UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

 

AMENDMENT NO. 1

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from ___________ to ___________

 

Commission File Number: 000-55594

 

INDOOR HARVEST CORP

(Exact name of registrant as specified in its charter)

 

Texas		45-5577364
(State or other jurisdiction of incorporation or organization)		IRS Employer Identification No.

 

5300 East Freeway Suite A

Houston, Texas 77020

(Address of principal executive offices)

 

(346) 310-3427

(Registrant’s telephone number, including area code)

 

832-649-3998

(Former name, former address and former phone number, if changed since last report) 

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and 2) 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [  ]

 

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 pursuant to Section 13(a) of the Exchange Act. [  ]

 

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

 

As of November 9, 2017, there were 24,987,030 shares issued and outstanding of the registrant’s common stock.

 

 

 

Explanatory Note

 

Indoor Harvest Corp (“we”, “our”, the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (the “Amendment”) to restate the following items of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, which we originally filed with the Securities and Exchange Commission on November 14, 2017 (the “Original Form 10-Q”):

 

(i)	Item 1 of Part I “Financial Information”
(ii)	Item 2 of Part I “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
(iii)	Item 4 of Part I “Controls and Procedures”
(iv)	Item 6 of Part II “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 unaudited interim financial statements included in the Original Form 10-Q 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. As at September 30, 2017, the Company had recorded $890,961 for Goodwill from the acquisition of Alamo CBD from the issuance of shares valued at $1,440,961 and reduced by $550,00 for the cancelation of shares by an officer of the Company. Management determined that the acquisition of Alamo CBD was not a business combination and was an acquisition of assets and 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 form Alamo.

 

This report on Form 10-Q/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, 3, 5, 10, and 11 to the consolidated financial statements, 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-Q 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-Q. In addition, the Company has concluded there were material weaknesses in the Company’s internal control over financial reporting as of September 30, 2017. See additional discussion included in Part I, Item 4 of this amended Quarterly Report on Form 10-Q/A.

 

 

INDOOR HARVEST CORP

 

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION
Item 1.	Condensed Financial Statements (Unaudited)			4
	Condensed Balance Sheets			4
	Condensed Statements of Operations			5
	Condensed Statements of Changes in Stockholders’ Deficit			6
	Condensed Statements of Cash Flows			7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.			22
Item 4.	Controls and Procedures.			26
PART II — OTHER INFORMATION
Item 6.	Exhibits.			27
SIGNATURES				28

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

INDOOR HARVEST CORP

CONDENSED BALANCE SHEETS

(UNAUDITED)

 

		September 30,				December 31,
		2017				2016
		(Restated)
ASSETS
Current assets:
Cash		$	5,279			$	78,219
Accounts receivable			-				34,853
Other receivable			-				7,323
Inventory			2,360				2,360
Total current assets			7,639				122,755
Furniture and equipment, net			121,205				158,418
Security deposit			12,600				12,600
Intangible asset, net			6,321				7,604
Total assets		$	147,765			$	301,377
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses		$	97,369			$	55,797
Convertible note payable, net of debt discount of $27,013 and $152,617, respectively			247,986				122,383
Note payable, net of discount of $0 and $15,714, respectively			-				209,786
Accrued payroll			3,722				7,142
Deferred rent			6,808				8,513
Note payable - current portion			7,330				6,790
Billing in excess of costs and estimated earnings			-				20,155
Total current liabilities			363,215				430,566
Long term liabilities:
Note payable			14,775				20,342
Total liabilities			377,990				450,908
Stockholders’ deficit:
Series A Convertible Preferred stock: $0.01 par value, 5,000,000 shares authorized; 750,000 and 250,000 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively			7,500				2,500
Common stock: $0.001 par value, 50,000,000 shares authorized; 24,657,360 and 15,213,512 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively			24,657				15,213
Additional paid-in capital			7,175,547				3,829,528
Accumulated deficit			(7,437,929	)			(3,996,772	)
Total stockholders’ deficit			(230,225	)			(149,531	)
Total liabilities and stockholders’ deficit		$	147,765			$	301,377

 

The Accompanying Notes are an Integral Part of these Unaudited Financial Statements.

 

 

INDOOR HARVEST CORP

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2017				2016				2017				2016
		(Restated)								(Restated)
Revenue		$	4,245			$	21,210			$	4,245				83,376
Cost of sales			1,165				11,278				15,594				55,199
Gross profit (loss)			3,080				9,932				(11,349	)			28,177
Operating expenses
Depreciation and amortization expense		$	12,792			$	12,958			$	39,046				38,221
Research and development			-				6,376				1,625				15,047
Impairment loss			1,440,961				-				1,440,961				-
Professional fees			8,107				11,355				374,707				87,277
General and administrative expenses			157,592				283,721				910,400				918,929
Total operating expenses			1,619,452				314,410				2,766,739				1,059,474
Loss from operations			(1,616,372	)			(304,478	)			(2,778,088	)			(1,031,297	)
Other income (expense)
Other income			7,177				52,324				7,192				52,347
Loss on investment in joint venture			-				-				(250,000	)			-
Interest expense			(6,141	)			(3,674	)			(125,373	)			(7,862	)
Derivative expense			-				(66,980	)			-				(66,980	)
Amortization of debt offering costs			-				(9,131	)			-				(20,000	)
Amortization of debt discount			(45,186	)			(234,883	)			(294,888	)			(331,034	)
Loss on debt settlement			-				(131,944	)			-				(131,944	)
Loss on sale of equipment			-				(36,626	)			-				(36,626	)
Change in fair value of embedded derivative liability			-				(44,661	)			-				(44,661	)
Total other income (expense)			(44,150	)			(475,575	)			(663,069	)			(586,760	)
Net loss		$	(1,660,522	)		$	(780,053	)		$	(3,441,157	)			(1,618,057	)
Net loss per common share:
Net loss per share, basic and diluted		$	(0.09	)		$	(0.06	)		$	(0.19	)			(0.14	)
Weighted average number
of common shares outstanding:
Basic and diluted			19,929,506				12,338,016				18,644,318				11,980,169

 

The Accompanying Notes are an Integral Part of these Unaudited Financial Statements.

 

 

INDOOR HARVEST CORP

CONDENSED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(UNAUDITED)

 

		Series A Convertible Preferred Stock, $0.01								Common Stock, $0.001								Additional								Total Stockholders’
		Par Value								Par Value								Paid in				Accumulated				Equity
		Shares				Amount				Shares				Amount				Capital				Deficit				(Deficit)
Balances, December 31, 2016			250,000			$	2,500				15,213,512			$	15,213			$	3,829,528			$	(3,996,772	)		$	(149,531	)
Issuance of common stock
For cash			-				-				2,060,000				2,060				821,940				-				824,000
For services			-				-				1,549,840				1,550				565,380				-				566,930
Convertible debt converted into common stock			-				-				333,333				333				99,667				-				100,000
Beneficial conversion feature			-				-				-				-				95,333				-				95,333
Conversion of preferred stock into common 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 nine months ended September 30, 2017			-				-				-				-				-				(3,441,157	)			(3,441,157	)
Balances, September 30, 2017 (Restated)			750,000			$	7,500				24,657,360			$	24,657			$	7,175,547			$	(7,437,929	)		$	(230,225	)

 

 

The Accompanying Notes are an Integral Part of these Unaudited Financial Statements.

 

 

INDOOR HARVEST CORP

CONDENSED STATEMENTS OF CASH FLOWS

 

(UNAUDITED)

 

		For the nine months ended
		September 30,
		2017				2016
		(Restated)
Cash flows from operating activities:
Net loss		$	(3,441,157	)		$	(1,618,057	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense			39,046				38,220
Impairment loss			1,440,961				-
Loss on the sale of other assets			-				36,626
Loss on debt modifications			-				131,944
Amortization of original issue discount			-				22,500
Amortization of debt discount			294,888				308,534
Amortization of debt offering costs			-				20,000
Derivative expense			-				66,980
Stock issued for services - related party			159,930				183,693
Stock issued for services			407,000				194,215
Change in fair value of derivative liability			-				44,661
Change in operating liability:
Decrease in deferred rent			(1,705	)			(696	)
Decrease in accounts receivable			34,853				59,200
(Increase) decrease in other receivable			7,323				(7,323	)
Decrease in inventory			-				4,292
Decrease in prepaid expense			-				1,697
Increase in accounts payable and accrued expenses			41,571				24,669
Increase (decrease) in accrued payroll			(3,420	)			4,327
Increase (decrease) in costs and estimated earnings in excess of billings			(20,155	)			15,049
Decrease in accrued compensation			-				(3,470	)
Net cash used in operating activities			(1,040,865	)			(472,939	)
Cash flows from investing activities:
Proceeds from sale of equipment			-				10,000
Purchase of equipment and software			(550	)			(6,988	)
Net cash provided by (used in) investing activities			(550	)			3,012
Cash flows from financing activities:
Repayments of note payable			(230,526	)			(4,539	)
Proceeds from convertible note payable, less offerings costs and OID costs paid			-				230,000
Repayment of convertible note			(175,000	)			(201,093	)
Proceeds from demand note payable, less OID costs paid			250,000				204,000
Issuance of preferred stock for cash			300,001				125,000
Issuance of common stock for cash			824,000				50,000
Net cash provided by financing activities			968,475				403,368
Decrease cash and cash equivalents			(72,940	)			(66,559	)
Cash and cash equivalents at beginning of period			78,219				100,906
Cash and cash equivalents at end of period		$	5,279			$	34,347
Supplementary disclosure of cash flow information
Cash paid during the period for:
Interest		$	1,917			$	2,405
Income taxes		$	-			$	-
Supplemental disclosure of non-cash investing and financing activities:
Beneficial conversion feature		$	95,333			$	154,416
Shares issued for debt issuance costs		$	-			$	143,500
Shares issued on conversion of convertible debt		$	-			$	103,351
Reclass of promissory note to convertible note		$	-			$	203,351
Settlement of convertible note into common shares		$	100,000			$	-
Conversion of preferred shares into common shares		$	2,500			$	-
Shares issued due to Alamo CBD asset acquisition		$	1,440,961			$	-

 

The Accompanying Notes are an Integral Part of these Unaudited Financial Statements.

 

 

INDOOR HARVEST CORP

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

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

 

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

 

Indoor Harvest Corp. (the “Company,”) is a Texas corporation formed on November 23, 2011. From its inception, the Company, through its brand name Indoor Harvest ®, specialized in equipment design, development, marketing and direct-selling of commercial grade aeroponics fixtures and supporting systems for use in urban Controlled Environment Agriculture (“CEA”) and Building Integrated Agriculture (“BIA”).

 

In the first half of 2017, the Company transitioned from an engineering, procurement, and construction management company for the vertical farming industry, into a developer of personalized cannabis medicines, and a provider of advanced cultivation technology, methods, and processes for cannabis production. Through its historical and current business and its brand name, Indoor Harvest ®, the Company continues to be a full-service state of the art design-build engineering firm for the indoor farming industry.

 

These unaudited interim condensed financial statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the United States Securities and Exchange Commission (the “SEC”) on April 17, 2017.

 

Use of Estimates

 

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

 

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

 

Cash and Cash Equivalents

 

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

 

Accounts Receivable and Work in Progress

 

Work in progress consists of costs recorded and revenue earned on projects recognized on the percentage of completion method for work performed on contracts in progress at September 30, 2017, and December 31, 2016. The Company records revenue based on contractual agreements entered into at the inception of construction contracts. Amounts are payable from customers based on milestones established in each contract. Amounts are billed at milestone completion and are reflected as accounts receivable when billed. Costs and estimated earnings are accumulated on projects in process and compared to amounts billed based on the percentage of completion method of accounting (cost to cost). Costs incurred in excess of amounts billed and related profit recognized are reflected as an asset on the balance sheet as costs and estimated earnings in excess of billings. Unearned billings are reflected in the balance sheet as a liability as billings in excess of costs and estimated earnings on projects in process (See Note 7).

 

 

Inventories

 

Inventory consists primarily of raw materials and packaging materials and is valued at the lower of cost or market. Cost is determined using the weighted average method and the average cost is recomputed after each inventory purchase or sale. Inventory is periodically reviewed to identify obsolete or damaged inventory and impaired values. Inventory is comprised of raw materials such as steel for our framing systems and packaging materials such as boxes and pallets valued at $2,360 at both September 30, 2017, and December 31, 2016.

 

Revenue Recognition

 

The Company recognizes revenue on arrangements in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 605, Revenue Recognition. In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. The Company will generate revenue from the design and installation of the equipment and licensing of technology.

 

Revenue from construction contracts are reported under the percentage of completion method for financial statement purposes. The estimated revenue for each contract reflected in the financial statements represent that percentage of estimated total revenue that costs incurred to date bear to estimated total costs, based on the Company’s current estimates. With respect to contracts that extend over one or more accounting periods, revisions in costs and revenue estimates during the work are reflected in the period the revisions become known. When current estimates of total contract costs indicate a loss, provision is made for the entire estimated loss.

 

The asset, “costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed. The liability, “Estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.

 

Billing practices for these projects are governed by the contract terms of each project based upon actual costs incurred, achievement of milestones, or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized under the percentage of completion method of accounting. Except for claims and change orders that are in the process of being negotiated with customers, unbilled work is usually billed during normal billing processes following achievement of the contractual requirements.

 

Stock Based Compensation

 

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

 

Basic Loss per Share

 

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

 

 

The Company has the following common stock equivalents for the nine months ended September 30, 2017 and 2016, respectively:

 

		September 30, 2017				September 30, 2016
Convertible debt (exercise price - $0.07/share)			-				1,307,190
Convertible debt (exercise price - $0.30/share)			916,667				-
Series A convertible preferred shares (exercise price - $0.08/share)			-				3,267,974
			916,667				4,575,164

 

Fair Value of Financial Instruments

 

The Company adopted ASC 820 Fair Value Measurements for financial and non-financial assets and liabilities. The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value and provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

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

 

Carrying amounts reported on the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to their relatively short maturity. Debt classified as Level 2 in the fair value hierarchy represent note payable, net of debt discount, of $0 and $209,786 at September 30, 2017 and December 31, 2016, respectively, and convertible notes payable of $247,986 and $122,383 at September 30, 2017 and December 31, 2016, respectively.

 

Income Taxes

 

The Company accounts for income taxes pursuant to ASC 740 Income Taxes. This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position.  If the more likely than not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all the deferred tax asset will not be realized. 

 

ASC 740 implements a process for measuring those tax positions that meet the recognition threshold of being ultimately sustained upon examination by the taxing authorities. There are no uncertain tax positions taken by the Company on its tax returns. The Company files tax returns in the U.S. and states in which it has operations and is subject to taxation.

 

Tax years 2016, 2015, 2014, 2013, 2012 and 2011, remain subject to examination by the Internal Revenue Service (“IRS”) and respective states.

 

 

Property and Equipment

 

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

 

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

 

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

 

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

 

Goodwill and Other Intangible Assets (Restated)

 

Goodwill and indefinite-lived intangible assets are not amortized but are evaluated for impairment annually or more often if indicators of a potential impairment are present. Indefinite-lived intangible assets consist of the Company’s domain name. Finite-lived intangible assets include software and is amortized over a 3 to 5 year period.

 

In accordance with ASC 350 Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible assets are reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company recognized $1,440,961 and $0 for impairment charges taken during the nine months ended September 30, 2017 and 2016, respectively.

 

Intangible assets consist of the following at September 30, 2017 and December 31, 2016:

 

Classification		September 30, 2017				December 31, 2016
Domain name		$	2,000			$	2,000
Facilities Manager’s Package Online (software)			1,022				1,022
MLC CD Systems (software)			7,560				7,560
Total			10,582				10,582
Less: Accumulated amortization			(4,261	)			(2,978	)
Intangible assets, net		$	6,321			$	7,604

 

Patent and Patent Application Expenses

 

Although the Company believes that its patent and underlying technology will have continuing value, the amount of future benefits to be derived from the patent is uncertain. Therefore, patent costs are expensed as incurred.

 

 

Research and Development

 

Research and development expenditures are charged to expense as incurred. Research and development expense for the three and nine months ended September 30, 2017 and 2016 are as follows:

 

		Three Months Ended								Nine Months Ended
		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Research and development expense		$	-			$	6,376			$	1,625			$	15,047

 

Advertising Expense

 

Advertising and promotional costs are expensed as incurred. Advertising expense for the three and nine months ended September 30, 2017 and 2016, are as follows:

 

		Three Months Ended								Nine Months Ended
		September 30, 2017				September  30, 2016				September 30, 2017				September 30, 2016
Advertising expense		$	3,298			$	5,418			$	16,185			$	67,079

 

Recent Accounting Pronouncements

 

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

 

The FASB issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805) clarifying the definition of a business. The amendment affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. For public companies, the amendment is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.

 

The FASB issued ASU No. 2016-02, Leases (Topic 842) providing new lease accounting guidance. The standard requires the recognition of right-of-use assets and lease liabilities for all long-term leases, including operating leases, on the balance sheet. The standard also provides additional guidance on the measurement of the right-of-use assets and lease liabilities and will require enhanced disclosures about the Company’s leasing arrangements. Under current accounting standards, substantially all the Company’s leases are considered operating leases and, as such, are not recognized on the Consolidated Balance Sheet. This standard is effective for the Company beginning on January 1, 2019, with early adoption permitted.

 

The FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) providing improved accounting for employee share-based payments. The standard affects all organizations that issue share-based payment awards to their employees. For public companies, the amendment is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.

 

The FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). This standard requires an entity to recognize the amount of revenue to which it expects to be entitled to for the transfer of promised goods or services to customers. The new standard was originally effective on January 1, 2017; however, in July 2015 the FASB decided to defer the effective date by one year. Early application is not permitted, but reporting entities may choose to adopt the standard as of the original effective date. The standard permits the use of either the retrospective or cumulative effect transition method.

 

Derivative Liability

 

The Company accounts for derivative instruments in accordance with ASC 815 Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At September 30, 2017 and December 31, 2016, the Company did not have any derivative instruments that were designated as hedges.

 

 

 

Beneficial Conversion Feature

 

For conventional convertible debt where the rate of conversion is below market value, the Company records a beneficial conversion feature (“BCF”) and related debt discount. When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The discount is amortized to interest expense over the life of the debt.

 

NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS

 

Subsequent to the filing on November 14, 2017, of the Form 10Q, 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. As at September 30, 2017, the Company had recorded $890,961 for Goodwill from the acquisition of Alamo CBD (“Alamo”), from the issuance of shares valued at $1,440,961 and reduced by $550,00 for the cancelation of shares by the Company’s officer. Management determined that the acquisition of Alamo CBD was not a business combination and was an acquisition of assets, and 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.

 

The effects of the adjustments on the Company’s previously issued financial statements as at September 30, 2017 and for the three and nine months ended September 30, 2017 are summarized as follows:

 

		Originally				Restatement
Balance Sheets		Reported				Adjustment				As Restated
Goodwill		$	890,961			$	(890,961	)		$	-
Total assets		$	1,038,726			$	(890,961	)		$	147,765
Accumulated deficit		$	(5,996,968	)		$	(1,440,961	)		$	(7,437,929	)
Total stockholders’ equity (deficit)		$	660,736			$	(890,961	)		$	(230,225	)
Total liabilities and stockholders’ equity (deficit)		$	1,038,726			$	(890,961	)		$	147,765

 

			Originally				Restatement
Statements of Operations			Reported				Adjustment				As Restated
For the nine months ended September 30, 2017
Impairment loss		$	-			$	1,440,961			$	1,440,961
Total operating expenses		$	1,325,778			$	1,440,961			$	2,766,739
Loss from operations		$	(1,337,127	)		$	(1,440,961	)		$	(2,778,088	)
Net loss		$	(2,000,196	)		$	(1,440,961	)		$	(3,441,157	)
Net loss per share, basic and diluted		$	(0.11	)		$	(0.08	)		$	(0.19	)
Weighted average number of common shares outstanding: Basic and diluted			18,644,318				-				18,644,318
			Originally				Restatement
Statements of Operations			Reported				Adjustment				As Restated
For the three months ended September 30, 2017
Impairment loss		$	-			$	1,440,961			$	1,440,961
Total operating expenses		$	178,491			$	1,440,961			$	1,619,452
Loss from operations		$	(175,411	)		$	(1,440,961	)		$	(1,616,372	)
Net loss		$	(219,561	)		$	(1,440,961	)		$	(1,660,522	)
Net loss per share, basic and diluted		$	(0.01	)		$	(0.08	)		$	(0.09	)
Weighted average number of common shares outstanding: Basic and diluted			19,929,506				-				19,929,506
			Originally				Restatement
Consolidated Statements of Cash Flows			Reported				Adjustment				As Restated
Net loss		$	(2,000,196	)		$	(1,440,961	)		$	(3,441,157	)
Impairment loss		$	-			$	1,440,961			$	1,440,961

 

 

NOTE 3 - GOING CONCERN (RESTATED)

 

As reflected in the accompanying unaudited financial statements, the Company had a net loss of $3,441,157, net cash used in operations of $1,040,865 and has an accumulated deficit of $7,437,929 for the nine months ended September 30, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The ability of the Company to continue as a going concern is dependent on Management’s plans which include potential asset acquisitions, mergers or business combinations with other entities, further implementation of its business plan and continuing to raise funds through debt or equity financings. The Company will likely rely upon related party debt or equity financing to ensure the continuing existence of the business.

 

The Company’s business plan is to engage in the design and development of commercial grade aeroponics fixtures and supporting systems for use in CEA and BIA cannabis production and to develop personalized cannabis medicines, as a provider of advanced cultivation technology, methods and processes. The Company provides the cannabis industry production platforms for CEA and BIA production. During the next twelve months, the Company’s strategy is to:

 

	●	complete ongoing product development;
	●	advance product assembly;
	●	construct a demonstration cannabis CEA and BIA farm for marketing purposes;
	●	offer design-build services to partners; and
	●	establish its long-term strategy to directly sell, license and franchise its patent-pending cannabis cultivation technologies and methods.

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following at September 30, 2017 and December 31, 2016:

 

Classification		September 30, 2017				December 31, 2016
Furniture and equipment		$	124,379			$	123,827
Tooling equipment			27,015				27,015
Leasehold improvements			57,780				57,780
Computer equipment			6,169				6,169
Research and development lab			63,177				63,177
Total			278,520				277,968
Less: Accumulated depreciation			(157,315	)			(119,550	)
Property and equipment, net		$	121,205			$	158,418

 

 Depreciation expense for the nine months ended September 30, 2017, totaled $37,765.

 

 

NOTE 5 - COMMITMENTS AND CONTINGENCIES

 

Alamo CBD (Restated)

 

On January 3, 2017, the Company signed a binding letter of intent with Alamo CBD to enter discussions to combine and create a medical cannabinoids pharmaceutical group. On August 3, 2017, the Company formed Alamo Acquisition, LLC, a Texas limited liability company, in which the Company owns 100% of Alamo Acquisition, LLC member interests.

 

On August 4, 2017, the Company entered into an Agreement and Plan of Merger and Reorganization, by and among the Company, Alamo Acquisition LLC, and Alamo CBD (the “Agreement”). On August 8, 2017, Chad Sykes, Founder and Chief Cultivation Officer of the Company, returned 2,500,000 shares of common stock to the Company in anticipation of the merger of the Company and Alamo CBD (the “Merger”) to be consummated pursuant to the Agreement. The return of common stock by Chad Sykes was a non-cash transaction valued at $0. 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 asset acquisition. Pursuant to ASC 805 “Business Combinations,” the Company determined this agreement to be an asset purchase and recorded fair value of $1,440,961 ($0.19 per share) based upon the most recent trading price per share. For the period ended September 30, 2018, the Company recorded an impairment loss of $1,440,961.

 

Vyripharm Joint Venture

 

On March 23, 2017, the Company entered into a Contractual Joint Venture Agreement with Vyripharm Enterprises, LLC (“Vyripharm”) and Alamo CBD, pursuant to which the parties agreed to participate in an unincorporated joint venture (the “Joint Venture”). The intent of the Joint Venture was for the Parties to work together to enhance the ability of Alamo CBD to apply for and obtain licensure, or a permit, to grow and/or dispense marijuana products for medical and/or consumer use through the Texas Compassionate Use Program. As of March 31, 2017, the Company paid Vyripharm $250,000 that was recorded as an Investment in Joint Venture on the balance sheet. Subsequently, the Joint Venture failed to receive licensure in Texas. However, the Joint Venture placed 16 out of 43 applicants and its application is currently considered pending by the Department of Public Safety (“DPS”).

 

On August 7, 2017, after negotiations, the Company advised Vyripharm that it intended to voluntarily default on the Contractual Joint Venture. Company management determined that without a license to produce cannabis, the Company would not be able to fully utilize the intent of the Joint Venture partnership and the Company would be financially burdened by the ongoing Joint Venture terms. Both parties agreed that this decision would not impair either party’s ability to pursue a Joint Venture in the future after the Company, or Alamo CBD, obtained license to produce cannabis. As such, Indoor Harvest recorded a loss on investment of the Joint Venture for the nine months ending September 30, 2017 of $250,000 as presented in the Condensed Statements of Operations.

 

Deferred Rent

 

Deferred rent payable at September 30, 2017 was $6,808. Deferred rent payable is the sum of the difference between the monthly rent payment and the straight-line monthly rent expense of an operating lease that contains escalated payments in future periods.

 

Rent expense for the three and nine months ended September 30, 2017 and 2016, were:

 

		Three Months Ended								Nine Months Ended
		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Rent expense		$	12,788			$	12,788			$	39,763			$	38,616

 

 

NOTE 6 - CONCENTRATIONS

 

At September 30, 2017 and December 31, 2016, the Company had concentrations of accounts receivable of:

 

Customer		September 30, 2017				December 31, 2016
Tweed, Inc.			-	%			100	%

 

For the three months ended September 30, 2017 and 2016, the Company had a concentration of sales of:

 

		Three Months Ended
Customer		September 30, 2017				September 30, 2016
Bright Orchard			66	%			-	%
Tweed			34	%			-	%
University of Arizona CEAC			-	%			24	%
ER Michigan			-	%			76	%

 

For the nine months ended September 30, 2017 and 2016, the Company had a concentration of sales of:

 

		Nine Months Ended
Customer		September 30, 2017				September 30, 2016
Bright Orchard			66	%			-%
Tweed			34	%			-%
University of Arizona CEAC			-%				22	%
GSS Colorado			-%				6	%
ER Michigan			-%				34	%
PH Research Platform			-%				5	%
UB Poland			-%				33	%

 

NOTE 7 - WORK IN PROCESS

 

Work in progress as of September 30, 2017 and December 31, 2016, consisted of the following:

 

Description		September 30, 2017				December 31, 2016
Costs incurred on uncompleted contracts		$	-			$	80,620
Estimated earnings			-				-
Less: Billings to date			-				(100,775	)
Total		$	-			$	(20,155	)
Reflected in balance sheet as:
Costs and estimated earnings in excess of billings on contracts in process		$	-			$	-
Billings in excess of costs and estimated earnings on contracts in process			-				20,155
Total		$	-			$	20,155

 

 

NOTE 8 - NOTE PAYABLE

 

Note payable as of September 30, 2017 and December 31, 2016, consisted of the following:

 

		September 30, 2017				December 31, 2016
On June 5, 2015, the Company entered into a five-year loan agreement totaling $36,100. The loan carries interest at a rate of 10.25%.		$	22,105			$	27,132
Less: current portion			7,330				6,790
Long-term note payable, net		$	14,775			$	20,342

 

NOTE 9 - DEBT AND CONVERTIBLE LOAN PAYABLE

 

Convertible Note Payable

 

On March 20, 2017, the Company entered into a settlement agreement relating to a promissory note with Chuck Rifici Holdings, Inc originally dated September 26, 2016 (“Rifici Note”). The Company settled the amount owed by paying $269,498 in cash. The Company was released from any further liability under this Rifici Note upon payment of this amount.

 

On March 20, 2017, the Company entered into a settlement agreement relating to two (2) promissory notes with FirstFire Global Opportunities Fund, LLC dated October 19, 2016 and December 12, 2016. Pursuant to the settlement, the Company paid the holder an aggregate of $252,917 in cash and issued 333,333 shares of common stock with a fair value of $100,000 based upon the conversion price of $0.30 per share. The Company was released from any further liability under this FirstFire Global Opportunities Fund, LLC note upon payment of this amount.

 

On March 24, 2017, the Company entered into a securities purchase agreement with Tangiers Global, LLC (“Tangiers”) relating to the issuance and sale of notes (“Tangiers Note”) in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. The Tangiers Note is convertible into shares of common stock at a price equal to $0.30 per share. The Tangiers Note carries interest on the unpaid principal amount at the rate of 8% per annum and is due and payable eight months from the effective date of each payment. For the nine months ended September 30, 2017, the Company received an initial $250,000 payment under the Tangiers Note, which when added to the 10% original issuance discount fee of $25,000, represents a $275,000 face amount outstanding (the “First Draw”).

 

On October 10, 2017, the Company executed Amendment #1 (“Amendment #1”) to the Tangiers Note for a final draw of $250,000 payment plus a 10% original issue discount (the “Final Draw”). Amendment #1 modified the maturity date of the Tangiers Note from eight months to six months from the effective date of each payment. In addition, Amendment #1 included use of proceeds for the $250,000 received from Tangiers. All other terms and conditions of the Tangiers Note remain effective and were not amended

 

The execution of Amendment #1 caused the Company to default on the First Draw due to the acceleration of the maturity date. The default caused an increase in the interest rate on the First Draw from 8% to 18% and allows Tangiers to demand payment in cash equal to 150% of the outstanding principal and interest, which is automatically added to the outstanding principle, and convert all or a portion of the outstanding principal into shares of common stock of the Company. The default conversion rate of the Tangiers Note is the lower of the conversion rate then in effect or 65% of the lowest trading price for the 15 days prior to Tangiers’ notice of conversion.

 

On October 17, 2017, the Company converted debt and accrued interest, totaling $30,000 into 329,670 shares of common stock. (See also Note 12).

 

For the three and nine months ended September 30, 2017, the Company accrued $5,545 and $11,874, respectively, in accrued interest related to outstanding the note.

 

Debt Discount and Original Issuance Costs for Convertible Note

 

During the nine months ended September 30, 2017 and 2016, the Company recorded debt discounts and original issuance costs totaling $120,333 and $380,267, respectively.

 

The debt discounts recorded in 2017 and 2016, pertain to beneficial conversion feature on the convertible notes. The notes are required to be bifurcated and reported at fair value on the date of grant. (see Note 1 Fair Value Measurements).

 

 

The Company amortized $294,888 and $331,034 to interest expense during the nine months ended September 30, 2017 and 2016, respectively.

 

		Nine Months Ended September 30, 2017				Year Ended December 31, 2016
Debt discount, beginning of period		$	152,617			$	-
Additional debt discount and debt issue cost			120,333				417,834
Amortization of debt discount and debt issue cost			(245,937	)			(265,217	)
Debt discount, end of period		$	27,013			$	152,617

 

Debt Issuance Costs for Convertible Note

 

During the nine months ended September 30, 2017 and 2016, the Company did not pay debt issuance costs.

 

During the nine months ended September 30, 2017 and 2016, the Company amortized $7,473 and $0 of debt issue costs, respectively.

 

		Nine Months Ended September 30, 2017				Year Ended December 31, 2016
Debt discount, beginning of period		$	7,473			$	-
Additional debt discount			-				10,000
Amortization of debt discount			(7,473	)			(2,527	)
Debt discount, end of period		$	-			$	7,473

 

Debt Discount for Promissory Note

 

During the nine months ended September 30, 2017 and 2016, the Company recorded debt discount of $0 and $34,112, respectively.

 

The Company amortized $15,715 and $767 to interest expense during the nine months ended September 30, 2017 and 2016, respectively.

 

		Nine Months Ended September 30, 2017				Year Ended December 31, 2016
Debt discount, beginning of period		$	15,715			$	-
Additional debt discount							34,112
Amortization of debt discount			(15,715	)			(18,398	)
Debt discount, end of period		$	-			$	15,715

 

 

NOTE 10 - RELATED PARTY TRANSACTIONS (RESTATED)

 

On August 8, 2017, Chad Sykes, Founder and Chief Cultivation Officer, returned 2,500,000 shares of common stock to the Company related to the merger of the Company and Alamo CBD.

 

On September 6, 2017, the Company issued 2,957,763 shares of common stock to Dr. Lang Coleman, Director, related to the merger of the Company and Alamo CBD.

 

On September 6, 2017, the Company issued 758,401 shares of common stock Rick Gutshall, Interim-Chief Executive Office, Chief Financial Officer and Director, related to the merger of the Company and Alamo CBD.

 

On September 15, 2017, the Company issued 250,000 shares of common stock related to an Employment Agreement with Annette Knebel, Chief Accounting Officer and Director.

 

NOTE 11 - STOCKHOLDERS’ DEFICIT (RESTATED)

 

Series A Convertible Preferred Stock

 

During the third quarter of fiscal 2016, the Company initiated a subscription agreement to offer accredited investors up to 1,000,000 units (“Units”) of securities, each Unit consists of one (1) share of Series A Convertible Preferred Stock and one (1) Series A Warrant (“Warrant”). The price per Unit was $0.50 for a maximum aggregate proceeds of $500,000. There are no dividends on the Series A Convertible Preferred Stock. The Warrants were exercisable at $0.50 per share for a period of one year. As of September 30, 2017, the warrants were not exercised. Therefore, the Company has disclosed the expiration of the Warrants.

 

From August 15 to August 29, 2016, the Company sold an aggregate of 250,000 Units to three (3) investors for total proceeds of $125,000. During the nine months ended September 30, 2017 and 2016, the Company amortized $33,238 and $0 of debt discount related to the warrants, respectively. The remaining debt discount related to the warrants is $0.

 

On March 20, 2017, the Company’s Series A Preferred Convertible Stock shareholders (“Series A Holders”) each voted to waive and remove the provisions of Section 5(iii) of the Certificate of Designations of the Series A Preferred Stock. Series A Holders have each agreed individually and also as a group to convert their Series A Convertible Preferred Stock into common stock at a conversion price equal to $0.30 per share. A total of 250,000 shares of the Company’s Series A Preferred Convertible Stock were converted into an aggregate of 416,667 shares of common stock.

 

From April 26, 2017 through May 3, 2017, the Company sold an aggregate of 750,000 shares of Series A Preferred Common Stock to thirteen (13) U.S. accredited investors at $0.40 per share for proceeds of $300,000.

 

Common Stock

 

January 16, 2017, the Company issued 145,740 shares of common stock related to a Director Agreement with Pawel Hardej. The Company recorded fair value of $64,126 ($0.44/share) based upon the most recent trading price per share of the Company’s stock.

 

January 16, 2017, the Company issued 41,640 shares of common stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $18,322 ($0.44/share) based upon the most recent trading price per share of the Company’s stock.

 

January 16, 2017, the Company issued 62,460 shares of common stock related to a Director Agreement with John Choo. The Company recorded fair value of $27,482 ($0.44/share) based upon the most recent trading price per share of the Company’s stock.

 

 

January 17, 2017, the Company issued 800,000 shares of common stock to Lyons Capital, LLC for a six-month consulting and road show services agreement. The Company recorded fair value of $352,000 ($0.44/share) based upon the most recent trading price per share of the Company’s stock.

 

From February 22, 2017 through March 15, 2017, the Company sold, in reliance upon Regulation D Rule 506, a total of 2,060,000 shares of common stock to seventeen (17) U.S. accredited investors at $0.40 per share for cash totaling $824,000.

 

On March 20, 2017, the Company settled the amount owed to FirstFire Global Opportunities Fund LLC by paying $252,917 in cash and issuing 333,333 shares of common stock with a fair value of $100,000 based upon the conversion price of $0.30/share (See Note 9).

 

On March 20, 2017, a total of 250,000 shares of the Company’s Series A Preferred Convertible Stock were converted into 416,667 shares of Common Stock. The Company recorded fair value of $175,000 ($0.42/share) based upon the most recent trading price per share of the Company’s stock.

 

On June 1, 2017, the Company issued 250,000 shares of common stock for a 12-month investor relations consulting agreement. The Company recorded fair value of $55,000 ($0.22/share) based upon the most recent trading price per share of the Company’s stock.

 

On August 8, 2017, Chad Sykes, Founder and Chief Cultivation Officer, returned 2,500,000 shares of common stock to the Company in anticipation of the Merger (See Note 5).

 

On September 6, 2017, the Company issued an aggregate of 7,584,008 shares of common stock to Alamo CBD, in connection with the Merger. The Company recorded fair value of $1,440,961 ($0.19 per share) based upon the most current trading price of the Company’s stock.

 

On September 15, 2017, the Company issued 250,000 shares of common stock related to an Employment Agreement with Annette Knebel, Chief Accounting Officer and Director. The Company recorded fair value of $50,000 ($0.20 per share) based upon the most current trading price of the Company’s stock.

 

Common Stock Warrants

 

On September 26, 2016, the Company issued the Rifici Note to Chuck Rifici Holdings, Inc, relating to the issuance of $225,500 in aggregate principal including a $204,000 actual payment of purchase price plus a 10% original issue discount. In conjunction with the issuance of the Rifici Note, the Company issued a one-year warrant to purchase 250,000 shares of common stock at an exercise price of $0.30 per share (See Note 9). The warrant expired September 26, 2017 and was not exercised.

 

		Number of Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in Years)
Balance, December 31, 2016			500,000				0.40				-
Granted			-				-				-
Exercised			-				-				-
Canceled/Forfeited			250,000				0.50				-
Expired			250,000				0.30				-
Balance September 30, 2017			-			$				$	-

 

For the nine months ended September 30, 2017, no warrants were outstanding.

 

 

For the year ended December 31, 2016, the following warrants were outstanding:

 

Exercise Price Warrants Outstanding		Warrants Exercisable				Weighted Average Remaining Contractual Life				Aggregate Intrinsic Value
$   0.30-0.50			500,000				0.69				32,500

 

Lattice Binomial model was used to value aggregate intrinsic value.

 

NOTE 12 - SUBSEQUENT EVENTS

 

On October 10, 2017, the Company executed Amendment #1 to the March 24, 2017 Tangiers Note for $250,000 payment plus a 10% original issue discount. The maturity date is six months from the effective date. All other terms and conditions of the Tangiers Note remain effective.

 

On October 12, 2017, the Company entered into an Investment Agreement with Tangiers Global, LLC (“Tangiers Global”) pursuant to which the Company may issue and sell to Tangiers Global up to $2,000,000 of the Company’s common stock. Concurrently, on October 12, 2017, the Company entered into a Registration Rights Agreement with Tangiers Global. The Investment Agreement shall terminate upon the earlier of: (i) the issuance of $2,000,000 of shares, (ii) 36 months after the Effective Date (as defined in the Investment Agreement), (iii) at such time the Registration Statement (as defined in the Investment Agreement) is no longer effective, or (iv) by the Company at any time by providing 15 days written notice to Tangiers Global.

 

On October 12, 2017, the Company issued a promissory note to Tangiers Global, in the principal amount of $50,000 in order to induce Tangiers Global to enter into the Investment Agreement. The note bears interest at a rate of 10% per annum and matures on May 12, 2018. Tangiers Global may, at any time, convert the unpaid principal amount of the note into shares of the Company’s common stock at a conversion price of $0.1666 per share.

 

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

 

 

Item 2. Management’s Discussion and Analysis or Plan of Operation.

 

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 Form 10-Q/A.

 

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 Quarterly 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 financial statements and other financial information appearing elsewhere in this Quarterly Report. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking statements. You can identify these statements by forward-looking words such as “plan,” “may,” “will,” “expect,” “intend,” “anticipate,” believe,” “estimate” and “continue” or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future and thus you should not unduly rely on these statements.

 

The forward-looking statements included herein are based on current expectations that involve several risks and uncertainties set forth under “Risk Factors” in our Annual Report on Form 10-K as of and for the year ended December 31, 2016 and other periodic reports filed with the United States Securities and Exchange Commission (“SEC”). Accordingly, to the extent that this Quarterly Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company’s actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements and thus you should not unduly rely on these statements.

 

Overview

 

We are currently in the process of implementing a significant change in our business focus and structure. We are seeking to use the relationships and technology we have developed to become a registered producer and seller under the federal Controlled Substance Act (“CSA”) of pharmaceutical grade cannabis for research and targeted treatment of specific medical symptoms. The Company is in the final stages of negotiating the development and construction of an aeroponic cannabis demonstration farm as well as a commercial production facility in the United States. The Company intends to generate revenue from engineering, project management, equipment leasing and technology licensing from these constructed facilities (demonstration farms).

 

Current Business and Operations

 

The Company, through its brand name Indoor Harvest®, is a developer of personalized cannabis chemical expression profiles and is a provider of advanced cultivation methods and processes. The Company intends to sell and license its patent pending high pressure aeroponic cultivation systems and methods to producers of cannabis.

 

 

Aeroponics is the process of growing plants in an air or mist environment without the use of soil or an aggregate medium (known as geoponics). Aeroponic culture differs from both conventional hydroponics and in-vitro (plant tissue culture) growing. Unlike hydroponics, which uses water as a growing medium and to provide essential minerals to sustain plant growth, aeroponics is conducted without a growing medium. Because water is used in aeroponics to transmit nutrients, it is sometimes considered a type of hydroponics. The Company’s patent pending aeroponic technology has been independently tested and shown to reduce cannabis production costs by up to 80%, while increasing cannabis biomass by 150% and increasing cannabis flower production by 50%. The technology allows for precision cultivation, while eliminating mediums, thereby dramatically reducing the potential for contaminants and the use of pesticides. When used with BIA and CEA installations, the Company’s aeroponic technology can provide a fully sterile production environment capable of producing consistent chemical expression of the cannabis plant for pharmaceutical research and development.

 

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 line of productions, developing our in-house manufacturing and fabrication facilities and the costs related to be a fully reporting company with the SEC.

 

Alamo CBD Asset Acquisition and Changes in Business Operations

 

On January 3, 2017, the Company signed a binding letter of intent with Alamo CBD to enter discussions to combine and create a medical cannabinoids pharmaceutical group. On August 3, 2017, the Company formed Alamo Acquisition, LLC, a Texas limited liability company, in which the Company owns 100% of Alamo Acquisition, LLC member interests.

 

On August 4, 2017, the Company entered into an Agreement and Plan of Merger and Reorganization, by and among the Company, Alamo Acquisition LLC, and Alamo CBD (the “Merger”). On August 8, 2017, Chad Sykes, Founder and Chief Cultivation Officer, returned 2,500,000 shares of common stock to the Company in anticipation of the Merger. The return of common stock by Chad Sykes was a non-cash transaction. On September 6, 2017, the Company issued an aggregate of 7,584,008 shares of common stock to the members of Alamo CBD related to the Merger. The Company recorded fair value of $1,440,961 ($0.19 per share) based upon the most recent trading price per share. The Company subsumed into goodwill all intangible assets acquired in the transaction. The aggregate value of goodwill at September 30, 2017 was $0, after an impairment charge to operating expenses of $1,440,961.

 

Contractual Joint Venture with Alamo CBD and Vyripharm Enterprises, LLC

 

On March 23, 2017, the Company entered into a Contractual Joint Venture Agreement with Vyripharm Enterprises, LLC (“Vyripharm”) and Alamo CBD, pursuant to which the parties agreed to participate in an unincorporated joint venture (the “Joint Venture”). The intent of the Joint Venture was for the Parties to work together to enhance the ability of Alamo CBD to apply for and obtain licensure, or a permit, to grow and/or dispense marijuana products for medical and/or consumer use through the Texas Compassionate Use Program. As of March 31, 2017, the Company paid Vyripharm $250,000 that was recorded as an Investment in Joint Venture on the balance sheet.

 

 

Voluntary Default of Joint Venture and Status of Application with DPS

 

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, 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 Compassionate Use Program. To date, the DPS has awarded two production licenses with the third applicant pending approval.

 

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. 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.

 

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 Controlled Substance Act. 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.

 

Current Projects

 

On May 31, 2017, the Company notified Tweed Marijuana Inc. (“Tweed”), that it had completed work under Phase Two of its Cannabis Production Pilot Agreement, originally entered on December 18, 2014. The Company installed 13 aeroponic systems at Tweed for an internal economic pilot. Additionally, the Company notified Tweed that it would not seek to renew the Cannabis Production Pilot Agreement.

 

On July 10, 2017, the Company 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 August 4, 2017, the Company ceased all direct operations within the vertical farming industry. The Company intends to sell its portfolio of vertical farming designs through third party reseller agreements.

 

Current EPCM Sales Pipeline

 

On August 4, 2017, the Company ceased all outside Engineering, Procurement and Construction Management services.

 

Results of Operations

 

For the three months ended September 30, 2017, we generated revenue of $4,245 with cost of sales of $1,165 resulting in gross income of $3,080 and gross margin of 73%. For the three months ended September 30, 2016 we generated revenue of $21,210 with cost of sales of $11,278 resulting in gross income of $9,932 and gross margin of 47%. For the nine months ended September 30, 2017, we generated revenue of $4,245 with cost of sales of $15,594 resulting in gross loss of $11,349 and gross margin of -267%. For the nine months ended September 30, 2016, we generated revenue of $83,376 with cost of sales of $55,199 resulting in gross income of $28,177 and gross margin of 34%.

 

 

For the three months ended September 30, 2017, we incurred $1,619,452 of operating expenses compared to $314,410 of operating expenses for the three months ended September 30, 2016. This represents a 415% increase quarter over quarter. The increase in our operating expenses was primarily due to the one-time impairment charge of $1,440,961 from the acquisition of intangible assets. Removing impairment charges our operating expenses decreased 43% as compared to the same period in 2016, primarily from a decrease in payroll costs and reduced operational activities. For the nine months ended September 30, 2017 and 2016, we incurred $2,766,739 and $1,059,474, respectively, in operating expenses. The increase in our operating expenses were due primarily due to the one-time impairment charge of $1,440,961 and due to increased operating costs and costs associated with our agreements to support Alamo CBD’s cannabis production license under the Texas Compassionate Use Program and professional fees associated with the Merger.

 

Our expenses related to research and development for the three months ended September 30, 2017 and 2016 were $0 and $6,376, respectively, representing a 100% decline from last year’s quarter to this year’s quarter. Our expenses related to research and development for the nine months ended September 30, 2017 and 2016 were $1,625 and $15,047, respectively. The decrease in research and development expenses was due to decreased costs associated with our collaborative R&D partnerships, in which we share some costs associated with R&D with our partners.

 

As of September 30, 2017, we had total liabilities of $377,990, while at December 31, 2016, we had total liabilities of $450,908, representing a 16% decrease. The decrease was the result of recapitalization and repayment of debt.

 

Deferred rent payable at September 30, 2017 was $6,808. Deferred rent payable is the sum of the difference between the monthly rent payment and the straight-line monthly rent expense of an operating lease that contains escalated payments in future periods.

 

Liquidity and Capital Resources

 

As of September 30, 2017, we had $7,639 in total current assets and current liabilities of $363,215. Accordingly, our working capital deficit at September 30, 2017 was $355,576. We also have the ability to raise additional capital as needed through external equity financing transactions. Additionally, considering that our fixed overhead costs are low, we have the ability to issue stock to compensate employees and management, and the level of future revenue we expect to generate from the sale of equipment and licensing revenue, we believe our liquidity and capital resources to be adequate to fund our operational and general and administrative expenses for at least the next 12 months. There is no guarantee we will have the ability to raise additional capital as needed through external equity financing transactions if required.

 

Operating activities used $1,040,864 in cash for the nine months ended September 30, 2017, as compared with $427,939 used for the nine months ended September 30, 2016, representing a 120% increase year over year. Our increase in cash used in operating activities was due primarily to an increase in net loss offset by cash provided by amortization of debt discount and stock issued for services and costs associated with our agreements to support Alamo CBD’s cannabis production license under the Texas Compassionate Use Program and professional fees associated with our merger with Alamo CBD.

 

Investing activities for the nine months ended September 30, 2017 used $550 in cash, as compared with providing $3,012 for the nine months ended September 30, 2016, representing a 118% decrease year over year. The reduction of cash used in investing activities is primarily related to the completion of the Tweed project during 2017.

 

Financing activities for the nine months ended September 30, 2017 generated $968,474 in cash, as compared with $403,368 for the nine months ended September 30, 2016, representing a 140% increase year over year. Proceeds from financing activities consisted primarily of proceeds from the issuance of preferred stock and common stock for cash and the proceeds from demand notes.

 

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 1.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

The Company’s management, consisting solely of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer has concluded that, as of September 30, 2017, the Company’s disclosure controls and procedures were not effective because of the following internal control over financial reporting deficiencies:

 

● We currently have an insufficient complement of personnel with the necessary accounting expertise and an inadequate supervisory review structure with respect to the requirements and application of US GAAP and SEC disclosure requirements.

 

● We currently have insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.

 

● We currently lack a formal process and timeline for closing the books and records at the end of each reporting period and such weaknesses restrict the Company’s ability to timely gather, analyze and report information relative to the financial statements.

 

● Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist.

 

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II — OTHER INFORMATION

 

Item 6. Exhibits.

 

 

Exhibit No.		Document Description
31.1*		CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.
31.2*		CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.
32.1**		CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEYACT OF 2002.
32.2**		CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEYACT OF 2002.
Exhibit 101		Interactive data files formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to the Consolidated Financial Statements.
		XBRL Instance Document*
		XBRL Taxonomy Extension Schema Document*
		XBRL Taxonomy Extension Calculation Linkbase Document*
		XBRL Taxonomy Extension Definition Linkbase Document*
		XBRL Taxonomy Extension Label Linkbase Document*
		XBRL Taxonomy Extension Presentation Linkbase Document*

 

*	Filed herewith.
**	Furnished herewith.

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		INDOOR HARVEST CORP.
		(Registrant)
Dated:  November 15, 2018		/s/ Daniel Weadock
		Daniel Weadock
		Chief Executive Officer and Director
		(Principal Executive Officer)
Dated:  November 15, 2018		/s/ Chad Sykes
		Chad Sykes
		Principal Financial Officer and Principal Accounting Officer
		(Principal Financial Officer and Principal Accounting Officer)