INQD Indoor Harvest Corp (CE)

Notes to Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (RESTATED)

Nature of Operations and Organization

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

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

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

Basis of Presentation

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

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

Use of Estimates

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

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

Principles of Consolidation

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

Cash and Cash Equivalents

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

Accounts Receivable and Work in Progress

Work in progress consists of costs recorded and revenue earned on projects recognized on the percentage of completion method for work performed on contracts in progress at September 30, 2017, and December 31, 2016. The Company records revenue based on contractual agreements entered into at the inception of construction contracts. Amounts are payable from customers based on milestones established in each contract. Amounts are billed at milestone completion and are reflected as accounts receivable when billed. Costs and estimated earnings are accumulated on projects in process and compared to amounts billed based on the percentage of completion method of accounting (cost to cost). Costs incurred in excess of amounts billed and related profit recognized are reflected as an asset on the balance sheet as costs and estimated earnings in excess of billings. Unearned billings are reflected in the balance sheet as a liability as billings in excess of costs and estimated earnings on projects in process (See Note 9).

Inventories

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

Revenue Recognition

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

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

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

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

Stock Based Compensation

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

Loss per Share

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

Fair Value of Financial Instruments

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

Income Taxes

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

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

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

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

Property and Equipment

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

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

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

Goodwill

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

Intangible Assets (Restated)

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

Patent and Patent Application Expenses

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

Research and Development

Research and development expenditures are charged to expense as incurred.

Advertising Expense

Advertising and promotional costs are expensed as incurred.

Reclassifications

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

Recent Accounting Pronouncements

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

The FASB has issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, clarifying the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business.

For public companies, the amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods.

The FASB has issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).

Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). The FASB has issued Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees.

Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.

For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private companies, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any organization in any interim or annual period.

The FASB has issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606.

The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The effective date for nonpublic entities is deferred by one year.

Derivative Liability

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

Beneficial Conversion Feature

For conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”) and related debt discount.

When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The discount is amortized to interest expense over the life of the debt.

NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS

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

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

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

NOTE 3 - GOING CONCERN

As reflected in the accompanying financial statements, the Company had a net loss of $4,412,050, net cash used in operations of $1,269,729 and has an accumulated deficit of $8,408,822, for the year ended December 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

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

The business plan of the Company is to engage in the design, development, marketing and direct-selling of commercial grade aeroponics fixtures and supporting systems for use in urban Controlled Environment Agriculture (“CEA”) and Building Integrated Agriculture (“BIA”). During the next twelve months, the Company’s strategy is to: complete ongoing product development; commence product marketing, product assembly and sales; construct a demonstration CEA and BIA farm; and offer design-build services. The Company’s long-term strategy is to direct sale, license and franchise their patented technologies and methods.

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

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

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

During the year ended December 31, 2016 the Company sold $46,626 of other assets which were equipment in exchange for $10,000 and recorded a loss on the sale of equipment of $36,626. The Company also placed in service $2,157 from other assets.

NOTE 5 - COMMITMENTS & CONTINGENCIES

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

Deferred rent payable at December 31, 2017 was $6,239. Deferred rent payable is the sum of the difference between the monthly rent payment and the straight-line monthly rent expense of an operating lease that contains escalated payments in future periods.

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

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

NOTE 6 – ASSET ACQUISITION (RESTATED)

Alamo CBD, LLC

On January 3, 2017, the Company signed a binding LOI with Alamo CBD to enter discussions to combine and create a medical cannabinoids pharmaceutical group. On August 3, 2017, we formed Alamo Acquisition, LLC, a wholly owned Texas limited liability company (“Alamo Acquisition Sub”).

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

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

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

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

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

On September 6, 2017, the Company issued an aggregate of 7,584,008 shares of common stock to the members of Alamo CBD related to the Merger. The Company recorded intangible assets at a fair value of $1,440,961 ($0.19 per share) based upon closing price per share of the Company’s common stock on the date the stock was issued. The intangible assets acquired in the transaction, were Alamo CBD’s pending provisional or full license to produce and dispense cannabis in the State of Texas.

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

Contractual Joint Venture with Alamo CBD and Vyripharm Enterprises, LLC

On March 23, 2017, Indoor Harvest entered into a Contractual Joint Venture Agreement by and between Vyripharm Enterprises, LLC (“Vyripharm”) and Alamo CBD, collectively the parties, pursuant to which the parties agreed to participate in an unincorporated joint venture (the “Joint Venture”) for the following business purposes:

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

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

Background for the Contractual Joint Venture

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

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

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

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

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

Voluntary Default of Joint Venture and Status of Application with DPS

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

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

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

On August 7, 2017, after negotiations, the Company advised Vyripharm that it intended to voluntarily default on the Joint Venture Agreement and the Company wrote off the $250,000 down payment towards the Joint Venture investment and there is no further obligation by either party under the terms of the Joint Venture. The Company’s management determined that without a license to produce cannabis, the Company would not be able to fully utilize the intent of the Joint Venture partnership and the Company would be financially burdened by the ongoing Joint Venture terms. Both parties agreed that this decision would not impair either party’s ability to pursue a Joint Venture in the future, after the Company, or Alamo CBD, obtained license to produce cannabis.

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

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

NOTE 7 - LOAN PAYABLE

On June 5, 2015, the Company entered into a five-year loan agreement totaling $36,100. The loan carries an interest rate of 10.25%. During the year ended December 31, 2017 the Company repaid $6,789 of the principal and the remaining balance is $20,343, of which $7,520 is recorded as a current note payable.

NOTE 8 - CONCENTRATIONS

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

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

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

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

NOTE 9 - INTANGIBLE ASSETS (RESTATED)

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

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

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

NOTE 11 - FAIR VALUE MEASUREMENTS

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

NOTE 12 - DEBT AND CONVERTIBLE LOAN PAYABLE

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

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

On March 24, 2017, the Company entered into a securities purchase agreement with Tangiers Global, LLC (“Tangiers”) relating to the issuance and sale of notes (“Note 1”) in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. Note1 is convertible into shares of common stock at a price equal to $0.30 per share; provided, however that if Note 1 is not retired on or before the maturity date, defined in Note 1 as a “Maturity Default” the conversion price shall be adjusted to be equal to the lower of: (i) $.30 or (ii) 65% multiplied by the lowest trading price of the Company’s common stock in the fifteen (15) consecutive trading day period immediately preceding the date that the Company receives a notice of conversion. The Tangiers Note carries interest on the unpaid principal amount at the rate of 8% per annum and is due and payable eight months from the effective date of each payment. As of December31, 2017, the balance under Note 1 is $519,000, which includes $44,000 guaranteed interest. As of December 31, 2017, Note 1 can be converted into 3,280,255 shares of the Company’s common stock.

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

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

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

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

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

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

Debt Discount and Original Issuance Costs

During the year end December 31, 2017 and 2016, the Company recorded debt discounts totaling $383,786 and $417,834, respectively. The debt discount amount consists of debt discount due to beneficial conversion features, warrant, original issue costs, and debt issue costs.

The debt discounts recorded in 2017 and 2016, pertain to beneficial conversion feature on the convertible notes. The notes are required to be bifurcated and reported at fair value on the date of grant.

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

Debt Issuance Costs

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

NOTE 13 - DERIVATIVE LIABILITIES

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

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

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

The Company recorded the debt discount to the extent of the gross proceeds raised and expensed immediately the remaining value of the derivative as it exceeded the gross proceeds of the note. The Company recorded derivative interest expenses for the year ended December 31, 2017 of $0.

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions during the current quarter:

NOTE 14 - RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

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

On August 9, 2017, John Seckman was elected a Director and member of the Board of Directors. On November 1, 2017, John Seckman resigned as a Director of the Company and as a member of the Board of Directors, effective December 4, 2017. Mr. Seckman’s resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies (including accounting or financial policies) or practices, the Company’s management or the Board. Mr. Seckman’s resignation was due to time constraints based on new business and increasing demands of John Seckman and Associates, of which Mr. Seckman is principal.

On August 9, 2017, we entered into a Director Agreement with Rick Gutshall. The Company agreed to reimburse the Director for reasonable travel and other incidental expenses incurred by the Director in performing his services and attending meetings as approved in advance by the Company.

On August 9, 2017, we entered into a Director Agreement with Annette Knebel. The Company agreed to reimburse the Director for reasonable travel and other incidental expenses incurred by the Director in performing his services and attending meetings as approved in advance by the Company.

On August 9, 2017, we entered into a Director Agreement with Dr. Lang Coleman. The Company agreed to reimburse the Director for reasonable travel and other incidental expenses incurred by the Director in performing his services and attending meetings as approved in advance by the Company.

On September 6, 2017, the Company issued 2,957,763 shares of common stock to Dr. Lang Coleman, Director, related to the merger of the Company and Alamo CBD. The Company recorded fair value of $561,975 ($0.19 per share) based upon the most recent trading price per share of the Company’s stock.

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

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

On May 9, 2016, the Company entered into a Director Agreement with Pawel Hardej. The Company will reimburse the Director for reasonable travel and other incidental expenses incurred by the Director in performing his services and attending meetings as approved in advance by the Company. The Company shall award to the Director 166,560 shares of common stock over a two-year period as directed in the Director Agreement. As of December 31, 2016, the Company issued 20,820 shares of common stock having a fair value of $13,512 ($0.65/share) based upon the most recent trading price per share of the Company’s common stock (See Note 11).

On April 8, 2016 the Company entered into an employment agreement with John Zimmerman, to serve as a Vice President of Business Development. The term of the agreement will continue until April 8, 2017, unless the employment is sooner terminated by the Board of Directors. As compensation for services, the employee will receive 100,000 shares of common stock and a percentage of closed projects as follows:

On April 8, 2016, we issued 100,000 shares of common stock related to an Executive Employment Agreement with John Zimmerman. The Company recorded fair value of $54,500 ($0.545/share) based upon the most recent trading price per share of the Company’s stock (See Note 11).

On March 1, 2015, the Company entered into a Director Agreement with William Jamieson. The Company will reimburse the Director for reasonable travel and other incidental expenses incurred by the Director in performing his services and attending meetings as approved in advance by the Company. The Company shall award to the Director 166,560 shares of common stock pursuant to the Company’s 2015 Stock Incentive over a two-year period as directed in the Director Agreement. As of December 31, 2016, the Company issued 83,280 shares of common stock having a fair value of $36,435 ($0.30 - $0.5/share) based upon the most recent trading price per share of the Company’s common stock (See Note 11).

On May 9, 2016, Mr. William Jamieson resigned as a Director in the Company. Mr. Jamieson’s resignation was not the result of any disagreement with us on any matter relating to our operations, policies (including accounting or financial policies) or practices. A majority of the Board of Directors decided to restructure the Board of Directors to better reflect the Company’s current business direction and Mr. Jamieson voluntarily agreed to resign as part of that restructuring effort. Mr. Jamieson was issued 83,280 shares of common stock as part of an agreement with the Company and the Company recorded a fair value of $54,049($0.649/share) based upon the most recent trading price per share of the Company’s common stock.

NOTE 15 - SHAREHOLDERS’ EQUITY

Convertible Series A Preferred Stock

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

From August 15 to August 29, 2016, the Company sold an aggregate of 250,000 Units to three (3) investors for total proceeds of $125,000. During the year ended December 31, 2017 and 2016, the Company amortized $33,238 and $0 of debt discount related to the warrants, respectively. The remaining debt discount related to the warrants is $0.

On March 20, 2017, the Company’s Series A Preferred Convertible Stock shareholders (“Series A Holders”) each voted to waive and remove the provisions of Section 5(iii) of the Certificate of Designations of the Series A Preferred Stock Designation. Series A Holders have each agreed individually and also as a group to convert their Series A Convertible Preferred Stock into common stock at a conversion price equal to $0.30 per share. A total of 250,000 shares of the Company’s Series A Preferred Convertible Stock were converted into an aggregate of 416,667 shares of common stock. As a result of this action, there currently are no Series A Convertible Preferred Stock issued and outstanding.

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

Common Stock

On January 19, 2016, the Company issued 300,000 shares of common stock to Kodiak Capital Group, LLC as a commitment fee for a Two Million Dollar Equity Financing Agreement. The Company recorded a fair value of $120,000 ($0.40 per share) based upon the most recent trading price per share of the Company’s stock. The Company is subject to a Registration Rights Agreement which requires the Company to file a S1 Registration Statement with the SEC by March 31, 2016 and must receive a notice of effectiveness from the SEC prior to executing a Put Notice. The Purchase Price of the security is based on 80% of the market price based on the Put Date. Market price is calculated on the lowest daily volume weight average price for any trading day during the valuation period, which is the five days from the Put Notice to the Put Date.

On January 22, 2016, the Company issued 125,000 shares of common stock to Emerging Growth, LLC, to provide investor and public relations services. The Company recorded a fair value of $43,750 ($0.35 per share) based upon the most recent trading price per share of the Company’s stock.

On March 14, 2016, the Company issued 11,330 shares to a consultant for services rendered, of common stock with a fair value of $4,986 ($0.44 per share) based upon the most recent trading price per share of the Company’s stock.

On March 22, 2016, the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund, LLC, and Rockwell Capital Partners Inc., relating to the issuance and sale of notes of $272,500 in aggregate principal amount including $250,000 actual payment of purchase price plus a 9% original issue discount, and an aggregate total of 50,000 shares of common stock valued at $23,500 ($0.47 per share). The notes carry an interest on the unpaid principal amount at the rate of 3% per annum. Any principal amount or interest which is not paid when due shall bear interest at the rate of 15% per annum from the due date until the same is paid. The notes mature on September 22, 2016 and may be prepaid in whole or in part except otherwise explicitly set forth in the Note. If the Company exercises its right to prepay or repay the notes, the Company shall make payment to the note holders of an amount in cash equal to the sum of 125% multiplied by the principal amount plus accrued and unpaid interest on the principal amount to the optional prepayment date plus default interest, if any. The notes convert into shares of common stock at a price equal to $0.30; provided, however that from and after the occurrence of any event of default hereunder, the conversion price shall be the lower of: (i) the fixed conversion price or (ii) 45% multiplied by the lowest sales price of the common stock in a public market during the ten (10) consecutive trading day period immediately preceding the trading day that the Company receives a Notice of Conversion (as defined in the notes).

On March 23, 2016, the Company issued 100,000 shares of common stock to one U.S. accredited investor at $0.50 per share for cash totaling $50,000.

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

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

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

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

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

On March 24, 2017, the Company entered into a securities purchase agreement with Tangiers Global, LLC (“Tangiers”) relating to the issuance and sale of notes (“Tangiers Note”) in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. The Tangiers Note is convertible into shares of common stock at a price equal to $0.30 per share. On October 10, 2017, the Company executed Amendment #1 (“Amendment #1”) to the Tangiers Note for a final draw of $250,000 payment plus a 10% original issue discount (the “Final Draw”). Amendment #1 modified the maturity date of the Tangiers Note from eight months to six months from the effective date of each payment. In addition, Amendment #1 included use of proceeds for the $250,000 received from Tangiers. All other terms and conditions of the Tangiers Note remain effective and were not amended.

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

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

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

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

On October 17, 2017, the Company issued 329,670 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of $30,000 of Note 1 at a conversion price of $0.09.

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

Common Stock Warrants

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

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

Lattice Binomial model was used to value aggregate intrinsic value.

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

NOTE 16 - INCOME TAXES

Indoor Harvest operates in the United States; accordingly, federal and state income taxes have been provided based upon the tax laws and rates of the US. Deferred taxes are determined based on the temporary differences between the financial statement and income tax bases of assets and liabilities as measured by the enacted tax rates, which will be in effect when these differences reverse.

The components of deferred income tax assets and liabilities as of December 31, 2017 and 2016 are as follows:

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

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

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

This loss carryforward expires according to the following schedule: