obtains employee services in stock-based payment transactions. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exceptions).

 

Loss per Share

 

Basic earnings per share amounts are calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is based on the weighted average numbers of shares of common stock outstanding for the periods, including dilutive effects of stock options, warrants granted and convertible preferred stock. Dilutive options and warrants that are issued during a period or that expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported. Since Indoor Harvest has incurred losses for all periods, the impact of the common stock equivalents would be anti- dilutive and therefore are not included in the calculation.

 

Fair Value of Financial Instruments

 

We adopted accounting guidance for financial and non-financial assets and liabilities (ASC 820). The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share- based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
   
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
   
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

 

Income Taxes

 

The Company accounts for income taxes pursuant to FASB ASC 740—Income Taxes, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. The Company provides for deferred taxes on temporary differences between the financial statements and tax basis of assets using the enacted tax rates that are expected to apply to taxable income when the temporary differences are expected to reverse.

 

ASB ASC 740 establishes a more-likely-than-not threshold for recognizing the benefits of tax return positions in the financial statements. Also, the statement implements a process for measuring those tax positions that meet the recognition threshold of being ultimately sustained upon examination by the taxing authorities. There are no uncertain tax positions taken by the Company on its tax returns. The Company files tax returns in the U.S. and states in which it has operations and is subject to taxation. Tax years subsequent to 2008 remain open to examination by U.S. federal and state tax jurisdictions.

 

Tax years 2017, 2016, 2015, 2014, and 2013, remain subject to examination by the IRS and respective states.

 

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On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). We recognize the impact of tax legislation in the period in which the law is enacted. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Reform Act. Consistent with that guidance, we recognized provisional amounts based upon our interpretation of the tax laws and estimates which require significant judgments. The actual impact of these tax laws may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in our interpretations and assumptions, additional guidance that may be issued by the government and actions we may take as a result of these enacted tax laws. Any adjustments recorded to the provisional amounts will be included in income from operations as an adjustment to tax expense.

 

Property and Equipment

 

Property and equipment is recorded at cost and depreciated or amortized using the straight-line method over the estimated useful life of the asset or the underlying lease term for leasehold improvements, whichever is shorter. The estimated useful life by asset description is noted in the following table:

 

Asset description   Estimated Useful
Life (Years)
 
Furniture and equipment     3 - 5  
Tooling equipment     10  
Leasehold improvements     *  

 

* The shorter of 5 years or the life of the lease.

 

Additions are capitalized and maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions of equipment are reflected in other income.

 

Goodwill

 

In accordance with ASC 350 Goodwill is not amortized but evaluated for impairment annually or more often if indicators of a potential impairment are present.

 

Intangible Assets (Restated)

 

In accordance with ASC 350 Goodwill and Other Intangible Assets, indefinite-lived intangible assets are not amortized but are evaluated for impairment annually or more often if indicators of a potential impairment are present. Indefinite-lived intangible assets consist of the Company’s domain name. Finite-lived intangible assets include software and is amortized over a 3 to 5-year period. The Company recognized $1,440,961 and $0 for impairment charges taken during the year ended December 31, 2017 and 2016, respectively.

 

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.

 

Advertising Expense

 

Advertising and promotional costs are expensed as incurred.

 

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Reclassifications

 

Certain expense items have been reclassified in the statement of operations for the year ended December 31, 2016, to conform to the reporting format adopted for the year ended December 31, 2017.

 

Recent Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect as of the date of the issuance of these financial statements. The following pronouncements may significantly impact future reporting of financial position and results of operations. Management is currently assessing implementation.

 

The FASB has issued 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.

 

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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, 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 - RESTATEMENT OF FINANCIAL STATEMENTS

 

On October 17, 2018, the Board was notified by Thayer that, in July 2018, information came to its attention that led it to investigate whether the Company’s acquisition of Alamo CBD was wrongly accounted for as a business combination. Thayer concluded this investigation on October 17, 2018 and notified the Board that the Company, pursuant to generally accepted accounting principles, should have accounted for the Alamo CBD transaction as an asset acquisition.

 

The Company had recorded $1,440,961 for Goodwill from the acquisition of Alamo CBD), from the issuance of 7,584,008 shares of common stock valued at $1,440,961. The Company has determined this amount should be restated as an impairment loss of intangible assets.

 

The effects of the adjustments on the Company’s previously issued financial statements as at December 31, 2017 and for the year ended December 31, 2017 are summarized as follows:

 

    Originally     Restatement        
Statements of Operations   Reported     Adjustment     As Restated  
For the twelve months ended December 31, 2017                        
Impairment loss from Goodwill   $ 1,440,961     $ (1,440,961 )   $ -  
Impairment loss of intangible assets   $ -     $ 1,440,961     $ 1,440,961  
Total operating expenses   $ 1,440,961     $ -     $ 1,440,961  

 

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NOTE 3 - GOING CONCERN

 

As reflected in the accompanying financial statements, the Company had a net loss of $4,412,050, net cash used in operations of $1,269,729 and has an accumulated deficit of $8,408,822, for the year ended December 31, 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 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 4 - PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following at December 31, 2017 and 2016:

 

Classification   2017     2016  
Furniture and equipment   $ 11,666     $ 123,829  
Tooling equipment           27,015  
Leasehold improvements     38,717       57,780  
Computer equipment     3,019       8,933  
Research and development lab           59,482  
Total     53,402       277,039  
Less: Accumulated depreciation     (28,779 )     (118,621 )
Property and equipment, net   $ 24,623     $ 158,418  

 

Depreciation expense for the years ended December 31, 2017 and 2016, totaled $49,797 and $51,484, respectively.

 

During the year ended December 31, 2017, the Company sold $23,467 of equipment in exchange for $10,800. In addition, the Company wrote off $201,651 of equipment primarily related to the fabrication of vertical farming equipment for produce. As a result of these disposals, the Company recorded a loss of $73,750 that was recorded in the Condensed Statement of Operations within general and administrative expenses.

 

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.

 

NOTE 5 - COMMITMENTS & CONTINGENCIES

 

On February 20, 2014, the Company signed a 60-month lease on a 10,000 sq. ft. office/warehouse facility and paid a deposit of $12,600. The monthly base rent is $4,200 increasing 6% every two years for the term of the lease. The property is adequate for all of the Company’s currently planned activities.

 

Deferred rent payable at December 31, 2017 was $6,239. 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.

 

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Rent expense for the years ended December 31, 2017 and 2016, were:

 

    2017     2016  
Rent expense   $ 52,550     $ 51,403  

 

At December 31, 2017, rental commitments are as follows:

 

Years Ending December 31,   Amount  
2018   $ 55,560  
2019     18,876  
Total   $ 74,436  

 

NOTE 6 – ASSET ACQUISITION (RESTATED)

 

Alamo CBD, LLC

 

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, we formed Alamo Acquisition, LLC, a wholly owned Texas limited liability company (“Alamo Acquisition Sub”).

 

On August 4, 2017, we consummated a reverse triangular merger pursuant to which Alamo Acquisition Sub acquired all of the outstanding member interests of Alamo CBD, LLC. (“Alamo CBD”), a Texas limited Liability Company. Upon closing of the Alamo Merger, the member interests (“Alamo Survivor Members”) of Alamo CBD were exchanged for 7,584,008 shares of Indoor Harvest’s common stock, the parent company of Alamo Acquisition Sub, and Alamo CBD continued as our surviving wholly-owned subsidiary, and Alamo Acquisition Sub ceased to exist.

 

As discussed above, management is now accounting for the acquisition of Alamo CBD as an acquisition of assets (and not a business combination).

 

In addition to the foregoing, following the closing of the transaction, and Alamo CBD being successfully awarded a provisional or full license to produce and dispense cannabis in the State of Texas, Indoor Harvest will issue to the individual Alamo Survivor Members, an additional Eight Million Five Hundred Thousand Dollars ($8,500,000) of newly-issued shares of common stock of Indoor Harvest, par value $0.001, based upon the three (3) day average closing price of the Company’s common stock, as quoted on the OTCQB, prior to the time of issuance.

 

Additionally, upon Alamo CBD successfully being registered and licensed by the DEA to produce and dispense cannabis under federal law, Indoor Harvest will issue to the individual Alamo Survivor Members, an additional Two Million Five Hundred Thousand Dollars ($2,500,000) cash payment, or newly-issued shares of common stock of Indoor Harvest, par value $0.001, based upon the three (3) day average closing price of the Company’s common stock, as quoted on the OTCQB, prior to the time of issuance, at the option of the individual Alamo Survivor Member. A combination of cash and common stock may be elected by Alamo Survivor Member individually.

 

On August 8, 2017, Chad Sykes, the Company’s Founder and Chief of Cultivation, returned 2,500,000 shares of common stock to the Company. Mr. Sykes voluntarily returned such shares in order to prevent dilution to the Company’s shareholders as a result of the merger and in order to facilitate the merger. The return of common stock by Chad Sykes was a non-cash transaction and reduces the common stock outstanding as of December 31, 2017.

 

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 intangible assets at a fair value of $1,440,961 ($0.19 per share) based upon closing price per share of the Company’s common stock on the date the stock was issued. The intangible assets acquired in the transaction, were Alamo CBD’s pending provisional or full license to produce and dispense cannabis in the State of Texas.

 

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During the quarter ended September 30, 2017, the Company’s management decided to impair the intangible assets created by the Alamo CBD transaction, as there are doubts regarding when a license may be issued, as the license is pending and may or may not ever be issued, and whether upon receipt of the license if it will lead to significant positive cash flows. The Company recorded an impairment loss of intangible assets of $1,440,961 in the Statement of Operations for the year ended December 31, 2017.

 

Contractual Joint Venture with Alamo CBD and Vyripharm Enterprises, LLC

 

On March 23, 2017, Indoor Harvest 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 would 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:

 

  i. In Texas, pursuant to the Texas Compassionate Use Act, as may be amended;
     
  ii. 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
     
  iii. 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 was to be five (5) years following the effective date, and the Joint Venture Agreement could be extended beyond this initial term by mutual consent of the parties. Pursuant to the Joint Venture terms, the Company agreed to contribute a total of $5,000,000 on the basis of $1,000,000 per year for each of the first five (5) years of the Initial Term. Should the Company fail to make payment under the Joint Venture, the agreement would terminate and neither party would have further obligation to the other.

 

The Company paid an initial down payment of $250,000 under the Joint Venture Agreement on March 30, 2017.

 

Background for the Contractual Joint Venture

 

The purpose of the above-described change in business and Joint Venture was twofold, as follows:

 

  It would separate the Company’s cannabis and produce related operations, as we indicated was previously a goal.
     
  It would put in place all elements necessary for the resulting Joint Venture, of which the resulting public reporting company would have a significant on-going interest, to become a registered producer under the federal CSA to produce cannabis.

 

As of December 1, 2017, only one entity, the University of Mississippi can legally manufacture Cannabis to supply researchers involved in the various studies about using cannabis to treat maladies such as PTSD or Epilepsy. On August 12, 2016, the DOJ and the DEA issued a policy statement on cannabis issues, as follows:

 

  It is well known that the DOJ and DEA have said that cannabis would continue to be classified as a Schedule 1 drug, like heroin.
     
  It is not so well known that the DOJ and DEA also reset the policy regarding entities that could legally manufacture cannabis to supply researchers involved in various clinical studies using cannabis to treat maladies such as PTSD or Epilepsy.

 

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According to the policy statement, the purpose of this policy reset is to increase the number of U.S. entities registered under the CSA to grow (manufacture) cannabis to supply researchers on the effectiveness of medical grade cannabis in treating these and other maladies.

 

The CSA under subsection 823(a)(1) provides, DEA is obligated to register only the number of bulk manufacturers of a given schedule I or II controlled substance that is necessary to “produce an adequate and uninterrupted supply of these substances under adequately competitive conditions for legitimate medical, scientific, research, and industrial purposes.”

 

The policy statement (Federal Register Vol. 81) provided additional explanation on how the DEA would evaluate applications for such registration consistent with the CSA and the obligations of the United States under the applicable international drug control treaty. The Company had reviewed these guidelines and believed all applicable requirements which could not be met by the Company alone would be met by the following:

 

  Our previous Cannabis Pilot Agreement and completed technology trials with Canopy Growth Corporation, a Canadian licensed producer under the Marihuana for Medical Purposes Regulations, had demonstrated that our aeroponic technology could augment and improve the quality and production of cannabis for use in cannabis research.
     
  We believed that the proposed combination with Alamo and the joint venture with Vyripharm Enterprises, LLC, in which the Company would have an equity interest due to its combination with Alamo, would meet all the additional guidelines and conditions set forth regarding the expected required experience in handling of a controlled substance and its related research with cannabis for pharmaceutical use that is one of the conditions of the policy statement.

 

Voluntary Default of Joint Venture and Status of Application with DPS

 

As published in the Texas Department of Public Safety (“DPS”) Self-Evaluation Report, on page 543, question (D), dated September 29, 2017, the DPS originally interpreted the statute as requiring a market-based system by which the number and location of licensees are determined by market factors rather than by regulation – as not mandating or limiting the number of licensed distributors. It was originally understood that the applicants would be required to satisfy certain basic requirements prior to licensure, and the ability to maintain compliance with DPS guidelines will be evaluated through on-going audits and inspections.

 

In late 2016, the DPS modified its approach to restrict the number of licenses to three. This necessitated the development of a competitive review process, where three applicants were conditionally approved based on the review of the submitted application materials. Upon successful onsite inspection of their facilities, qualified applicants will be issued licenses. Because of this competitive review process, the Joint Venture group placed 16th out of 43 applicants and its application is currently considered pending by the DPS.

 

On June 30, 2017, the Company, Alamo CBD and Vyripharm entered into discussions to amend and extend the payment terms under the Joint Venture Agreement due to the group not being awarded one of the three initial provisional licenses to produce cannabis in Texas under the TCUP.

 

On August 7, 2017, after negotiations, the Company advised Vyripharm that it intended to voluntarily default on the Joint Venture Agreement and the Company wrote off the $250,000 down payment towards the Joint Venture investment and there is no further obligation by either party under the terms of the Joint Venture. The Company’s 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.

 

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The Company is a member and is working with the Medical Cannabis Association of Texas and expects both lobbying and legislative efforts currently being undertaken to result in the program being expanded, additional permits being awarded, and new legislation being introduced in 2019 to allow for a separate permitting process to conduct cannabis research in line with the CSA. There is no guarantee that these efforts will result in the Company obtaining a license or permit to produce cannabis in Texas or that legislation will be adopted allowing a separate licensing or permitting process for research purposes.

 

As part of the Company’s annual impairment evaluation, management decided to impair the goodwill created by the Alamo Merger as there are doubts regarding when a license may be issued, as the license is pending and may or may not ever be issued, and whether upon receipt of the license if it will lead to significant positive cash flows. The Company recorded an impairment of goodwill in the Statement of Operations for the year ended December 31, 2017 of $1,440,961.

 

NOTE 7 - 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, 2017 the Company repaid $6,789 of the principal and the remaining balance is $20,343, of which $7,520 is recorded as a current note payable.

 

Year Ending December 31,   Amount  
       
2018   $ 7,520  
2019     8,328  
2020     4,495  
    $ 20,343  

 

NOTE 8 - CONCENTRATIONS

 

At December 31, 2017 and December 31, 2016, the Company had concentrations of accounts receivable of:

 

Customer   December 31, 2017     December 31, 2016  
Tweed, Inc.     0 %     100 %

 

For the years ended December 31, 2017 and December 31, 2016, the Company had a concentration of sales of:

 

    2017     2016  
Customer   Revenue ($)     Percentage     Revenue ($)     Percentage  
Tweed (Canopy Growth Corporation)   $       %   $ 80,620       50 %
ER Michigan (Michigan State University)   $       %   $ 28,385       18 %
Urbanika Farms   $       %   $ 27,600       17 %
University of Arizona CEAC   $       %   $ 18,626       11 %
GSS Colorado   $       %   $ 5,000       2 %
PH Research Platform   $       %   $ 3,765       2 %
Total   $       %   $ 163,996       100 %

 

For the year ended December 31, 2017, the Company had a purchasing concentration of $3,897 with Illumitex, LLC, a manufacturer largely specializing in the production and development of LED lights for indoor and vertical farming totaling 74%.

 

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For the year ended December 31, 2016, the Company had a purchasing concentration of $29,500 with 3rd Coast Pump & Equipment, LLC, a manufacturer of custom specialty pump and control packages totaling 37%.

 

NOTE 9 - INTANGIBLE ASSETS (RESTATED)

 

There were no impairment charges taken for the domain name during the year ended December 31, 2017 and December 31, 2016.

 

Intangible assets consist of the following at December 31, 2017 and December 31, 2016:

 

Classification   2017     2016  
Domain name   $ 2,000     $ 2,000  
Facilities Manager’s Package Online     1,022       1,022  
MLC CD Systems (software)     7,560       7,560  
Total     10,582       10,582  
Less: Accumulated amortization     (4,690 )     (2,978 )
Intangible assets, net   $ 5,892     $ 7,604  

 

The Company recognized $1,440,961 and $0 for impairment charges taken during the nine months ended September 30, 2017 and 2016, respectively, for the acquisition of Alamo CBD assets.

 

NOTE 10 - WORK IN PROCESS

 

Work in progress as of December 31, 2017 and December 31, 2016, consisted of the following:

 

Description   2017     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 11 - FAIR VALUE MEASUREMENTS

 

Carrying amounts reported on the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to their relatively short maturity. Debt classified as Level 2 in the fair value hierarchy represent note payable, net of debt discount, of $0 and $209,786 at December 31, 2017 and December 31, 2016, respectively, and convertible notes payable of $668,912 and $122,383 at December 31, 2017 and December 31, 2016, respectively. Debt classified as Level 3 in the fair value hierarchy represents derivative liability of $554,916 and $0 at December 31, 2017 and December 31, 2016, respectively.

 

NOTE 12 - DEBT AND CONVERTIBLE LOAN 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.

 

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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 (“Note 1”) in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. Note1 is convertible into shares of common stock at a price equal to $0.30 per share; provided, however that if Note 1 is not retired on or before the maturity date, defined in Note 1 as a “Maturity Default” the conversion price shall be adjusted to be equal to the lower of: (i) $.30 or (ii) 65% multiplied by the lowest trading price of the Company’s common stock in the fifteen (15) consecutive trading day period immediately preceding the date that the Company receives a notice of conversion. The Tangiers Note carries interest on the unpaid principal amount at the rate of 8% per annum and is due and payable eight months from the effective date of each payment. As of December31, 2017, the balance under Note 1 is $519,000, which includes $44,000 guaranteed interest. As of December 31, 2017, Note 1 can be converted into 3,280,255 shares of the Company’s common stock.

 

On October 12, 2017, the Company entered into an Investment Agreement with Tangiers. Pursuant to the terms of the Investment Agreement, Tangiers committed to purchase up to $2,000,000 of our common stock over a period of up to 36 months. From time to time during the 36-month period commencing from the effectiveness of the registration statement, we may deliver a put notice to Tangiers which states the dollar amount that we intend to sell to Tangiers on a date specified in the put notice. The maximum investment amount per notice must be no more than 200% of the average daily trading dollar volume of our common stock for the eight (8) consecutive trading days immediately prior to date of the applicable put notice and such amount must not exceed an accumulative amount of $250,000. The minimum put amount is $5,000. The purchase price per share to be paid by Tangiers will be the 80% of the of the average of the two lowest closing bid prices of the common stock during the pricing period applicable to the put notice, provided, however, an additional 10% will be added to the discount of each put if (i) we are not DWAC eligible and (ii) an additional 15% will be added to the discount of each put if we are under DTC “chill” status on the applicable date of the put notice.

 

The Company issued a fixed convertible promissory note to Tangiers for the principal sum of $50,000 as a commitment fee for the Investment Agreement. The promissory note maturity date is May 12, 2018. The principal amount due under Note 2 can be converted by Tangiers any time, into shares of the Company’s common stock at a conversion price of $0.1666 per share. Upon a “Maturity Default,” which is defined in Note 2 as the event in which Note 2 is not retied prior to its maturity date, Tangiers’ conversion rights under Note 2 would be adjusted such that the conversion price would be the lower of (i) $0.1666 or (ii) b) 65% of the average of the two lowest trading prices of the Company’s common stock during the 10 consecutive trading days prior to the date on which Tangiers elects to convert all or part of the note. As of December 31, 2017, the balance under Note 2 is $55,000, which includes $5,000 guaranteed interest. As of December 31, 2017, Note 2 can be converted into 300,120 shares of the Company’s common stock.

 

On October 17, 2017, the Company converted debt and accrued interest, totaling $30,000 into 329,670 shares of common stock.

 

On December 18, 2017, the Company converted debt and accrued interest, totaling $45,000 into 516,648 shares of common stock. On October 10, 2017, the Company executed Amendment #1 to the Tangiers Note for a final draw of $250,000 payment plus a 10% original issue discount (“Note 2”). Amendment #1 modified the maturity date for the Tangier Note from eight months to six months from the effective date of each payment. All other terms and conditions of the Tangiers Note remain effective.

 

The execution of the amendment to Note 1 on October 10, 2017 caused the Company to default on the first draw due under Note 1 due to the acceleration of the maturity date. The default allows Tangiers to demand payment in cash equal to 150% of the outstanding principal and interest, which is automatically added to the outstanding principle, and convert all or a portion of the outstanding principal into shares of common stock of the Company. The default conversion rate of Note 1 is now the lower of the conversion rate then in effect or 65% of the lowest trading price for the 15 days prior to Tangiers’ notice of conversion. As of March 13, 2018, Tangiers has informed the Company that they have elected at this time not to enforce the default interest rate under Note 1 and also not to enforce the fees, reserving its rights to enforce the foregoing in their discretion. Other than the foregoing, none of the above listed notes are currently in default.

 

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For the year ended December 31, 2017 and December 31, 2016, the Company accrued $49,000 and $10,334, respectively, in accrued interest related to outstanding the note.

 

Debt Discount and Original Issuance Costs

 

During the year end December 31, 2017 and 2016, the Company recorded debt discounts totaling $383,786 and $417,834, 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 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.

 

The Company amortized $466,862 and $265,217 to interest expense during the years ended December 31, 2017 and 2016, as follows:

 

    2017     2016  
Debt discount, beginning of period   $ 152,617     $  
Additional debt discount and debt issue cost     383,786       417,834  
Amortization of debt discount and debt issue cost     (466,862 )     (265,217 )
Debt discount, end of period   $ 69,541     $ 152,617  

 

Debt Issuance Costs

 

During the year ended December 31, 2017 and 2016, the Company paid debt issue costs totaling $0 and $20,000, respectively. During the years ended December 31, 2017 and 2016, the Company amortized $0 and $20,000 of debt issue costs, respectively. The following is a summary of the Company’s debt issue costs for the years ended December 31, 2017 and 2016:

 

    2017     2016  
Debt discount, beginning of period   $     $  
Additional debt discount           20,000  
Amortization of debt discount           (20,000 )
Debt discount, end of period   $     $  

 

NOTE 13 - DERIVATIVE LIABILITIES

 

The Company identified the conversion features embedded within its convertible debts as financial derivatives. The Company has determined that the embedded conversion option should be accounted for at fair value.

 

The following schedule shows the change in fair value of the derivative liabilities at year end December 31, 2017:

 

Derivative liabilities - December 31, 2016   $  
Add fair value at the commitment date for convertible notes issued during the current year     213,453  
Less derivatives due to conversion     (101,493 )
Fair value mark to market adjustment for derivatives     442,957  
Derivative liabilities - December 31, 2017     554,917  
Less : current portion     (554,917 )
Long-term derivative liabilities   $  

 

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The following schedule shows the change in fair value of the derivative liabilities at year end December 31, 2016:

 

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     141,755  
Derivative liabilities - December 31, 2017      
Less : current portion      
Long-term derivative liabilities   $  

 

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, 2017 of $0.

 

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

    Remeasurement Date  
Expected dividends:     %     %
Expected volatility:     134 %     130 - 169 %
Expected term (years):     0.42       0.15 - 0.36 years  
Risk free interest rate:     1.19 %     1.25 - 1.39 %

 

NOTE 14 - RELATED PARTY TRANSACTIONS

 

On 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 per share) based upon the most recent trading price per share of the Company’s stock.

 

On 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 per share) based upon the most recent trading price per share of the Company’s stock.

 

On 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 per share) based upon the most recent trading price per share of the Company’s stock.

 

On August 8, 2017, Chad Sykes, the Company’s Founder and Chief of Cultivation, returned 2,500,000 shares of common stock to the Company. Mr. Sykes voluntarily returned such shares in order to prevent dilution to the Company’s shareholders as a result of the Alamo Merger and in order to facilitate the merger. The return of common stock by Chad Sykes was a non-cash transaction and reduces the common stock outstanding as of December 31, 2017.

 

On August 9, 2017, Chad Sykes, the Company founder, tendered his resignation as a Director and member of the Board of Directors as part of the Company’s merger agreement with Alamo CBD.

 

On August 9, 2017, John Choo tendered his resignation as a Director and member of the Board of Directors as part of the Company’s merger agreement with Alamo CBD.

 

On August 9, 2017, Pawel Hardej tendered his resignation as a Director and member of the Board of Directors as part of the Company’s merger agreement with Alamo CBD.

 

On August 9, 2017, John Seckman was elected a Director and member of the Board of Directors. On November 1, 2017, John Seckman resigned as a Director of the Company and as a member of the Board of Directors, 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.

 

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On August 9, 2017, we entered into a Director Agreement with Rick Gutshall. The Company agreed to 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.

 

On August 9, 2017, we entered into a Director Agreement with Annette Knebel. The Company agreed to 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.

 

On August 9, 2017, we entered into a Director Agreement with Dr. Lang Coleman. The Company agreed to 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.

 

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. The Company recorded fair value of $561,975 ($0.19 per share) based upon the most recent trading price per share of the Company’s stock.

 

On September 6, 2017, the Company issued 758,401 shares of common stock Rick Gutshall, former Interim-Chief Executive Office, former Chief Financial Officer, and Director, related to the merger of the Company and Alamo CBD. The Company recorded fair value of $144,096 ($0.19 per share) based upon the most recent trading price per share 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 Financial Officer and Director and former Chief Accounting Officer. The Company recorded fair value of $50,000 ($0.20 per share) based upon the most recent trading price per share of the Company’s stock.

 

On May 9, 2016, the Company entered into a Director Agreement with Pawel Hardej. The Company will reimburse the Director for reasonable travel and other incidental expenses incurred by the Director in performing his services and attending meetings as approved in advance by the Company. The Company shall award to the Director 166,560 shares of common stock over a two-year period as directed in the Director Agreement. 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.)

 

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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.

 

NOTE 15 - SHAREHOLDERS’ EQUITY

 

Convertible Series A 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 year ended December 31, 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 Designation. Series A Holders have each agreed individually and also as a group to convert their Series A Convertible Preferred Stock into common stock at a conversion price equal to $0.30 per share. A total of 250,000 shares of the Company’s Series A Preferred Convertible Stock were converted into an aggregate of 416,667 shares of common stock. As a result of this action, there currently are no Series A Convertible Preferred Stock issued and outstanding.

 

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

 

On January 19, 2016, the Company issued 300,000 shares of common stock to Kodiak Capital Group, LLC as a commitment fee for a Two Million Dollar Equity Financing Agreement. The Company recorded a fair value of $120,000 ($0.40 per 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.

 

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On January 22, 2016, the Company 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 per share) based upon the most recent trading price per share of the Company’s stock.

 

On March 14, 2016, the Company issued 11,330 shares to a consultant for services rendered, of common stock with a fair value of $4,986 ($0.44 per 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 per 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 notes, 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 notes).

 

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 March 31, 2016, the Company issued 5,000 shares to a consultant for services rendered, of common stock with a fair value of $2,050 ($0.41 per share) based upon the most recent trading price per share of the Company’s stock.

 

On 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 per 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’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.

 

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. 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. 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.

 

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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.

 

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 per share) based upon the most recent trading price per share of the Company’s stock.

 

On September 6, 2017, the Company issued 758,401 shares of common stock Rick Gutshall, former Interim-Chief Executive Office, former Chief Financial Officer, and Director, related to the merger of the Company and Alamo CBD. The Company recorded fair value of $144,096 ($0.19 per share) based upon the most recent trading price per share of the Company’s stock.

 

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 issued 329,670 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of $30,000 of Note 1 at a conversion price of $0.09.

 

On December 18, 2017, the Company issued 516,648 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of $45,000 of Note 1 at a conversion price of $0.09.

 

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. 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 December 31, 2017         $        

 

There were no warrants outstanding as of December 31, 2017.

 

Common Stock Equivalents

 

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.

 

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The Company has the following common stock equivalents for the years ended December 31, 2017 and 2016, respectively:

 

    2017     2016  
Convertible debt (exercise price - $0.30/share)     3,580,375       916,667  
Series A convertible preferred shares (exercise price - $0.08/share)           1,633,987  
      3,580,375       2,550,654  

 

NOTE 16 - 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, 2017 and 2016 are as follows:

 

Description   2017     2016  
             
Deferred tax assets                
Net operating losses   $ 1,118,472     $ 1,005,468  
Deferred tax liabilities                
Accelerated tax depreciation     19,183       19,183  
                 
Net deferred tax assets     1,137,655       986,285  
Less: Valuation allowance     (1,137,655 )     (986,285 )
                 
Net   $     $  

 

At December 31, 2017 and 2016, the Company has provided a full valuation allowance for the deferred tax assets. The Company’s accumulated net operating loss as of December 31, 2017 of $5,856,768, if not used, will begin to expire in 2037.

 

The change in the valuation allowance for the year ended December 31, 2017 amounted to $151,370, $8,000 of which was attributable to the change in tax rates resulting form 2017 tax legislation.

 

The Company experienced a change in control for tax purposes in 2017 as a result of the merger with Alamo CBD. Accordingly, the future utilization of net operating losses will be severely restricted by Section 382 of the Internal Revenue Code. Management is in the process of assessing this impact.

 

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  
2037     2,899,509  
    $ 5,856,768  

 

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NOTE 17 - SUBSEQUENT EVENTS

 

On January 9, 2018, the Company issued 899,685 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of $100,000 of Note 1 at a conversion price of $0.11.

 

On January 15, 2018 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 (“Note 3”) to Tangiers (the “Buyer”), in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. Note 3 is convertible into shares of the Company’s common stock at a conversion price of $0.30 per share. However, if Note is not paid back on or before the maturity date, defined in Note 3 as a “Maturity Default”, the conversion price of Note 3 shall then be adjusted to be equal to the lower of: (i) $0.30 or (ii) 65% multiplied by the lowest trading price of the Company’s common stock in the fifteen (15) consecutive trading day period immediately preceding the trading day that the Company receives a notice of conversion of Note 3. As of April 17, 2018, the balance under Note 3 is $231,660, which includes $17,160 guaranteed interest. As of April 17, 2018, Note 3 can be converted into 650,000 shares of the Company’s common stock. Note 3 has a maturity date of July 16, 2018.

 

On February 5, 2018, Dr. Coleman and Benjamin Coleman voluntarily returned and canceled an aggregate of 3,280,470 common shares in order to prevent dilution to the shareholders during the Company’s efforts to secure new senior management, provide additional incentive equity and to form an advisory board. The return of common stock by Dr. Coleman and Benjamin Coleman was a non-cash transaction and reduces the common stock outstanding as of April 17, 2018.

 

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On February 20, 2018, Mr. Daniel Weadock was appointed Chief Executive Officer and Director of the Company. On February 20, 2018, the Company entered into an executive employment agreement with Mr. Weadock (the “Weadock Employment Agreement”), pursuant to which Mr. Weadock agreed to act as the Company’s chief executive officer. Pursuant to the terms of the Weadock Employment Agreement, Mr. Weadock initial will not receive a salary. However, effective on the business day after the date on which the Company achieves Capitalization (as hereinafter defined) of $2,000,000 or more, Mr. Weadock’s annual base salary will be $100,000. For purposes of the Weadock Employment Agreement, “Capitalization” means aggregate net cash proceeds received by the Company from (a) the Company’s sale of common stock pursuant to Puts (as such term is defined in the Investment Agreement dated as of October 12, 2017 by and between the Company and Tangiers Global, LLC (the “Investment Agreement”)) under the Investment Agreement, and/or (b) any other sale by the Company of common stock or preferred stock, whether in a public offering or a private placement. In addition, pursuant to the terms of the Weadock Employment Agreement, the Company agreed to grant Mr. Weadock (i) 300,000 shares of restricted stock as soon as administratively practicable following execution of the Weadock Employment Agreement, and (ii) 1,584,202 shares of restricted common stock, consistent with the grant and vesting schedule set forth in the agreement; provided, however, that no grant will be made and no shares will be issued with respect to any grant if Mr. Weadock is not employed by the Company as an executive on the respective Date of Grant as set forth in the agreement. The Weadock Employment Agreement has a term of one year, unless Mr. Weadock’s employment is terminated sooner by the board of directors, and the term will be extended for additional one-year periods unless the Company or Mr. Weadock gives the other party at least 30 days’ prior written notice of its intent not to renew. On February 20, 2018, the Company also entered into a compensation agreement with Mr. Weadock (the “Director Compensation Agreement”).Pursuant to the terms of the Director Compensation Agreement, the Company agreed to grant Mr. Weadock an aggregate of 240,000 shares of restricted common stock, consistent with the grant and vesting schedule set forth in the agreement; provided, however, that no grant will be made and no shares will be issued with respect to any grant, if Mr. Weadock is not a member of the Company’s board of directors on the respective Date of Grant as set forth in the agreement. If the Company is acquired by, or merged into and with, another entity prior to the last Date of Vesting set forth in the agreement (i.e. February 23, 2022), all shares issuable to Mr. Weadock under the Director Compensation Agreement will become fully vested and non-forfeitable. The Company also agreed to reimburse Mr. Weadock for all reasonable travel and incidental expenses incurred by Mr. Weadock in performing his services and attending meetings as approved in advance by the Company. Also, on February 20, 2018, the Company also entered into an indemnity agreement with Mr. Weadock (the “Weadock Indemnity Agreement”). Pursuant to the terms of the Indemnity Agreement, the Company agreed to use reasonable efforts to obtain and maintain in full force and effect directors’ and officers’ liability insurance (“D&O Insurance”) in reasonable amounts from established and reputable insurers; provided, however, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage is reduced by exclusions so as to provide an insufficient benefit, or Mr. Weadock is covered by similar insurance maintained by a subsidiary of the Company. In addition the foregoing, the Company will indemnify Mr. Weadock from certain third party actions, derivative actions and actions where Mr. Weadock is decreased; provided, however, the Company shall not be obligated to indemnify Mr. Weadock for actions including, but not limited to, actions initiated by Mr. Weadock, for any action in which it is determined that the material assertions made by Mr. Weadock in such proceeding were not made in good faith or were frivolous, for any settlements not authorized by the Company, for any actions on the account of Mr. Weadock’s willful misconduct, and for any expenses and the payment of profits arising from the purchase and sale Mr. Weadock of securities in violation of Section 16(b) of the Securities Exchange Act, or any similar successor statute; provided, further that, that the Company shall not be obligated to indemnify Mr. Weadock for expenses or liabilities of any type whatsoever which have been paid directly to Mr. Weadock pursuant to the Company’s D&O Insurance policy.

 

On March 5, 2018, the Company issued 269,716 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $25,000 of Note 1 at a conversion price of $.09.

 

On March 21, 2018, the Company issued 295,631 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $25,000 of Note 1 at a conversion price of $.08.

 

On April 13, 2018, the Company issued 769,231 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $50,000 of Note 1 at a conversion price of $.07.

 

  41  
 

 

Item 15. Exhibits, Financial Statement Schedules.

 

Exhibit     Description
     
31.1*   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1**   Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2**   Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS* XBRL Instance Document
   
101.SCH* XBRL Taxonomy Extension Schema Document
   
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

 

** In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are furnished and not filed.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: February 15, 2019 INDOOR HARVEST CORP
     
  By: /s/ Daniel Weadock
    Daniel Weadock
    Chief Executive Officer and Director
    (principal executive officer)

 

Dated: February 15, 2019 INDOOR HARVEST CORP
   
  By: /s/ Chad Sykes
    Chad Sykes
    Principal Financial Officer and Principal Accounting Officer
    (principal financial and accounting officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 

Signatures   Title   Date
         
/s/ Rick Gutshall   Director  

February 15, 2019

Rick Gutshall        
         
/s/ Daniel Weadock   Director  

February 15, 2019

Daniel Weadock        
         
/s/ Dr. Lang Coleman   Director  

February 15, 2019

Dr. Lang Coleman        

 

  43  
 

 

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