Indoor Harvest Corp - Quarter Report: 2014 September (Form 10-Q)

FORM 10-Q

For the quarterly period ended September 30, 2014

For the transition period from ______________ to ______________

 

 

 

As of November 26, 2014 there were 8,812,388 shares issued and outstanding of the registrant's common stock.

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TABLE OF CONTENTS

 

 

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

The accompanying notes are an integral part of these financial statements.

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Nature of operations and organization

 

Indoor Harvest Corp., or the "Company," is a Texas corporation formed on November 23, 2011.  Indoor Harvest, Corp., through its brand name Indoor Harvest™ is a company specializing in equipment design, development, marketing and direct-selling of commercial grade aeroponic fixtures and supporting systems for use in urban Controlled Environment Agriculture ("CEA") and Building Integrated Agriculture ("BIA").

 

Basis of presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in The United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial information.  Accordingly, they do not include all the information necessary for a comprehensive presentation of financial position and results of operations.

It is management's opinion, however, that all material adjustments (consisting of normal and recurring adjustments) have been made which are necessary for a fair financial statements presentation.  The results for the interim period are not necessarily indicative of the results to be expected for the year.  For a more complete discussion of significant accounting policies and certain other information, please refer to the annual audited financial statements for the year ended December 31, 2013 included in our Initial and amended registration statements on Form S-1 and S-1/A.

 

Use of estimates

 

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

 

Significant estimates include, but are not limited to the estimated useful lives of equipment for purposes of depreciation and the valuation of common shares issued for services, equipment and the liquidation of liabilities.

 

Reclassification

We have reclassified certain prior period amounts to conform to the current period presentation. These reclassifications have no effect on the financial position or on the results of operations or cash flows for the periods presented.

 

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.

 

Stock-based Compensation

 

The Company follows ASC 718-10, Stock Compensation, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-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).

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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

 

The Company's financial instruments consisted primarily of cash and accrued expenses.  The carrying amounts of the Company's financial instruments generally approximate their fair values as of September 30, 2014 and December 31, 2013, respectively, due to the short-term nature of these instruments.  

 

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.

FASB 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 2013, 2012 and 2011, remain subject to examination by the IRS and respective states.

 

Property and Equipment

 

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

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

Intangible Asset

 

The Company's intangible assets consist of domain names and is accounted for as an indefinite lived intangible asset in accordance with ASC 350 "Goodwill and Other Intangible Assets" ("ASC 350").

 

Domain names are not being amortized as they are determined to have indefinite lives.

Intangible assets are reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no impairment charges taken during the nine months ended September 30, 2014 and 2013, and since inception.

 

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.

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Research and Development

Research and development expenditures are charged to expense as incurred. Research and development expense was as follows:

Advertising Expense

Advertising and promotional costs are expensed as incurred. Advertising expense was as follows:

Recent Accounting Pronouncements

On June 10, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation ("ASUE 2014-10"). The guidance is intended to reduce the overall cost and complexity associated with financial reporting for development stage entities without reducing the availability of relevant information. The Board also believes the changes will simplify the consolidation accounting guidance by removing the differential accounting requirements for development stage entities. As a result of these changes, there no longer will be any accounting or reporting differences in GAAP between development stage entities and other operating entities. For organizations defined as public business entities the presentation and disclosure requirements in Topic 915 will no longer be required starting with the first annual period beginning after December 15, 2014, including interim periods therein. Early application is permitted for any annual reporting period or interim period for which the entity's financial statements have not yet been issued (public business entities) or made available for issuance (other entities). The Company has adopted this guidance as of September 30, 2014.

 

 

As reflected in the accompanying consolidated financial statements, the Company had a net loss of $314,937 and net cash used in operations of $319,487 for the nine months ended September 30, 2014. 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 aeroponic 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: (i) complete product development; (ii) commence product marketing, product assembly and sales; (iii) develop the aerofarmer.com web portal;(iv) construct a demonstration CEA and BIA farm; and (v) offer design build services. The Company's long-term strategy is to direct sale, license and franchise their patented technologies and methods.

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The accompanying consolidated 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.

Property and equipment consist of the following at September 30, 2014 and December 31, 2013:

Depreciation expense for the periods noted is as follows: 

During the nine months ended September 30, 2014, the Company paid deposits and or acquired equipment totaling $68,083 which has not been placed in service as of September 30, 2014 and is included in other assets as of September 30, 2014.

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 September 30, 2014 was $8,838. 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 periods noted is as follows:

 

	3 Months ended									9 Months ended
		September 30, 2014				September 30, 2013				September 30, 2014				September 30, 2013
Rent expense		$	12,788				-			$	29,838				-

 

At September 30, 2014, rental commitments are as follows: 

 

On September 18, 2013, the Company entered into a material transfer agreement with the Massachusetts Institute of Technology's Media Lab ("MIT") to provide aeroponic system components and fixtures to be used for the purpose of developing a wall facade aeroponic system as part of MIT Media Lab's Changing Places research. The Company is responsible for providing technical assistance and materials.  In connection with this agreement, MIT has agreed to reimburse the Company $12,242 in costs incurred as of September 30, 2014; the Company has recorded this reimbursement as other assets as of September 30, 2014 and a reduction in research and development expense.

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COMMON STOCK

 

In January of 2014, the Company entered into an advisory agreement where the advisor agreed to act as a mentor or advisor to the Company and provide advice and assistance ranging from attending quarterly meetings to providing feedback on Company strategy to making introductions and assisting in acquisitions. The Company issued 65,552 common shares in connection with this agreement with a valuation of $16,388 ($0.25/share). All shares to be issued per this agreement have been issued.

In January of 2014, the Company issued 207,455 shares of Common stock to the Company's legal counsel as part of legal fees with a valuation of $51,864 ($0.25/share).

During the nine months ended September 30, 2014, the company sold a total of 1,734,000 shares of Common Stock at prices ranging from $0.25 to $0.50 per share for cash totaling $504,750.

 NOTE 6 - SUBSEQUENT EVENTS

The company has evaluated subsequent events after the balance sheet date of September 30, 2014 through November 21, 2014.

On November 18, 2014, the Company sold 300,000 shares of Common Stock to one U.S. accredited investor for $150,000 cash ($0.50/share).

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

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and other financial information included in this Form 10-Q.

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

Forward-Looking Statements

The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial statements and the related notes, and other financial information included in our Form S-1.

 

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

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

 

Indoor Harvest, Corp., through its brand name Indoor Harvest™, seeks to become an equipment design, developer, marketer and direct-seller of commercial grade aeroponic fixtures and supporting systems for use in urban Controlled Environment Agriculture ("CEA") and Building Integrated Agriculture ("BIA"). Indoor Harvest Corp was incorporated in the state of Texas on November 23, 2011. We are a development-stage company and have generated only minimal revenues from business operations. Our independent registered public accounting firm has issued a going concern opinion. This means there is substantial doubt that we can continue as an on-going business unless we obtain additional capital to pay our ongoing operational costs. Accordingly, we must locate sources of capital to pay our operational costs.

Aeroponics is the process of growing plants in an air or mist environment without the use of soil or an aggregate medium (known as geoponics). Aeroponic culture differs from both conventional hydroponics and in-vitro (plant tissue culture) growing. Unlike hydroponics, which uses water as a growing medium and essential minerals to sustain plant growth, aeroponics is conducted without a growing medium.  Because water is used in aeroponics to transmit nutrients, it is sometimes considered a type of hydroponics.

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

Our operational expenditures are primarily related to developing our line of productions, developing our in-house manufacturing and fabrication facilities and the costs related to being a fully reporting company with the Securities and Exchange Commission.

We are in the process of developing our products and services. Consequently, we have not generated revenues as of the date of this report. We have an accumulated deficit and have incurred operating losses since our inception and expect losses to continue during 2014. Our auditor has indicated in their Report that these conditions raise substantial doubt about our ability to continue as a going concern. 

We cannot guarantee we will be successful in our business operations.  Our business is subject to risks inherent in the establishment of a new business enterprise, including the financial risks associated with the limited capital resources currently available to us for the implementation of our business strategies. To become profitable and competitive, we must develop the business plan and execute the plan.

We are unable to provide a timeline for the generation of revenues which casts substantial doubt on the viability of our business and our ability to continue as a going concern.

For the three months ended September 30, 2014 and September 30, 2013, we had a net loss of $111,075 and $28,453, respectively. For the nine months ended September 30, 2014 and September 30, 2013, we had a net loss of $314,937 and $95,734, respectively. The primary driver behind the increase in the loss was attributable to the increase in expenses as noted below.

For the nine months ended September 30, 2014 and September 30, 2013, we incurred $315,086 and $95,758, respectively, in operating expenses. For the three months ended September 30, 2013 and September 30, 2013, we incurred $111,081 and $28,463, respectively, in operating expenses. The increase in our operating expenses due to increases in costs related to research and development, payroll costs, building lease, and professional expenses related to the filing of our registration statement.

Our expenses related to research and development for the nine months ended September 30, 2014 and September 30, 2013 were $21,966 and $12,257, respectively. Our expenses related to research and development for the three months ended September 30, 2014 and September 30, 2013 were $20,956 and $5,271, respectively. The increase in research and development expenses was due to increased costs supporting our collaboration with MITCityFarm as well as continued product development.

As of September 30, 2014 we had total liabilities of $16,077, while at December 31, 2013, we had total liabilities of $6,181.  The increase was the result of accrued payroll expenses from hiring new employees and deferred rent on our building lease.

Deferred rent payable at September 30, 2014 was $8,838. Deferred rent payable is the sum of the difference between the monthly rent payment and the straight-line monthly rent expense of an operating lease that contains escalated payments in future periods.

 

 

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As of November 24, 2014, we had $311,353 in our bank account available for use. Our estimated day-to-day operational costs, exclusive of those costs in our Plan of Operations for the next 12 months, as set forth above, are estimated to be approximately $262,144 to maintain minimal operational activities during the next 12 months. Our minimal annual operating expenses include our previously executed employment agreement with our CEO and sole founder for a salary of $70,000 annually, non-management salaries of $118,144, our lease agreement for our 10,000 sq. ft. facility of $50,400 per year, our estimated annual utility expenses of $10,800 and $12,800 in miscellaneous operating expenses.  In addition, we will have $75,000 in costs related to maintaining our publicly traded status over the next 12 months. However, as stated above, in order to implement our Plan of Operations for the next 12 months we will need to secure $750,000 in funds. If we are unable to secure the necessary funds, we will not be able to undertake some or all of our planned business development activities. Accordingly, we anticipate, based upon the assumption of $337,144 in our minimal day-to-day operational and public company reporting costs during the next 12 months as set forth above, a minimum average monthly burn rate of no more than $28,095 during the next 12 months, which will be paid from our existing funds, plus cash flow we expect to start generating during the next 12 months.

 

Based upon the assumption of our monthly burn rate exclusive of those costs in our Plan of Operations for the next 12 months as set forth above, the Company currently has sufficient funds to meet our current estimated day-to-day operations, plus SEC filing costs, as well as commence some, but not all of our planned activities as set forth in the table above.

We are in the process of developing our products and services. Consequently, we have not generated revenues as of the date of this Report. We have an accumulated deficit and have incurred operating losses since our inception and expect losses to continue during 2014. Our auditor has indicated in their Report that these conditions raise substantial doubt about our ability to continue as a going concern.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

For a discussion of our accounting policies and related items, please see the Notes to the Financial Statements, included in Item 1.

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk.

Not applicable.

 

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) under the Securities Exchange Act) that are designed to ensure that information required to be disclosed in the Company's Securities 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.

 

The Company's management, consisting solely or the Company's Chief Executive Officer/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/Chief Financial Officer has concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act) during the fiscal quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 

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Item 1. Legal Proceedings.

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

We relied upon Section 4(2) of the Securities Act of 1933, as amended for the above issuance.  We believed that Section 4(2) of the Securities Act of 1933 was available because:

 

 

In connection with the above transactions, although of the investor was an Accredited Investor as defined in SEC Regulation D, we provided the following to the investor:

 

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

 

Item 6. Exhibits.

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* This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 of the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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Indoor Harvest, Corp., a Texas corporation

 

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* This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 of the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.