UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended | September 30, 2019 |
or
| [ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| 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.) |
7401 W. Slaughter Lane #5078 Austin, Texas | 78739 | |
| (Address of principal executive offices) | (Zip Code) |
| 512-710-7676 |
| (Registrant’s telephone number, including area code) |
| N/A |
| (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | [X] | 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 [X] NO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 99,891,885 common shares issued and outstanding as of November 13, 2019.
EXPLANATORY NOTES
This Amendment No. 1 to our Quarterly Report on Form 10-Q/A for the nine months ended September 30, 2019, amends in its entirety the Quarterly Report on Form 10-Q that was originally filed on November19, 2019 (the “Quarterly Report”), to:
| ● | comply with Rule 10-01(d) Regulation S-X, which requires interim financial statements included in quarterly reports on Form 10-Q to be reviewed by an independent public accountant using professional standards and procedures for conducting such reviews, as established by PCAOB, | |
| ● | to update financial statements and various other disclosures throughout this quarterly report, | |
| ● | to include the required certifications of the Company’s Principal Executive Officer and Principal Financial and Accounting Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act, and, | |
| ● | to include exhibit 101, for XBRL (eXtensible Business Reporting Language) files. |
This Amendment No. 1 revises the original filing of the Original Report and does not otherwise reflect events that may have occurred subsequent to the original filing date.
| 2 |
TABLE OF CONTENTS
| 3 |
FORWARD-LOOKING STATEMENTS
Except for any historical information contained herein, the matters discussed in this quarterly report on Form 10-Q contain certain “forward-looking statements’’ within the meaning of the federal securities laws. This includes statements regarding our future financial position, economic performance, results of operations, business strategy, budgets, projected costs, plans and objectives of management for future operations, and the information referred to under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
These forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may,’’ “will,’’ “expect,’’ “intend,’’ “estimate,’’ “anticipate,’’ “believe,’’ “continue’’ or similar terminology, although not all forward-looking statements contain these words. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements. Important factors that may cause actual results to differ from projections include, for example:
| ● | the success or failure of management’s efforts to implement our business plan; | |
| ● | our ability to fund our operating expenses; | |
| ● | our ability to compete with other companies that have a similar business plan; | |
| ● | the effect of changing economic conditions impacting our plan of operation; and | |
| ● | our ability to meet the other risks as may be described in future filings with the Securities and Exchange Commission (the “SEC”). |
Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made in this quarterly report on Form 10-Q.
When considering these forward-looking statements, you should keep in mind the cautionary statements in this quarterly report on Form 10-Q and in our other filings with the SEC. We cannot assure you that the forward-looking statements in this quarterly report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may prove to be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time-frame, or at all.
| 4 |
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements |
INDOOR HARVEST CORP
CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Indoor Harvest Corp.
Results of Review of Interim Financial Information
We have reviewed the consolidated balance sheet of Indoor Harvest Corp. (the Company) as of September 30, 2019, and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2019, the consolidated statements of stockholders’ deficits, and consolidated statements of cash flows for the nine-month periods then ended, and the related notes (collectively referred to as the interim financial statements). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 | ||
| San Mateo, CA | WWC, Professional Corporation | |
| December 26, 2019 | Certified Public Accountants |
| F-2 |
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 22,195 | $ | 155,682 | ||||
| Prepaid expenses | 9,000 | 18,370 | ||||||
| Security deposit | - | 12,600 | ||||||
| Total Current Assets | 31,195 | 186,652 | ||||||
| Furniture and equipment, net | 6,737 | 14,250 | ||||||
| Intangible asset, net | 3,068 | 4,202 | ||||||
| TOTAL ASSETS | $ | 41,000 | $ | 205,104 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 309,656 | $ | 234,699 | ||||
| Accrued payroll | - | 3,722 | ||||||
| Deferred rent | - | 1,826 | ||||||
| Due to related party | 25,208 | - | ||||||
| Convertible notes payable, net of debt discount of $64,955 and $20,826, respectively | 850,640 | 952,251 | ||||||
| Derivative liability | 1,628,881 | 1,452,469 | ||||||
| Note payable - current portion | 7,369 | 8,332 | ||||||
| Total Current Liabilities | 2,821,754 | 2,653,299 | ||||||
| Long Term Liabilities: | ||||||||
| Note payable | - | 4,493 | ||||||
| Total Liabilities | 2,821,754 | 2,657,792 | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock: 15,000,000 authorized; $0.01 par value Series A Convertible Preferred stock: 5,000,000 designated, 750,000 shares issued and outstanding at September 30, 2019 and December 31, 2018 | 7,500 | 7,500 | ||||||
| Common stock: 3,000,000,000 authorized; $0.001 par value 65,690,760 and 34,888,415 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 65,691 | 34,888 | ||||||
| Additional paid in capital | 10,119,815 | 9,299,988 | ||||||
| Accumulated deficit | (12,973,760 | ) | (11,795,064 | ) | ||||
| Total Stockholders’ Deficit | (2,780,754 | ) | (2,452,688 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 41,000 | $ | 205,104 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-3 |
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenue | $ | - | $ | - | $ | - | $ | - | ||||||||
| Operating Expenses | ||||||||||||||||
| Depreciation and amortization | 2,843 | 3,019 | 8,647 | 9,074 | ||||||||||||
| Stock based compensation | 35,960 | 52,041 | 111,514 | 258,535 | ||||||||||||
| Professional fees | 60,715 | 81,717 | 221,214 | 194,756 | ||||||||||||
| General and administrative | 18,738 | 109,789 | 173,053 | 368,326 | ||||||||||||
| Total Operating Expenses | 118,256 | 246,566 | 514,428 | 830,691 | ||||||||||||
| Loss from operations | (118,256 | ) | (246,566 | ) | (514,428 | ) | (830,691 | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest expense | (17,399 | ) | (39,128 | ) | (31,511 | ) | (87,313 | ) | ||||||||
| Amortization of debt discount | (56,548 | ) | (16,047 | ) | (130,871 | ) | (125,957 | ) | ||||||||
| Change in fair value of embedded derivative liability | (301,458 | ) | (1,089,075 | ) | (501,886 | ) | (1,527,396 | ) | ||||||||
| Total other expense | (375,405 | ) | (1,144,250 | ) | (664,268 | ) | (1,740,666 | ) | ||||||||
| Loss before income taxes | (493,661 | ) | (1,390,816 | ) | (1,178,696 | ) | (2,571,357 | ) | ||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net Loss | $ | (493,661 | ) | $ | (1,390,816 | ) | $ | (1,178,696 | ) | $ | (2,571,357 | ) | ||||
| Basic and dilutive loss per common share | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.03 | ) | $ | (0.10 | ) | ||||
| Weighted average number of common shares outstanding | 52,651,594 | 27,954,160 | 44,666,277 | 25,878,110 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-4 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
For the Nine Months Ended September 30, 2019
Series A Convertible Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Paid in Capital | Accumulated Deficit | Stockholders’ Deficit | ||||||||||||||||||||||
| Balance - December 31, 2018 | 750,000 | $ | 7,500 | 34,888,415 | $ | 34,888 | $ | 9,299,988 | $ | (11,795,064 | ) | $ | (2,452,688 | ) | ||||||||||||||
| Common stock issued for services - third party | - | - | 790,249 | 791 | 32,827 | - | 33,618 | |||||||||||||||||||||
| Common stock issued for services - related party | - | - | 129,012 | 129 | 6,050 | - | 6,179 | |||||||||||||||||||||
| Convertible debt converted into common stock | - | - | 2,898,278 | 2,898 | 63,629 | - | 66,527 | |||||||||||||||||||||
| Derivative liability | - | - | - | - | 143,937 | - | 143,937 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (514,842 | ) | (514,842 | ) | |||||||||||||||||||
| Balance - March 31, 2019 | 750,000 | 7,500 | 38,705,954 | 38,706 | 9,546,431 | (12,309,906 | ) | (2,717,269 | ) | |||||||||||||||||||
| Common stock issued for services - third party | - | - | 1,455,069 | 1,455 | 29,793 | - | 31,248 | |||||||||||||||||||||
| Common stock issued for services - related party | - | - | 130,000 | 130 | 4,379 | - | 4,509 | |||||||||||||||||||||
| Convertible debt converted into common stock | - | - | 6,970,743 | 6,971 | 106,844 | - | 113,815 | |||||||||||||||||||||
| Derivative liability | - | - | - | - | 204,886 | - | 204,886 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (170,193 | ) | (170,193 | ) | |||||||||||||||||||
| Balance - June 30, 2019 | 750,000 | 7,500 | 47,261,766 | 47,262 | 9,892,333 | (12,480,099 | ) | (2,533,004 | ) | |||||||||||||||||||
| Common stock issued for services - third party | - | - | - | - | - | - | - | |||||||||||||||||||||
| Common stock issued for services - related party | - | - | 30,000 | 30 | 330 | - | 360 | |||||||||||||||||||||
| Convertible debt converted into common stock | - | - | 18,398,994 | 18,399 | 88,501 | - | 106,900 | |||||||||||||||||||||
| Derivative liability | - | - | - | - | 138,651 | - | 138,651 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (493,661 | ) | (493,661 | ) | |||||||||||||||||||
| Balance - September 30, 2019 | 750,000 | $ | 7,500 | 65,690,760 | $ | 65,691 | $ | 10,119,815 | $ | (12,973,760 | ) | $ | (2,780,754 | ) | ||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-5 |
INDOOR HARVEST CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
For the Nine Months Ended September 30, 2018
Series A Convertible Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Paid in Capital | Accumulated Deficit | Stockholders’ Deficit | ||||||||||||||||||||||
| Balance - December 31, 2017 | 750,000 | $ | 7,500 | 25,503,678 | $ | 25,502 | $ | 7,376,196 | $ | (8,408,822 | ) | $ | (999,624 | ) | ||||||||||||||
| Common stock issued for services - related party | - | - | 285,522 | 286 | 79,788 | - | 80,074 | |||||||||||||||||||||
| Convertible debt converted into common stock | - | - | 1,465,032 | 1,465 | 148,535 | - | 150,000 | |||||||||||||||||||||
| Derivative liability | - | - | - | - | 286,296 | - | 286,296 | |||||||||||||||||||||
| Beneficial conversion feature | - | - | - | - | 15,750 | - | 15,750 | |||||||||||||||||||||
| Voluntary return of stock by related party | - | - | (3,280,470 | ) | (3,280 | ) | 3,280 | - | - | |||||||||||||||||||
| Net loss | - | - | - | - | - | (127,220 | ) | (127,220 | ) | |||||||||||||||||||
| Balance - March 31, 2018 | 750,000 | 7,500 | 23,973,762 | 23,973 | $ | 7,909,845 | (8,536,042 | ) | (594,724 | ) | ||||||||||||||||||
| Common stock issued for services - third party | - | - | 424,500 | 425 | 50,515 | - | 50,940 | |||||||||||||||||||||
| Common stock issued for services - related party | - | - | 459,012 | 459 | 75,022 | - | 75,481 | |||||||||||||||||||||
| Convertible debt converted into common stock | - | - | 1,065,089 | 1,065 | 73,935 | - | 75,000 | |||||||||||||||||||||
| Derivative liability | - | - | - | - | 156,568 | - | 156,568 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,053,321 | ) | (1,053,321 | ) | |||||||||||||||||||
| Balance - June 30, 2018 | 750,000 | 7,500 | 25,922,363 | $ | 25,922 | $ | 8,265,885 | $ | (9,589,363 | ) | $ | (1,290,056 | ) | |||||||||||||||
| Common stock issued for services - third party | - | - | 683,333 | 683 | 41,817 | - | 42,500 | |||||||||||||||||||||
| Common stock issued for services - related party | - | - | 159,012 | 159 | 9,381 | - | 9,540 | |||||||||||||||||||||
| Convertible debt converted into common stock | - | - | 4,276,751 | 4,277 | 158,313 | - | 162,590 | |||||||||||||||||||||
| Derivative liability | - | - | - | - | 399,408 | - | 399,408 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,390,816 | ) | (1,390,816 | ) | |||||||||||||||||||
| Balance - September 30, 2018 | 750,000 | $ | 7,500 | 31,041,459 | $ | 31,041 | $ | 8,874,804 | $ | (10,980,179 | ) | $ | (2,066,834 | ) | ||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-6 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (1,178,696 | ) | $ | (2,571,357 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | 8,647 | 9,074 | ||||||
| Amortization of debt discount | 130,871 | 125,957 | ||||||
| Expenses paid by related party | 18,108 | - | ||||||
| Change in fair value of embedded derivative liability | 501,886 | 1,527,396 | ||||||
| Stock issued for services - third party | 100,466 | 93,440 | ||||||
| Stock issued for services - related party | 11,048 | 165,095 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | 9,370 | (12,048 | ) | |||||
| Security deposit | 12,600 | - | ||||||
| Accounts payable and accrued expenses | 94,117 | 99,464 | ||||||
| Deferred rent | (1,826 | ) | (3,044 | ) | ||||
| Accrued compensation - officers | (3,722 | ) | (2,931 | ) | ||||
| Net Cash used in Operating Activities | (297,131 | ) | (568,954 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Repayments of note payable | (5,456 | ) | (5,566 | ) | ||||
| Proceeds from convertible notes, less OID costs paid | 162,000 | 653,000 | ||||||
| Proceeds from related party | 7,100 | - | ||||||
| Net Cash provided by Financing Activities | 163,644 | 647,434 | ||||||
| Net change in cash and cash equivalents | (133,487 | ) | 78,480 | |||||
| Cash and cash equivalents, beginning of period | 155,682 | 35,453 | ||||||
| Cash and cash equivalents, end of period | $ | 22,195 | $ | 113,933 | ||||
| Supplemental Cash Flow Information | ||||||||
| Cash paid for interest | $ | 779 | $ | 1,380 | ||||
| Cash paid for taxes | $ | - | $ | - | ||||
| Non-Cash Investing and Financing Activities: | ||||||||
| Derivative liability recognized as debt discount | $ | 162,000 | $ | - | ||||
| Beneficial conversion feature | $ | - | $ | 15,750 | ||||
| Settlement of convertible note into common shares | $ | - | $ | 387,590 | ||||
| Conversion of convertible note into common shares | $ | 251,642 | $ | - | ||||
| Conversion of preferred shares into common shares | $ | - | $ | - | ||||
| Derivative liability reclassified to paid-in capital | $ | 487,474 | $ | 842,272 | ||||
| Voluntary return of common stock by related party | $ | - | $ | 3,280 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-7 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Organization
Indoor Harvest Corp (the “Company,”) is a Texas corporation formed on November 23, 2011. Our principal executive office is located at 7401 W. Slaughter Lane #5078, Austin, Texas 78739. On August 3, 2017, we formed Alamo Acquisition, LLC, a wholly owned Texas limited liability company (“Alamo Acquisition Sub”). On August 4, 2017, we consummated a business acquisition (the “Alamo Acquisition”) pursuant to which Alamo Acquisition Sub acquired all of the outstanding member interests of Alamo CBD, LLC. (“Alamo CBD”), a Texas limited Liability Company. Upon closing of the Alamo Acquisition, the member interests of Alamo CBD were exchanged for 7,584,008 shares of Indoor Harvest’s common stock, the parent company of Alamo Acquisition Sub, and Alamo CBD continued as our surviving wholly-owned subsidiary, and Alamo Acquisition Sub ceased to exist. Pursuant to ASC 805“Business Combinations,” the Company determined the Alamo Acquisition was an asset purchase.
From inception until August 4, 2017, the Company provided full service, state of the art design-build, engineering, procurement and construction services to the indoor and vertical farming industry. The Company provided production platforms, mechanical systems and complete custom designed build outs for both Controlled Environment Agriculture (“CEA”) and Building Integrated Agriculture (“BIA”), for two unique industries, produce and cannabis. In mid-2016, the Company began efforts to separate its produce and cannabis related operations due to ongoing feedback from both clients and potential institutional investors. It was determined that the Company’s involvement in the cannabis industry was creating conflicts for clients and potential institutional investors wishing to work with the Company from the produce industry due to the public perception and political issues surrounding the cannabis industry. By late-2016, the Company had decided to cease actively selling its products and services to the vertical farming industry and to focus on utilizing the Company’s developed technology and methods for the cannabis industry. On August 4, 2017, the Company ceased actively supporting business development of vertical farms for produce production.
On August 14, 2019, the Company established a wholly owned subsidiary, IHC Consulting, Inc. (“IHC”), in the State of New York of the United States of America. The IHC is a dormant company as of the date of this report.
Basis of Presentation
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
It is management’s opinion, however, that all material adjustments (consisting of normal and recurring adjustments) have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to, the estimate of percentage of completion on construction contracts in progress at each reporting period which we rely on as a primary basis of revenue recognition, estimated useful lives of equipment for purposes of depreciation and the valuation of common shares issued for services, equipment and the liquidation of liabilities.
| F-8 |
Principles of Consolidation
The consolidated financial statements include the accounts of Indoor Harvest Corp. and its wholly-owned subsidiaries, Alamo CBD and IHC. All significant inter-company accounts and transactions have been eliminated in consolidation.
Loss per Share
Basic earnings (loss) per share amounts are calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is based on the weighted average numbers of shares of common stock outstanding for the periods, including dilutive effects of stock options, warrants granted and convertible preferred stock. Dilutive options and warrants that are issued during a period or that expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported. Since Indoor Harvest has incurred losses for all periods, the impact of the common stock equivalents would be anti- dilutive and therefore are not included in the calculation.
Fair Value of Financial Instruments
As defined in ASC 820” FairValue Measurements,” fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The following table summarizes fair value measurements by level at September 30, 2019 and December 31, 2018, measured at fair value on a recurring basis:
| September 30, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets | ||||||||||||||||
| None | $ | - | $ | - | $ | - | $ | - | ||||||||
| Liabilities | ||||||||||||||||
| Derivative liabilities | $ | - | $ | - | $ | 1,628,881 | $ | 1,628,881 | ||||||||
| December 31, 2018 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets | ||||||||||||||||
| None | $ | - | $ | - | $ | - | $ | - | ||||||||
| Liabilities | ||||||||||||||||
| Derivative liabilities | $ | - | $ | - | $ | 1,452,469 | $ | 1,452,469 | ||||||||
Adoption of New Accounting Standards
Effective January 1, 2019, we adopted Accounting Standards Codification 842, Leases (“ASC 842”). Operating lease right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on our consolidated balance sheet and are expensed on a straight-line basis over the lease term in our consolidated statement of income. The adoption of this standard did not have a significant impact on the financial statements.
NOTE 2 - GOING CONCERN
As reflected in the accompanying financial statements, the Company had a net loss of $1,178,696, net cash used in operations of $297,131 and has an accumulated deficit of $12,973,760, for the nine months ended September 30, 2019. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
| F-9 |
The ability of the Company to continue as a going concern is dependent on Management’s plans which include potential asset acquisitions, mergers or business combinations with other entities, further implementation of its business plan and continuing to raise funds through debt or equity financings. The Company will likely rely upon related party debt or equity financing in order to ensure the continuing existence of the business.
The business plan of the Company is to engage in the design, development, marketing and direct-selling of commercial grade aeroponics fixtures and supporting systems for use in urban Controlled Environment Agriculture (“CEA”) and Building Integrated Agriculture (“BIA”). During the next twelve months, the Company’s strategy is to: complete ongoing product development; commence product marketing, product assembly and sales; construct a demonstration CEA and BIA farm; and offer design-build services. The Company’s long-term strategy is to direct sale, license and franchise their patented technologies and methods.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 – ACCOUNTS PAYABLE AND ACCRUED LIABILITEIS
Accounts payable and accrued liabilities at September 30, 2019 and December 31, 2019 are as follows:
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Accounts payable | $ | 120,814 | $ | 45,525 | ||||
| Credit card | 15,965 | 17,198 | ||||||
| Accrued expenses | 49,881 | 59,335 | ||||||
| Accrued interest | 122,996 | 112,641 | ||||||
| $ | 309,656 | $ | 234,699 | |||||
NOTE 4 - CONVERTIBLE NOTES PAYABLE
Convertible notes payable at September 30, 2019 and December 31, 2018 are as follows:
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Note 1 | $ | - | $ | 32,027 | ||||
| Note 2 | 50,000 | 50,000 | ||||||
| Note 3 | 349,545 | 550,000 | ||||||
| Note 4 | 451,050 | 341,050 | ||||||
| Note 5 | 65,000 | - | ||||||
| Total convertible notes payable | 915,595 | 973,077 | ||||||
| Less: Unamortized debt discount | (64,955 | ) | (20,826 | ) | ||||
| Total convertible notes | 850,640 | 952,251 | ||||||
| Less: current portion of convertible notes | 850,640 | 952,251 | ||||||
| Long-term convertible notes | $ | - | $ | - | ||||
| F-10 |
Conversion
During the nine months ended September 30, 2019, the Company converted notes with principal amounts and accrued interest of $251,642 into 24,268,015 shares of common stock. The corresponding derivative liability at the date of conversion of $487,474 was settled through additional paid in capital.
Note 1
On March 24, 2017, the Company entered into a securities purchase agreement with Tangiers Global, LLC (“Tangiers”) relating to the issuance and sale of notes (“Note 1”) in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. Note 1 is convertible into shares of common stock at a price equal to $0.30 per share; provided, however that if Note 1 is not retired on or before the maturity date, defined in Note 1 as a “Maturity Default” the conversion price shall be adjusted to be equal to the lower of: (i) $0.30 or (ii) 65% multiplied by the lowest trading price of the Company’s common stock in the fifteen (15) consecutive trading day period immediately preceding the date that the Company receives a notice of conversion. The Tangiers Note 1 carries interest on the unpaid principal amount at the rate of 8% per annum and is due and payable eight months from the effective date of each payment. As of September 30, 2019 and December 31, 2018, the balance under Note 1 is $917 and $39,997, which $917 and $7,970 in accrued interest, respectively. As of September 30, 2019 and December 31, 2018, Note 1 can be converted into 293,910 and 2,017,525 shares of the Company’s common stock, respectively.
On October 12, 2017, the Company entered into an Investment Agreement with Tangiers. Pursuant to the terms of the Investment Agreement, Tangiers committed to purchase up to $2,000,000 of our common stock over a period of up to 36 months. From time to time during the 36-month period commencing from the effectiveness of the registration statement, we may deliver a put notice to Tangiers which states the dollar amount that we intend to sell to Tangiers on a date specified in the put notice. The maximum investment amount per notice must be no more than 200% of the average daily trading dollar volume of our common stock for the eight (8) consecutive trading days immediately prior to date of the applicable put notice and such amount must not exceed an accumulative amount of $250,000. The minimum put amount is $5,000. The purchase price per share to be paid by Tangiers will be the 80% of the of the average of the two lowest closing bid prices of the common stock during the pricing period applicable to the put notice, provided, however, an additional 10% will be added to the discount of each put if (i) we are not DWAC eligible and (ii) an additional 15% will be added to the discount of each put if we are under DTC “chill” status on the applicable date of the put notice.
On October 10, 2017, the Company executed Amendment #1 to the Tangiers Note 1 for a final draw of $250,000 payment plus a 10% original issue discount. Amendment #1 modified the maturity date for the Tangier Note from eight months to six months from the effective date of each payment. All other terms and conditions of the Tangiers Note 1 remain effective.
The execution of Amendment #1 to Note 1 on October 10, 2017 caused the Company to default on the first draw due under Note 1 due to the acceleration of the maturity date. The default allows Tangiers to demand payment in cash equal to 150% of the outstanding principal and interest, which is automatically added to the outstanding principle, and convert all or a portion of the outstanding principal into shares of common stock of the Company. The default conversion rate of Note 1 is now the lower of the conversion rate then in effect or 65% of the lowest trading price for the 15 days prior to Tangiers’ notice of conversion. As of May 1, 2018, Tangiers has informed the Company that they have elected at this time not to enforce the default interest rate of 18% under Note 1 and also not to enforce the fees, reserving its rights to enforce the foregoing in their discretion.
Note 2
On October 12, 2017, the Company issued a fixed convertible promissory note to Tangiers for the principal sum of $50,000 as a commitment fee for the Investment Agreement. The promissory note (“Note 2”) maturity date is May 12, 2018. The principal amount due under Note 2 can be converted by Tangiers any time, into shares of the Company’s common stock at a conversion price of $0.1666 per share. The promissory note is in a “Maturity Default,” which is defined in Note 2 as the event in which Note 2 is not retired prior to its maturity date, Tangiers’ conversion rights under Note 2 would be adjusted such that the conversion price would be the lower of (i) $0.1666 or (ii) b) 65% of the average of the two lowest trading prices of the Company’s common stock during the 10 consecutive trading days prior to the date on which Tangiers elects to convert all or part of the note. The default interest rate is 20%. As of September 30, 2019 and December 31, 2018, the balance under Note 2 is $61,863 and $61,384, which includes $5,000 and $5,000 in guaranteed interest and $6,863 and $6,384 in accrued interest, respectively. As of September 30, 2019 and December 31, 2018, Note 2 can be converted into 19,827,797 and 3,096,270 shares of the Company’s common stock, respectively.
| F-11 |
Note 3
On January 16, 2018, the Company issued and sold an 8% Fixed Convertible Promissory Note (“Note 3”) to Tangiers (the “Buyer”), in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. Note 3 is convertible into shares of the Company’s common stock at a conversion price of $0.30 per share. However, if Note 3 is not paid back on or before the maturity date, defined in Note 3 as a “Maturity Default”, the conversion price of Note 3 shall then be adjusted to be equal to the lower of: (i) $0.30 or (ii) 65% multiplied by the lowest trading price of the Company’s common stock in the fifteen (15) consecutive trading day period immediately preceding the trading day that the Company receives a notice of conversion of Note 3.
On February 13, 2018, April 17, 2018, June 13, 2018, and July 27, 2018, the Company executed Amendments #1, #2, #3, and #4 to the Tangiers Note 3 for draws of $132,000, $132,000, $101,750 and $101,750, respectively. All other terms and conditions of the Tangiers Note 3 remain effective. As of September 30, 2019 and December 31, 2018, the balance under Note 3 is $412,238 and $616,002, which includes $37,400 and $44,000 in guaranteed interest and $25,293 and $22,002 in accrued interest. As of September 30, 2019 and December 31, 2018, Note 3 can be converted into 132,127,546 and 25,528,999 shares of the Company’s common stock.
Note 4
On September 14, 2018, the Company issued and sold an 8% Fixed Convertible Promissory Note (“Note 4”) to Tangiers (the “Buyer”), in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. Note 4 is convertible into shares of the Company’s common stock at a conversion price of $0.08 per share. However, if Note 4 is not paid back on or before the maturity date, defined in Note 4 as a “Maturity Default”, the conversion price of Note 4 shall then be adjusted to be equal to the lower of: (i) $0.08 or (ii) 65% of the lowest trading price of the Company’s common stock during the 15 consecutive trading days prior to the date on which Buyer elects to convert all or part of the Note 4.
On December 14, 2018 and April 2, 2019, the Company executed Amendments #1 and #2 to the Tangiers Note 4 for draws of $171,050 and $110,000, respectively. All other terms and conditions of the Tangiers Note 4 remain effective. As of September 30, 2019 and December 31, 2018, the balance under Note 4 is $498,449 and $368,334, which includes $36,084 and $27,284 in guaranteed interest and $11,315 and $0 in accrued interest.
Note 5
On September 23, 2019, the Company issued and sold an 10% Fixed Convertible Promissory Note (“Note 5”) to Power Up Lending Group Ltd. (“Power Up”), in the principal amount of $65,000, which includes a $3,000 original issue discount. Note 5 is convertible into shares of the Company’s common stock one hundred eighty (180) days from September 23, 2019. Note 5 is convertible at a conversion price of 61% of the average of the two (2) lowest trading prices of the Company’s common stock during the twenty (20) consecutive trading days prior to the date of on which Power Up elects to convert all or part of the Note 5.
Debt Discount and Original Issuance Costs
The debt discount amount consists of debt discount due to beneficial conversion features, warrant, original issue costs, and debt issue costs. The Company amortized debt discount of $130,871 and $125,957 to interest expense during the nine months ended September 30, 2019 and 2018, as follows:
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Debt discount, beginning of period | $ | 20,826 | $ | 69,541 | ||||
| Additional debt discount and debt issue cost | 175,000 | 98,300 | ||||||
| Amortization of debt discount and debt issue cost | (130,871 | ) | (147,015 | ) | ||||
| Debt discount, end of period | $ | 64,955 | $ | 20,826 | ||||
| F-12 |
NOTE 5 - DERIVATIVE LIABILITIES
The Company identified the conversion features embedded within its convertible debts as financial derivatives. The Company has determined that the embedded conversion option should be accounted for at fair value.
At September 30, 2019, the estimated fair values of the liabilities measured on a recurring basis are as follows:
Nine months ended September 30, 2019 | Year ended December 31, 2018 | |||||||
| Expected term | 0.01 - 0.50 | - | ||||||
| Expected average volatility | 186% - 287 | % | - | |||||
| Expected dividend yield | - | - | ||||||
| Risk-free interest rate | 1.75% - 2.45 | % | - |
The following schedule shows the change in fair value of the derivative liabilities at September 30, 2019:
| Fair Value Measurements Using Significant Observable Inputs (Level 3) | ||||
| Balance - December 31, 2018 | $ | 1,452,469 | ||
| Addition of new derivatives recognized as debt discounts | 162,000 | |||
| Addition of new derivatives recognized as options compensation | - | |||
| Addition of new derivatives recognized as loss on derivatives | 969,724 | |||
| Settled on issuance of common stock | (487,474 | ) | ||
| Gain on change in fair value of the derivative | (467,838 | ) | ||
| Balance - September 30, 2019 | 1,628,881 | |||
| Less: current portion | (1,628,881 | ) | ||
| Long-term derivative liabilities | $ | - | ||
The aggregate loss on derivatives during the nine months ended September 30, 2019 and 2018 was $501,886 and $1,527,396, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS
On January 15, 2018 Ms. Sandra Fowler, was appointed as the Chief Marketing Officer of the Company. Pursuant to the terms of the Fowler Employment Agreement, Ms. Fowler shall serve as Chief Marketing Officer of the Company. The initial term of the agreement will expire on January 15, 2019 and commencing on January 15, 2019 and on each anniversary of such date thereafter, the term of the Fowler Employment Agreement shall automatically renew for a one-year period, unless earlier terminated by either party pursuant to the terms of the Fowler Employment Agreement. In consideration for Ms. Fowler’s services, under the Fowler Employment Agreement, Ms. Fowler shall receive (i) an annual base salary of $48,000 and (ii) 200,000 shares of restricted common stock of the Company. Further, pursuant to the Fowler Employment Agreement, the Company agreed to revise the annual base compensation for Ms. Fowler to $65,000, after 90 days of the execution of the Fowler Employment Agreement, or after the Company raises not less than $1,000,000 from sales of its equity securities subsequent to the execution of the Fowler Employment Agreement, whichever may come first. In addition, Ms. Fowler shall be eligible to participate in any equity-based incentive compensation plan or programs adopted by the Company’s board of directors. On January 15, 2019, this agreement was terminated.
| F-13 |
Weadock Employment Agreement
On February 20, 2018, Mr. Daniel Weadock was appointed Chief Executive Officer and Director of the Company. On February 20, 2018, the Company entered into an executive employment agreement with Mr. Weadock (the “Weadock Employment Agreement”), pursuant to which Mr. Weadock agreed to act as the Company’s chief executive officer. Pursuant to the terms of the Weadock Employment Agreement, Mr. Weadock initial will not receive a salary. However, effective on the business day after the date on which the Company achieves Capitalization (as hereinafter defined) of $2,000,000 or more, Mr. Weadock’s annual base salary will be $100,000. For purposes of the Weadock Employment Agreement, “Capitalization” means aggregate net cash proceeds received by the Company from (a) the Company’s sale of common stock pursuant to Puts (as such term is defined in the Investment Agreement dated as of October 12, 2017 by and between the Company and Tangiers Global, LLC (the “Investment Agreement”)) under the Investment Agreement, and/or (b) any other sale by the Company of common stock or preferred stock, whether in a public offering or a private placement. In addition, pursuant to the terms of the Weadock Employment Agreement, the Company agreed to grant Mr. Weadock (i) 300,000 shares of restricted stock as soon as administratively practicable following execution of the Weadock Employment Agreement, and (ii) 1,584,202 shares of restricted common stock, consistent with the grant and vesting schedule set forth in the agreement; provided, however, that no grant will be made and no shares will be issued with respect to any grant if Mr. Weadock is not employed by the Company as an executive on the respective Date of Grant as set forth in the agreement. The Weadock Employment Agreement has a term of one year, unless Mr. Weadock’s employment is terminated sooner by the board of directors, and the term will be extended for additional one-year periods unless the Company or Mr. Weadock gives the other party at least 30 days’ prior written notice of its intent not to renew. On February 20, 2018, the Company also entered into a compensation agreement with Mr. Weadock (the “Director Compensation Agreement”).Pursuant to the terms of the Director Compensation Agreement, the Company agreed to grant Mr. Weadock an aggregate of 240,000 shares of restricted common stock, consistent with the grant and vesting schedule set forth in the agreement; provided, however, that no grant will be made and no shares will be issued with respect to any grant, if Mr. Weadock is not a member of the Company’s board of directors on the respective Date of Grant as set forth in the agreement. If the Company is acquired by, or merged into and with, another entity prior to the last Date of Vesting set forth in the agreement (i.e. February 23, 2022), all shares issuable to Mr. Weadock under the Director Compensation Agreement will become fully vested and non-forfeitable. The Company also agreed to reimburse Mr. Weadock for all reasonable travel and incidental expenses incurred by Mr. Weadock in performing his services and attending meetings as approved in advance by the Company. Also, on February 20, 2018, the Company also entered into an indemnity agreement with Mr. Weadock (the “Weadock Indemnity Agreement”). Pursuant to the terms of the Indemnity Agreement, the Company agreed to use reasonable efforts to obtain and maintain in full force and effect directors’ and officers’ liability insurance (“D&O Insurance”) in reasonable amounts from established and reputable insurers; provided, however, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage is reduced by exclusions so as to provide an insufficient benefit, or Mr. Weadock is covered by similar insurance maintained by a subsidiary of the Company. In addition the foregoing, the Company will indemnify Mr. Weadock from certain third party actions, derivative actions and actions where Mr. Weadock is decreased; provided, however, the Company shall not be obligated to indemnify Mr. Weadock for actions including, but not limited to, actions initiated by Mr. Weadock, for any action in which it is determined that the material assertions made by Mr. Weadock in such proceeding were not made in good faith or were frivolous, for any settlements not authorized by the Company, for any actions on the account of Mr. Weadock’s willful misconduct, and for any expenses and the payment of profits arising from the purchase and sale Mr. Weadock of securities in violation of Section 16(b) of the Securities Exchange Act, or any similar successor statute; provided, further that, that the Company shall not be obligated to indemnify Mr. Weadock for expenses or liabilities of any type whatsoever which have been paid directly to Mr. Weadock pursuant to the Company’s D&O Insurance policy.
Effective May 15, 2019, the Registrant mutually and amicably arranged with departing officer and Director Daniel Weadock, for him to transition to becoming an advisor to the Registrant. Thus, Mr. Weadock no longer serves in any officer or Director capacity. As part of a non-material arrangement, subject to the Board monthly requests, Mr. Weadock focuses include consulting on potential acquisitions, among other things. The Board confirmed typical consulting arrangements to apply moving forward, including some shares of common stock, 100,000, potential future stock and other considerations, indemnifications and reimbursement of expenses.
| F-14 |
Management
Effective May 15, 2019, the Board of Directors has appointed Thomas Cook to act as interim principal accounting officer and principal executive officer serving in the capacity of interim CEO and interim CFO with non-material arrangements to apply moving forward, including compensation of $5,000 and 10,000 shares monthly, potential stock and other considerations, indemnifications and reimbursement of expenses. Mr. Cook owns no Company securities at this time. While Mr. Cook is acting CEO and CFO, the Company sees him serving in a limited role while it is actively seeking new CEO and CFO candidates to serve on long term basis, with education and experiences to fit the Company 2019 plans.
NOTE 7 - SHAREHOLDERS’ EQUITY
Preferred Stock
The Company has authorized 15,000,000 shares of preferred stock with a par value of $0.01.
Convertible Series A Preferred Stock
As at September 30, 2019 and December 31, 2018, there were 750,000 shares of Series A Convertible Preferred Stock issued and outstanding.
Common Stock
The Company has authorized 3,000,000,000 shares of common stock with a par value of $0.001 per share. Each common stock entitles the holder to one vote, in person or proxy, on any matter on which action of the stockholders of the corporation is sought.
During the nine months ended September 30, 2019, the Company issued 30,802,345 shares of common stock as follows:
| ● | 6,245,318 shares valued at $100,466 for consulting services | |
| ● | 129,012 shares valued at $6,179 pursuance to Weadock Employment Agreement (Note6) | |
| ● | 100,000 shares valued at $3,690 for a termination of Weadock Employment Agreement (Note 6) | |
| ● | 60,000 shares valued at $1,179 for a management compensation (Note 6) | |
| ● | 24,268,015 shares for conversion of debt of $251,642 (Note 4) |
NOTE 8 - COMMITMENTS & CONTINGENCIES
On February 20, 2014, the Company signed a 60-month lease on a 10,000 sq. ft. office/warehouse facility and paid a deposit of $12,600. The monthly base rent is $4,200 increasing 6% every two years for the term of the lease. The property is adequate for all of the Company’s currently planned activities. The lease was terminated during the nine months ended September 30, 2019 and a security deposit was fully applied to a payment of accrued rent. As of September 30, 2019, the Company recorded accrued rent of $15,714.
Deferred rent payable at September 30, 2019 and December 31, 2018 was $0 and $1,826, respectively. 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 nine months ended September 30, 2019 and 2018, were $17,050 and $34,831, respectively.
NOTE 9 - SUBSEQUENT EVENTS
Subsequent to September 30, 2019, the Company issued 34,201,125 shares for conversion of debt of $55,024.
| F-15 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition or Plan of Operation |
Results of Operations
Three months ended September 30, 2019 compared to three months ended September 30, 2018
The following table presents our operating results for the three months ended September 30, 2019 compared to three months ended September 30, 2018:
| Three Months Ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| 2019 | 2018 | Change | % | |||||||||||||
| Revenue | $ | - | $ | - | $ | - | - | |||||||||
| Operating expenses | ||||||||||||||||
| Depreciation and amortization expense | 2,843 | 3,019 | (176 | ) | (6 | )% | ||||||||||
| Stock based compensation | 35,960 | 52,041 | (16,081 | ) | (31 | )% | ||||||||||
| Professional fees | 60,715 | 81,717 | (21,002 | ) | (26 | )% | ||||||||||
| General and administrative expenses | 18,738 | 109,789 | (91,051 | ) | (83 | )% | ||||||||||
| Total operating expenses | 118,256 | 246,566 | (128,310 | ) | (52 | )% | ||||||||||
| Loss from operations | (118,256 | ) | (246,566 | ) | (128,310 | ) | (52 | )% | ||||||||
| Other expense | ||||||||||||||||
| Interest expense | (17,399 | ) | (39,128 | ) | (21,729 | ) | (56 | )% | ||||||||
| Amortization of debt discount | (56,548 | ) | (16,047 | ) | 40,501 | 252 | % | |||||||||
| Change in fair value of embedded derivative liability | (301,458 | ) | (1,089,075 | ) | (787,617 | ) | (72 | )% | ||||||||
| Total other expense | (375,405 | ) | (1,144,250 | ) | (768,845 | ) | (67 | )% | ||||||||
| Net loss | $ | (493,661 | ) | $ | (1,390,816 | ) | $ | (897,155 | ) | (65 | )% | |||||
Revenues
During the three months ended September 30, 2019 and 2018, the Company generated no revenue.
Operating Expenses
Total operating expenses for the three months ended September 30, 2019 and 2018 were $118,256 and $246,566, respectively, for an aggregate decrease of $128,310 or 52%. The aggregate decrease is primarily related to a decrease in general and administrative expenses of $91,051 or 83% associated with payroll expense.
Other Expense
Total other expense for the three months ended September 30, 2019 and 2018 were $375,405 and $1,144,250, respectively. The decrease in other expense is primarily related to the change in the fair value of the embedded derivative liability of $787,617, from a loss of $1,089,075 in 2018 to a loss of $301,458 in 2019.
Net Loss
As a result of the factors discussed above, net loss for the three months ended September 30, 2019 and 2018 was $493,661 and $1,390,816, respectively, for a decrease of $897,155 or 65%.
| 5 |
Nine months ended September 30, 2019 compared to Nine months ended September 30, 2018
The following table presents our operating results for the nine months ended September 30, 2019 compared to nine months ended September 30, 2018:
| Nine Months Ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| 2019 | 2018 | Change | % | |||||||||||||
| Revenue | $ | - | $ | - | $ | - | - | |||||||||
| Operating expenses | ||||||||||||||||
| Depreciation and amortization expense | 8,647 | 9,074 | (427 | ) | (5 | )% | ||||||||||
| Stock based compensation | 111,514 | 258,535 | (147,021 | ) | (57 | )% | ||||||||||
| Professional fees | 221,214 | 194,756 | 26,458 | 14 | % | |||||||||||
| General and administrative expenses | 173,053 | 368,326 | (195,273 | ) | (53 | )% | ||||||||||
| Total operating expenses | 514,428 | 830,691 | (316,263 | ) | (38 | )% | ||||||||||
| Loss from operations | (514,428 | ) | (830,691 | ) | (316,263 | ) | (38 | )% | ||||||||
| Other expense | ||||||||||||||||
| Interest expense | (31,511 | ) | (87,313 | ) | (55,802 | ) | (64 | )% | ||||||||
| Amortization of debt discount | (130,871 | ) | (125,957 | ) | 4,914 | 4 | % | |||||||||
| Change in fair value of embedded derivative liability | (501,886 | ) | (1,527,396 | ) | (1,025,510 | ) | (67 | )% | ||||||||
| Total other expense | (664,268 | ) | (1,740,666 | ) | (1,076,398 | ) | (62 | )% | ||||||||
| Net loss | $ | (1,178,696 | ) | $ | (2,571,357 | ) | $ | (1,392,661 | ) | (54 | )% | |||||
Revenues
During the nine months ended September 30, 2019 and 2018, the Company generated no revenue.
Operating Expenses
Total operating expenses for the nine months ended September 30, 2019 and 2018 were $514,428 and $830,691, respectively, for an aggregate decrease of $316,263 or 38%. The aggregate decrease is primarily related to a decrease in general and administrative expenses of $195,273 or 53% associated with payroll expense and to a decrease in stock based compensation of $147,021 or 57%.
Other Expense
Total other expense for the nine months ended September 30, 2019 and 2018 were $664,268 and $1,740,666, respectively. The decrease in other expense is primarily related to the change in the fair value of the embedded derivative liability from $1,527,396 in 2018 to $501,886 in 2019.
Net Loss
As a result of the factors discussed above, net loss for the nine months ended September 30, 2019 and 2018 was $1,178,696 and $2,571,357, respectively, for a decrease of $1,392,661 or 54%.
| 6 |
Liquidity and Capital Resources
The following table provides selected financial data about our Company as of September 30, 2019 and December 31, 2018, respectively.
Working Capital
| September 30, 2019 | December 31, 2018 | Change | % | |||||||||||||
| Current assets | $ | 31,195 | $ | 186,652 | $ | (155,457 | ) | (83 | )% | |||||||
| Current liabilities | $ | 2,821,754 | $ | 2,653,299 | $ | 168,455 | 6 | % | ||||||||
| Working capital deficiency | $ | (2,790,559 | ) | $ | (2,466,647 | ) | $ | 323,912 | 13 | % | ||||||
As at September 30, 2019, December 31, 2018, our Company’s cash balance was $22,195 and total assets were $41,000. As at December 31, 2018, our Company’s cash balance was $155,682 and total assets were $205,104.
As at September 30, 2019, our Company had total liabilities of $2,821,754 compared with total liabilities of $2,657,792 as at December 31, 2018.
As at September 30, 2019, our Company had a working capital deficiency of $2,790,559 compared with a working capital deficiency of $2,466,647 as at December 31, 2018. The increase in working capital deficiency was primarily attributed to a decrease in cash and security deposit and an increase in accounts payable and accrued expenses offset by a decrease in convertible notes.
Cash Flows
| Nine Months Ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| 2019 | 2018 | Change | % | |||||||||||||
| Cash used in operating activities | $ | (297,131 | ) | $ | (568,954 | ) | $ | (271,823 | ) | (48 | )% | |||||
| Cash provided by financing activities | $ | 163,644 | $ | 647,434 | $ | (483,790 | ) | (75 | )% | |||||||
| Net Change in Cash During Period | $ | (133,487 | ) | $ | 78,480 | $ | (211,967 | ) | (270 | )% | ||||||
Cash Flow from Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2019 and 2018 were $297,131 and $568,954, respectively, for a decrease of $271,823. The improvement in net cash used in operating activities is primarily related to a decrease in net loss.
Cash Flow from Investing Activities
For the nine months ended September 30, 2019 and 2018, our Company did not have any investing activities.
Cash Flow from Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2019 and 2018 were $163,644 and $647,434, respectively. The decrease in the cash flow is mainly due to decrease in proceeds from convertible notes from $653,000 in the nine months ended September 2018 to $162,000 in the same period in 2019.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a “smaller reporting company”, we are not required to provide the information required by this Item.
| 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, Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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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, 2019, 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 Controls
There have been no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rule 13a-15 or Rule 15d-15 that occurred in the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| Item 1. | Legal Proceedings |
From time to time we may become involved in various legal proceedings that arise in the ordinary course of business. We are not currently a party to any material legal proceeding.
| Item 1A. | Risk Factors |
As a “smaller reporting company”, we are not required to provide the information required by this Item.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not Applicable.
| Item 5. | Other Information |
(a) Not applicable.
(b) Not applicable.
| Item 6. | Exhibits |
The following exhibits are included as part of this report:
| INCORPORATED BY REFERENCE | ||||||||
| Exhibit | Description | Form | Exhibit | Filing Date | ||||
| (31) | Rule 13a-14(a)/15d-14(a) Certifications | |||||||
| * | Section 302 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer | |||||||
| * | Section 302 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer | |||||||
| (32) | Section 1350 Certifications | |||||||
| * | Section 906 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer | |||||||
| * | Section 906 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer | |||||||
| (101) | Interactive Data Files | |||||||
| * | 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 | |||||||
| † | Management Contract or Compensation Plan | |||||||
* Filed herewith. In addition, in accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
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In accordance with Section 13 or 15(d) 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: December 26, 2019 | /s/ Thomas Cook |
| Thomas Cook | |
| Chief Executive Officer and Chief Financial Officer | |
| (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
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