NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP).
It is management's opinion, however, that all material adjustments (consisting of normal and recurring adjustments) have been made which are necessary for a fair financial statements presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.
Indoor Harvest Corp., or the "Company," is a Texas corporation formed on November 23, 2011. Indoor Harvest Corp., through its brand name Indoor Harvest™, is a company specializing in equipment design, development, marketing and direct-selling of commercial grade aeroponics fixtures and supporting systems for use in urban Controlled Environment Agriculture ("CEA") and Building Integrated Agriculture ("BIA").
Indoor Harvest Corp transitioned in the first half of 2017 from an Engineering, Procurement and Construction Management Company for the vertical farming industry, into a developer of personalized cannabis medicines, and a provider of advanced cultivation technology, methods and processes for cannabis production.
These unaudited interim condensed financial statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on April 17, 2017.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to the estimate of percentage of completion on construction contracts in progress at each reporting period which we rely on as a primary basis of revenue recognition, estimated useful lives of equipment for purposes of depreciation and the valuation of common shares issued for services, equipment and the liquidation of liabilities.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less to be cash and cash equivalents.
Accounts Receivable and Work in Progress
Work in process consists of costs recorded and revenue earned on projects recognized on the percentage of completion method for work performed on contracts in progress at June 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 in the balance sheet as costs and estimated earnings in excess of billings. Unearned billings are reflected in the balance sheet as a liability as billings in excess of costs and estimated earnings on projects in process (See Note 6).
Inventories
Inventory consists primarily of raw materials and packaging materials and is valued at the lower of cost or market. Cost is determined using the weighted average method and average cost is recomputed after each inventory purchase or sale. Inventory is periodically reviewed to identify obsolete or damaged inventory and impaired values. Inventory is comprised of raw materials such as steel for our framing systems and packaging materials such as boxes and pallets valued at $2,360 at both June 30, 2017 and December 31, 2016.
Revenue Recognition
The Company recognizes revenue on arrangements in accordance with ASC No. 605, Revenue Recognition. In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. The Company will generate revenue from the design and installation of the equipment.
Revenue from construction contracts are reported under the percentage of completion method for financial statement purposes. The estimated revenue for each contract reflected in the financial statements represent that percentage of estimated total revenue that costs incurred to date bear to estimated total costs, based on the Company’s current estimates. With respect to contracts that extend over one or more accounting periods, revisions in costs and revenue estimates during the work are reflected in the period the revisions become known. When current estimates of total contract costs indicate a loss, provision is made for the entire estimated loss.
The asset, “costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed. The liability, “Estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.
Billing practices for these projects are governed by the contract terms of each project based upon actual costs incurred, achievement of milestones, or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized under the percentage of completion method of accounting. Except for claims and change orders that are in the process of being negotiated with customers, unbilled work is usually billed during normal billing processes following achievement of the contractual requirements.
Stock Based Compensation
The Company recognizes stock based compensation in accordance with ASC 718-10, Stock Compensation. ASC 718-10 focuses on transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus in which an entity obtains employee services in stock based payment transactions. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exceptions).
Basic Loss per Share
Basic loss per share amounts are calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is based on the weighted average numbers of shares of common stock outstanding for the periods, including dilutive effects of stock options, warrants granted and convertible preferred stock. Dilutive options and warrants that are issued during a period or that expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported. Since the Company has incurred losses for all periods, the impact of the common stock equivalents would be antidilutive and therefore are not included in the calculation.
The Company has the following common stock equivalents for the six months ended June 30, 2017 and 2016, respectively:
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Convertible debt (exercise price - $0.30/share)
|
|
|
916,667
|
|
|
|
908,333
|
|
Fair Value of Financial Instruments
The Company adopted ASC 820 Fair Value Measurements for financial and non-financial assets and liabilities. The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value and provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share based payments. ASC 820 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
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·
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Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
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·
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Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
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|
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·
|
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
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Carrying amounts reported in 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 June 30, 2017 and December 31, 2016, respectively, and convertible notes payable of $202,800 and $122,383 at June 30, 2017 and December 31, 2016, respectively.
Income Taxes
The Company accounts for income taxes pursuant to 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.
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 2016, 2015, 2014, 2013, 2012 and 2011, remain subject to examination by the IRS and respective states.
Property and Equipment
Property and equipment is recorded at cost and depreciated or amortized using the straight-line method over the estimated useful life of the asset or the underlying lease term for leasehold improvements, whichever is shorter. The estimated useful life by asset description is noted in the following table:
Asset Description
|
|
Estimated Useful Life (Years)
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|
Furniture and equipment
|
|
|
3 - 5
|
|
Tooling equipment
|
|
|
10
|
|
Leasehold improvements
|
|
|
*
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|
__________
* The shorter of 5 years or the life of the lease.
Additions are capitalized and maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions of equipment are reflected in other income.
Intangible Assets
The Company's intangible assets consist of the domain name and is accounted for as an indefinite lived intangible asset in accordance with ASC 350 "Goodwill and Other Intangible Assets" ("ASC 350"). It also includes software and is amortized over a 3-5-year period.
Intangible assets are reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no impairment charges taken during the six months ended June 30, 2017 and 2016.
Intangible assets consist of the following at June 30, 2017 and December 31, 2016:
Classification
|
|
June 30,
2017
|
|
|
December 31,
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
|
|
|
(3,832
|
)
|
|
|
(2,978
|
)
|
Intangible assets, net
|
|
$
|
6,750
|
|
|
$
|
7,604
|
|
Patent and Patent Application Expenses
Although the Company believes that its patent and underlying technology will have continuing value, the amount of future benefits to be derived from the patent is uncertain. Therefore, patent costs are expensed as incurred.
Research and Development
Research and development expenditures are charged to expense as incurred. Research and development expense for the three and six months ended June 30, 2017 and 2016 are as follows:
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Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Research and development expense
|
|
$
|
887
|
|
|
$
|
5,641
|
|
|
$
|
1,625
|
|
|
$
|
8,672
|
|
Advertising Expense
Advertising and promotional costs are expensed as incurred. Advertising expense for the three and six months ended June 30, 2017 and 2016, are as follows:
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Three Months Ended
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|
Six Months Ended
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Advertising expense
|
|
$
|
3,036
|
|
|
$
|
-
|
|
|
$
|
12,887
|
|
|
$
|
-
|
|
Reclassifications
Certain balance sheet items have been reclassified at December 31, 2016 to conform to the reporting format adopted at June 30, 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 impact future reporting of financial position and results of operations. Management is currently assessing implementation.
The FASB issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805) clarifying the definition of a business. The amendment affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. For public companies, the amendment is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.
The FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) providing new lease accounting guidance. 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:
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A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and
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·
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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.
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·
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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.
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·
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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.
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Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). The FASB has issued Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees.
Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.
For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private companies, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any organization in any interim or annual period.
The FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendment clarifies the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendment does not change the core principle of the guidance in Topic 606.
The effective date and transition requirements for the amendment is 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 Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At June 30, 2017 and December 31, 2016, the Company did not have any derivative instruments that were designated as hedges.
Beneficial Conversion Feature
For conventional convertible debt where the rate of conversion is below market value, the Company records a "beneficial conversion feature" ("BCF") and related debt discount. When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The discount is amortized to interest expense over the life of the debt.
NOTE 2 - GOING CONCERN
As reflected in the accompanying unaudited financial statements, the Company had a net loss of $1,780,636, net cash used in operations of $988,218 and has an accumulated deficit of $5,777,408, for the six months ended June 30, 2017. These factors raise substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on Management's plans which include potential asset acquisitions, mergers or business combinations with other entities, further implementation of its business plan and continuing to raise funds through debt or equity financings. The Company will likely rely upon related party debt or equity financing to ensure the continuing existence of the business.
The Company’s business plan is to engage in the design and development of commercial grade aeroponics fixtures and supporting systems for use in CEA and BIA cannabis production and to develop personalized cannabis medicines, as a provider of advanced cultivation technology, methods and processes. The Company provides the cannabis industry production platforms for CEA and BIA production. During the next twelve months, the Company's strategy is to:
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complete ongoing product development;
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·
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advance product assembly and sales;
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·
|
construct a demonstration cannabis CEA and BIA farm for marketing purposes;
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·
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offer design-build services to partners; and
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·
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establish its long-term strategy to directly sell, license and franchise its patented cannabis cultivation technologies and methods.
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The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2017 and December 31, 2016:
Classification
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Furniture and equipment
|
|
$
|
124,379
|
|
|
$
|
123,827
|
|
Tooling equipment
|
|
|
27,015
|
|
|
|
27,015
|
|
Leasehold improvements
|
|
|
57,780
|
|
|
|
57,780
|
|
Computer equipment
|
|
|
6,169
|
|
|
|
6,169
|
|
Research and development lab
|
|
|
63,177
|
|
|
|
63,177
|
|
Total
|
|
|
278,520
|
|
|
|
277,968
|
|
Less: Accumulated depreciation
|
|
|
(144,952
|
)
|
|
|
(119,550
|
)
|
Property and equipment, net
|
|
$
|
133,568
|
|
|
$
|
158,418
|
|
Depreciation expense for the six months ended June 30, 2017, totaled $25,402.
NOTE 4 - COMMITMENTS & CONTINGENCIES
Alamo CBD and Vyripharm Joint Venture
On January 3, 2017, the Company signed a binding letter of intent with Alamo CBD, LLC (“Alamo CBD”) to enter discussions to combine and create a medical cannabinoids pharmaceutical group. Pursuant to the terms, the Company was required as a precondition, to raise, as necessary, up to $1,000,000 in capital by February 15, 2017, to pay off all existing debt, including convertible notes, owed by the Company. On February 15, 2017, the Company and Alamo CBD extended the terms of the preconditions until March 15, 2017.
On March 23, 2017 (the “Effective Date”), the Company entered into a Contractual Joint Venture Agreement by and between Vyripharm Enterprises, LLC (“Vyripharm”) and Alamo CBD, collectively the Parties, pursuant to which the parties agreed to participate in an unincorporated joint venture (the “Joint Venture” or “JV”). The intent of the Joint Venture was for the Parties to work together to enhance the ability of Alamo CBD to apply for and obtain licensure, or a permit, to grow and/or dispense marijuana products for medical and/or consumer use:
·
|
In Texas, pursuant to the Texas Compassionate Use Act, as may be amended;
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|
|
·
|
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
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|
|
·
|
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.
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|
|
·
|
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 drug-resistant epilepsy, post-traumatic stress disorder, Alzheimer’s, ALS, and other neurodegenerative diseases; and
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|
·
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To establish Indoor Harvest as the project developer and engineering, procurement and construction group, in which Indoor Harvest would be 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.
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The initial term of the Joint Venture as set forth in the JV Agreement was five (5) years following the Effective Date, and the JV Agreement could be extended beyond the Initial Term by mutual consent of the Parties.
Pursuant to the JV Agreement, IHI agreed to contribute a total of $5,000,000 based on $1,000,000 per year for each of the first five (5) years of the Initial Term. The first payment of $1,000,000 would be paid to Vyripharm no later than four (4) days following the Effective Date, and the remaining four (4) annual payments would be paid by IHI to Vyripharm on each of the following one (1) year anniversaries of the Effective Date.
As set forth in the JV Agreement, if IHI failed to timely pay the initial $1,000,000, the JV Agreement would terminate and neither Party would have further obligation to the other. If IHI failed to pay the second $1,000,000 payment within thirty (30) days following the second anniversary of the Effective Date, then the JV Agreement would terminate and Alamo CBD would forfeit four-fifths (4/5) of its revenue share from any product that had been developed or would be subsequently developed by Vyripharm using the cannabis oil and/or processes supplied to Vyripharm by IHI. If IHI failed to pay the third $1,000,000 payment within thirty (30) days following the third anniversary of the Effective Date, then the JV Agreement would terminate and IHI would forfeit three-fifths (3/5) of its revenue share from any product that had been developed or would subsequently be developed by Vyripharm using the medical cannabis oil and/or processes supplied to Vyripharm by IHI. If IHI fails to pay the fourth $1,000,000 payment within thirty (30) days following the fourth anniversary of the Effective Date, then the JV Agreement would terminate and IHI would forfeit four-fifths (2/5) of its revenue share from any product that had been developed or would be subsequently developed by Vyripharm using the medical cannabis oil and/or processes supplied to Vyripharm by IHI. If IHI fails to pay the fifth $1,000,000 payment within thirty (30) days following the fifth anniversary of the Effective Date, then the JV Agreement would terminate and IHI would forfeit one-fifth (1/5) of its revenue share from any product that had been developed or was subsequently developed by Vyripharm using the medical cannabis oil and/or processes supplied to Vyripharm by IHI. Except for cost sharing for the filing of, prosecuting and maintaining any joint patent applications pursuant to Paragraph 6 of this Agreement, and unless the Parties mutually agree, IHI will have no further financial obligations under the JV Agreement during the Initial Term, and the Parties must bear their own costs in carrying out their respective responsibilities under this Agreement.
Note: Based on the described fees and schedule that Vyripharm must attain with the institutions in the TMC, the Company can only accept a payout structure of the first $1,000,000 under the following three scenarios:
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·
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Option 1: All $1,000,000 for the year will be paid to Vyripharm in advance if excess funds are raised (above $10,250,000);
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|
|
|
·
|
Option 2: 5% of funds, up to $10,250,000, which are raised from private investors at events where Vyripharm participates in the meetings or presentation(s) will be paid;
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|
|
|
|
·
|
Option 3: If less than $10,250,000 is raised in 2017, IHI will make four installment payments of $250,000 to Vyripharm, with the first at the 1
st
quarter, and with a second payment of $250,000 at the end of the 2nd quarter of 2017. If IHI does not have the funds to make its third installment of $250,000 in the 3rd quarter of 2017, that payment will be required during the 4th quarter along with the final payment for a total of $500,000 to be paid to Vyripharm during or by the end of the 4th quarter of 2017
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The Company was paid the initial $250,000 down payment as required by the Agreement during the three months ending March 31, 2017. On June 30, 2017, Indoor Harvest, Alamo CBD and Vyripharm entered into discussions to amend and extend the payment terms under the Joint Venture for the 2
nd
and future payment obligation due to the group not being awarded a provisional license to produce cannabis in Texas under the Compassionate Use Program. The Joint Venture group placed 16th out of 43 applicants and its application is currently considered pending by the Department of Public Safety (“DPS’). To date, the DPS has conditionally approved the first three applicants to proceed with development of their operations under the Compassionate Use Program.
On August 7, 2017, after negotiations, the Company advised Vyripharm that it intended to voluntarily default on the Joint Venture. Indoor Harvest 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 Indoor Harvest, or Alamo CBD, obtained license to produce cannabis. As such, Indoor Harvest recorded a loss on investment of the joint venture as of June 30, 2017 of $250,000 as presented in the Condensed Statements of Operations.
Deferred Rent
Deferred rent payable at June 30, 2017 was $7,376. Deferred rent payable is the sum of the difference between the monthly rent payment and the straight-line monthly rent expense of an operating lease that contains escalated payments in future periods.
Rent expense for the three and six months ended June 30, 2017 and 2016, were:
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|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Rent expense
|
|
$
|
8,336
|
|
|
$
|
-
|
|
|
$
|
26,975
|
|
|
$
|
-
|
|
NOTE 5 - CONCENTRATIONS
At June 30, 2017 and December 31, 2016, the Company had concentrations of accounts receivable of:
Customer
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Tweed, Inc.
|
|
|
-
|
%
|
|
|
100
|
%
|
For the three months ended June 30, 2017 and 2016, the Company had a concentration of sales of:
|
|
Three Months Ended
|
|
Customer
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
University of Arizona CEAC
|
|
|
-
|
%
|
|
|
31
|
%
|
GSS Colorado
|
|
|
-
|
%
|
|
|
-
|
%
|
ER Michigan
|
|
|
-
|
%
|
|
|
55
|
%
|
PH Research Platform
|
|
|
-
|
%
|
|
|
17
|
%
|
UB Poland
|
|
|
-
|
%
|
|
|
69
|
%
|
For the six months ended June 30, 2017 and 2016, the Company had a concentration of sales of:
|
|
Six Months Ended
|
|
Customer
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
University of Arizona CEAC
|
|
|
-
|
%
|
|
|
22
|
%
|
GSS Colorado
|
|
|
-
|
%
|
|
|
8
|
%
|
ER Michigan
|
|
|
-
|
%
|
|
|
20
|
%
|
PH Research Platform
|
|
|
-
|
%
|
|
|
6
|
%
|
UB Poland
|
|
|
-
|
%
|
|
|
44
|
%
|
NOTE 6 - WORK IN PROCESS
Work in progress as of June30, 2017 and December 31, 2016, consisted of the following:
Description
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Costs incurred on uncompleted contracts
|
|
$
|
-
|
|
|
$
|
80,620
|
|
Estimated earnings
|
|
|
-
|
|
|
|
-
|
|
Less: Billings to date
|
|
|
-
|
|
|
|
(100,775
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
(20,155
|
)
|
|
|
|
|
|
|
|
|
|
Reflected in balance sheet as:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on contracts in process
|
|
$
|
-
|
|
|
$
|
-
|
|
Billings in excess of costs and estimated earnings on contracts in process
|
|
|
-
|
|
|
|
20,155
|
|
Total
|
|
$
|
-
|
|
|
$
|
20,155
|
|
NOTE 7 - NOTE PAYABLE
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
On June 5, 2015, the Company entered into a five-year loan agreement totaling $36,100. The loan carries interest at a rate of 10.25%.
|
|
$
|
23,824
|
|
|
$
|
27,132
|
|
Less: current portion
|
|
|
7,714
|
|
|
|
6,790
|
|
Long-term note payable, net
|
|
$
|
16,110
|
|
|
$
|
20,342
|
|
NOTE 8 - DEBT AND CONVERTIBLE LOAN PAYABLE
Convertible Note Payable
On March 20, 2017, the Company settled $225,500 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 (“Rifici Note”). The Company settled the amount owed by paying $269,498 in cash. The Company was released from any further liability under this Rifici Note upon payment of this amount.
On March 20, 2017, the Company settled $275,000 in principal and interest, plus 115% multiplied by the principal amount of $275,000 plus accrued interest of $7,333 on the principal amount of a promissory note with FirstFire Global Opportunities Fund, LLC originally dated October 19, 2016 and December 12, 2016. The Company settled the amount owed by paying $252,917 in cash and issuing 333,333 shares of common stock with a fair value of $100,000 based upon the conversion price of $0.30 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 Note”), relating to the issuance and sale of notes of $550,000 in aggregate principal amount including $250,000 actual payment of purchase price plus a 10% original issue discount.
The Tangiers Note carry interest on the unpaid principal amount at the rate of 8% per annum. Any principal amount or interest which is not paid when due shall bear interest at the rate of 18% per annum from the due date until the same is paid. The Tangiers Note matures on November 24, 2017 and may be prepaid in whole or in part except otherwise explicitly set forth in the Tangiers Note. If the Company exercises its right to prepay or repay the Note, the Company shall make payment to the note holders of an amount in cash equal to the following:
Days Since Effective Date
|
|
Prepayment Amount
|
Under 90 days
|
|
115% of principal amount
|
91 - 135 days
|
|
120% of principal amount
|
136 - 180 days
|
|
155% of principal amount
|
After 180 days from the effective date of this note may not be prepaid.
The Tangiers Note converts 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) 65% multiplied by the lowest sales price of the common stock in a public market during the fifteen (15) consecutive trading day period immediately preceding the trading day that the Company receives a Notice of Conversion (as defined in the Tangiers Note). For the six months ended June 30, 2017, the Company received $275,000 proceeds less $25,000 in original issuance discount fee pursuant to the terms of this convertible note. For convertible debt, the convertible was not in default as of June 30, 2017, as a result, the Company recorded a BCF and related debt discount.
For the three and six months ended June 30, 2017, the Company accrued $5,485 and $5,907, respectively, in accrued interest related to outstanding the note.
Debt Discount and Original Issuance Costs for Convertible Note
During the six months ended June 30, 2017 and 2016, the Company recorded debt discounts and original issuance costs totaling $120,333 and $176,916, respectively.
The debt discounts recorded in 2017 and 2016, pertain to beneficial conversion feature on the convertible notes. The notes are required to be bifurcated and reported at fair value on the date of grant. (see Note 1 Fair Value Measurements).
The Company amortized $200,750 and $96,152 to interest expense during the six months ended June 30, 2017 and 2016, respectively.
|
|
Six Months
Ended
|
|
|
Year
Ended
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Debt discount, beginning of period
|
|
$
|
152,617
|
|
|
$
|
-
|
|
Additional debt discount and debt issue cost
|
|
|
120,333
|
|
|
|
417,834
|
|
Amortization of debt discount and debt issue cost
|
|
|
(200,750
|
)
|
|
|
(265,217
|
)
|
Debt discount, end of period
|
|
$
|
72,200
|
|
|
$
|
152,617
|
|
Debt Issuance Costs for Convertible Note
During the six months ended June 30, 2017 and 2016, the Company paid debt issuance costs totaling $0 and $10,000, respectively.
During the six months ended June 30, 2017 and 2016, the Company amortized $7,473 and $0 of debt issue costs, respectively.
|
|
Six Months
Ended
|
|
|
Year
Ended
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Debt discount, beginning of period
|
|
$
|
7,473
|
|
|
$
|
-
|
|
Additional debt discount
|
|
|
|
|
|
|
10,000
|
|
Amortization of debt discount
|
|
|
(7,473
|
)
|
|
|
(2,527
|
)
|
Debt discount, end of period
|
|
$
|
-
|
|
|
$
|
7,473
|
|
Debt Discount for Promissory Note
During the six months ended June 30, 2017 and 2016, the Company recorded debt discount of $0 and $0, respectively.
The Company amortized $15,715 and $0 to interest expense during the six months ended June 30, 2017 and 2016, respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS
January 16, 2017, the Company issued 145,740 shares of common stock related to a Director Agreement with Pawel Hardej. The Company recorded fair value of $64,126 ($0.44/share) based upon the most recent trading price per share of the Company's stock.
January 16, 2017, the Company issued 41,640 shares of common stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $18,322 ($0.44/share) based upon the most recent trading price per share of the Company's stock.
January 16, 2017, the Company issued 62,460 shares of common stock related to a Director Agreement with John Choo. The Company recorded fair value of $27,482 ($0.44/share) based upon the most recent trading price per share of the Company's stock.
NOTE 10 - STOCKHOLDERS' DEFICIT
Series A Convertible Preferred Stock
During the third quarter 2016, the Company initiated a subscription agreement to offer accredited investors up to 1,000,000 units (“Unit”) of security, where each Unit consists of one (1) share of Series A Convertible Preferred Stock and one (1) Series A Warrant. The price per Unit is $0.50 for a maximum aggregate of 1,000,000 Units and maximum aggregate proceeds of $500,000. The stated value of each preferred stock is $0.50 and there are no dividends on the Series A Convertible Preferred Stock. The Warrants are exercisable at $0.50 per share and shall be exercisable for a period of one year.
From August 15 to August 29, 2016, the Company subscribed 250,000 Units to three (3) investors for total proceeds of $125,000. During the six months ended June 30, 2017 and 2016, the Company amortized $33,238 and $0 of debt discount related to the warrants, respectively. The remaining debt discount related to the warrants is $0.
On March 20, 2017, the Company's Series A Preferred Convertible Stock shareholders ("Series A Holders") each voted to waive and remove the provisions of Section 5(iii) of the Series A Preferred Stock Designation. This waives and removes what is known as “full ratchet protection” provisions for adjustments in the Conversion Price and formula. Series A Holders have each agreed individually and also as a group to convert their Series A Convertible Preferred Stock into common stock at a conversion price equal to $0.30 per share. A total of 250,000 shares of the Company's Series A Preferred Convertible Stock were converted into 416,667 shares of common stock.
From April 26, 2017 through May 3, 2017, the Company sold 750,000 shares of Series A Preferred Common Stock to thirteen (13) U.S. accredited investors at $0.40 per share for cash totaling $300,000.
Common Stock
January 16, 2017, the Company issued 145,740 shares of common stock related to a Director Agreement with Pawel Hardej. The Company recorded fair value of $64,126 ($0.44/share) based upon the most recent trading price per share of the Company's stock.
January 16, 2017, the Company issued 41,640 shares of common stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $18,322 ($0.44/share) based upon the most recent trading price per share of the Company's stock.
January 16, 2017, the Company issued 62,460 shares of common stock related to a Director Agreement with John Choo. The Company recorded fair value of $27,482 ($0.44/share) based upon the most recent trading price per share of the Company's stock.
January 17, 2017, the Company issued 800,000 shares of common stock to Lyons Capital, LLC for a six-month consulting and road show services agreement. The Company recorded fair value of $352,000 ($0.44/share) based upon the most recent trading price per share of the Company's stock.
From February 22, 2017 through March 15, 2017, the Company sold, in reliance upon Regulation D Rule 506, a total of 2,060,000 shares of common stock to seventeen (17) U.S. accredited investors at $0.40 per share for cash totaling $824,000.
On March 20, 2017, the Company settled the amount owed to FirstFire Global Opportunities Fund LLC by paying $252,917 in cash and issuing 333,333 shares of common stock with a fair value of $100,000 based upon the conversion price of $0.30/share (See Note 8).
On March 20, 2017, a total of 250,000 shares of the Company's Series A Preferred Convertible Stock were converted into 416,667 shares of Common Stock. The Company recorded fair value of $175,000 ($0.42/share) based upon the most recent trading price per share of the Company’s stock.
On June 1, 2017, the Company issued 250,000 shares of common stock for a 12-month investor relations consulting agreement. The Company recorded fair value of $55,000 ($0.22/share) based upon the most recent trading price per share of the Company's stock.
Common Stock Warrants
On September 26, 2016, the Company entered a promissory note with Chuck Rifici Holdings, Inc. (“Rifici Note”), relating to the issuance of $225,500 in aggregate principal including a $204,000 actual payment of purchase price plus a 10% original issue discount. In conjunction with the issuance of the Rifici Note, the Company issued a one-year warrant to purchase 250,000 shares of common stock at an exercise price of $0.30 per share (See Note 8).
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (in Years)
|
|
Balance, December 31, 2016
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Forfeited
|
|
|
250,000
|
|
|
|
-
|
|
|
|
-
|
|
Balance June 30, 2017
|
|
|
250,000
|
|
|
$
|
0.30
|
|
|
$
|
0.24
|
|
For the six months ended June 30, 2017, the following warrants were outstanding:
Exercise Price Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Aggregate
Intrinsic Value
|
|
$
|
0.30
|
|
|
|
250,000
|
|
|
|
0.24
|
|
|
|
-
|
|
For the year ended December 31, 2016, the following warrants were outstanding:
Exercise Price
Warrants Outstanding
|
|
Warrants Exercisable
|
|
|
Weighted Average
Remaining Contractual Life
|
|
|
Aggregate
Intrinsic Value
|
|
$
|
0.30-0.50
|
|
|
500,000
|
|
|
|
0.69
|
|
|
|
32,500
|
|
Lattice Binomial model was used to value aggregate intrinsic value.
NOTE 11 - SUBSEQUENT EVENTS
On August 3, 2017, the Company formed Alamo Acquisition, LLC, a Texas limited liability Company, in which Indoor Harvest Corp owns 100% of Alamo Acquisition, LLC member interests.
On August 4, 2017, the Company entered into an Agreement and Plan of Merger and Reorganization, by and among Indoor Harvest Corp, a Texas corporation, Alamo Acquisition LLC., a Texas Limited Liability Company, and Alamo CBD, LLC, a Texas Limited Liability Company.
On August 9, 2017, Chad Sykes, the Company’s founder and largest shareholder canceled and returned to the unissued and authorized shares of the Company, 2,500,000 shares of the Company common stock. Because of the cancellation of shares, the Company currently has 16,823,352 shares of common stock outstanding.
On August 9, 2016, Mr. John Choo resigned as a Director and Chief Executive Officer in the Company. Mr. Choo'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. Choo voluntarily agreed to resign as part of that restructuring effort.
On August 9, 2017, Rick Gutshall was elected as a Director, Interim Chief Executive Officer and Chief Financial Officer of the Corporation.
On August 9, 2016, Mr. Pawel Hardej resigned as a Director in the Company. Mr. Hardej’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. Hardej voluntarily agreed to resign as part of that restructuring effort.
On August 9, 2017, Annette Knebel was elected as a Director and Chief Accounting Officer of the Corporation.
On August 9, 2016, Mr. Chad Sykes resigned as a Director and Chief Innovation Officer in the Company. Mr. Sykes’ 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. Sykes voluntarily agreed to resign as part of that restructuring effort.
On August 9, 2017, Dr. Lang Coleman was elected as a Director of the Corporation.
On August 9, 2017, John Seckman was elected as a Director and Interim-Chairman of the Corporation.