Indoor Harvest Corp - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2016

OR

For the transition period from __________ to __________

Issuer's telephone number: 713-410-7903.

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 (Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K . ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: The aggregate market value of the 13,444,612 shares of voting stock held by nonaffiliates of the registrant, computed by reference to the closing price as reported on the OTCQB, as of the last business day of Indoor Harvest's most recently completed second fiscal quarter (June 30, 2016), was $6,856,752.

We have 19,073,352 shares of common stock outstanding as of March 31, 2017.

TABLE OF CONTENTS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

This Annual Report on Form 10-K, the other reports, statements, and information that we have previously filed or that we may subsequently file with the Securities and Exchange Commission, or SEC, and public announcements that we have previously made or may subsequently make include, may include, incorporate by reference or may incorporate by reference certain statements that may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and are intended to enjoy the benefits of that act. Unless the context is otherwise, the forward-looking statements included or incorporated by reference in this Form 10-K and those reports, statements, information and announcements address activities, events or developments that Indoor Harvest, Corp. (hereinafter referred to as “we,” “us,” “our,” “our Company” or “Indoor Harvest”) expects or anticipates, will or may occur in the future. Any statements in this document about expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results may differ materially from those in such forward-looking statements due to fluctuations in interest rates, inflation, government regulations, economic conditions and competitive product and pricing pressures in the geographic and business areas in which we conduct operations, including our plans, objectives, expectations and intentions and other factors discussed elsewhere in this Report.

Certain risk factors could materially and adversely affect our business, financial conditions and results of operations and cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. The risks and uncertainties we currently face are not the only ones we face. New factors emerge from time to time, and it is not possible for us to predict which will arise. There may be additional risks not presently known to us or that we currently believe are immaterial to our business. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If any such risks occur, our business, operating results, liquidity and financial condition could be materially affected in an adverse manner. Under such circumstances, you may lose all or part of your investment.

The industry and market data contained in this report are based either on our management's own estimates or, where indicated, independent industry publications, reports by governmental agencies or market research firms or other published independent sources and, in each case, are believed by our management to be reasonable estimates. However, industry and market data is subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey of market shares. We have not independently verified market and industry data from third-party sources. In addition, consumption patterns and customer preferences can and do change. As a result, you should be aware that market share, ranking and other similar data set forth herein, and estimates and beliefs based on such data, may not be verifiable or reliable.

Item 1. DESCRIPTION OF BUSINESS

Organization

Indoor Harvest Corp., or 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.

Business

We are currently in the process of implementing a significant change in our business focus and structure. We are seeking to use the relationships and technology we have developed to become a registered producer and seller under the federal Controlled Substance Act (“CSA”) of pharmaceutical grade cannabis for research and targeted treatment of specific medical symptoms. We plan to discontinue our efforts to sell our current products and services related to vertical farming to include our branding, equipment and services. Instead, we will focus on licensing the use of our current branding, products and services exclusively for all cultivars except for cannabis to The Harvest Group, a new separate company with most of the same management as now, which will be spun off from our current business and in which we will retain a minority interest.

Current Business and Operations

Indoor Harvest Corp, through its brand name Indoor Harvest®, is currently operating as a full service, state of the art design-build, engineering, procurement and construction firm for the indoor and vertical farming industry. The company provides production platforms, mechanical systems and complete custom designed build outs for both Controlled Environment Agriculture ("CEA") and Building Integrated Agriculture ("BIA"), tailored to the specific needs of virtually any cultivar.

CEA is the process of manipulating any agricultural technology to allow the farmer an ability to manipulate a crop's environment to desired conditions. Technologies include greenhouse production, hydroponics, aquaculture, aquaponics and aeroponics. Controlled variables may include temperature, lighting, humidity, pH and nutrient analysis.

BIA is the process of locating CEA methods on, or in, mixed use buildings to provide synergy with the buildings infrastructure and the agriculture process. Earliest examples of BIA include the use of hydroponics, aeroponics and aquaponics, where waste heat is captured through the building's existing heating, ventilation and air conditioning system as well as the combined use of solar, rainwater collection and evaporative systems. Current operating examples include such buildings as Eli Zabar's rooftop greenhouse, The Sun Works Center for Environmental Studies, Gotham Greens, Sky Vegetables, Top Sprouts, Cityscape Farms, Dongtan, Masdar City, AeroFarms, Solar 2, Lufa Farms, BrightFarms, FarmedHere, Green Sense Farms, Green Spirit Farms and Big Box Farms. The term building-integrated agriculture was coined by Dr. Ted Caplow in a paper delivered at the 2007 Passive and Low Energy Cooling Conference in Crete, Greece.

We currently offer a vertical farm racking system with integrated LED lighting. Our vertical farm racking system was designed to be used for both aeroponic and hydroponic layered crop production within a CEA or BIA operation. Our racking system will work with any standard 48" X 96" or 24" X 48" third party flood table or aeroponic system. We also offer patent pending aeroponic fixtures that are compatible with our vertical farm racking system. We offer our vertical farm racking system and aeroponic fixtures for use by both horticulture enthusiasts and commercial operators who seek to utilize vertical farming methods within a controlled indoor environment.

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.

The Company generates revenue from vertical farm rack system sales, aeroponic fixture sales and design build construction management services. Our products are designed for the production of aeroponic and hydroponic leafy greens, micro-greens, fruiting plants and herbs. Our fixtures and systems can also be adapted for a variety of other uses such as horticulture research, medicinal plant production, pharmaceutical plant production, plant cloning and hardwood propagation.

In addition to these products, the Company also generates revenue from engineering, procurement and construction management services. Engineering, procurement, and construction management (EPCM) is a common form of contracting arrangement for very large infrastructure and facility projects. Under an EPCM arrangement, the client engages the Company to coordinate all design, procurement and construction work to assure that the whole project is completed as required.

Active Potential Acquisition Plans and Status; Changes in Business Operations

On January 3, 2017, the Company signed a binding letter of intent with Alamo CBD, LLC (“Alamo CBD”) to enter discussions to combine and create a medical cannabinoids pharmaceutical group. Pursuant to the terms, the Company was required as a precondition to moving forward with the proposed transaction, to raise, as necessary, up to $1,000,000 in capital by February 15, 2017, to pay off all existing debt, including convertible notes, owed by the Company and to complete a spin-off of the Company’s produce related operations. On February 15, 2017 the Company and Alamo CBD extended the deadline until March 15, 2017.

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 17 U.S. accredited investors at $0.40 per share for cash totaling $824,000 and the Company and Alamo CBD agreed that sufficient capital had been raised to meet preconditions. The Company and Alamo CBD expect to execute a Definitive Agreement on April 21, 2017 which is summarized below.

Summary of the proposed transaction

On March 16, 2017, the Company amended the original letter of intent with Alamo CBD and both parties have proposed the following general terms for the Definitive Agreement.

Background of the proposed transaction

The purpose of the above-described proposed transaction is twofold, as follows:

Until August 12, 2016, only one entity, the University of Mississippi could 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 Department of Justice (DOJ) and the Drug Enforcement Agency (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 will 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 has reviewed these guidelines and believes all applicable requirements which cannot be met by the Company alone will be met by the following:

Contractual Joint Venture with Alamo CBD, LLC and Vyripharm Enterprises, LLC

On March 23, 2017, the Company entered into a Contractual Joint Venture Agreement by and between Indoor Harvest Corp, 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 shall be five (5) years following the Effective Date, and the Agreement may be extended beyond the Initial Term by mutual consent of the Parties.

Costs of Operation of the Joint Venture

Pursuant to the Agreement, Indoor Harvest has 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. The first payment of $1,000,000 shall be paid to Vyripharm no later than four (4) days following the Effective Date, in which the Company has paid $250,000 under the agreement and will be required to pay an additional $250,000 by June 30, 2017 and $500,000 by December 31, 2017.

The remaining four (4) annual payments shall be paid by Indoor Harvest to Vyripharm on each of the following one (1) year anniversaries of the Effective Date. If Indoor Harvest should fail to timely pay the initial $1,000,000 as set forth above, this Agreement shall terminate and neither Party shall have further obligation to the other. If Indoor Harvest should fail to pay the second $1,000,000 payment within thirty (30) days following the second anniversary of the Effective Date, then this Agreement shall terminate and Alamo CBD shall forfeit four-fifths (4/5) of its revenue share as set forth in Paragraph 7 from any product that has been developed or is subsequently developed by Vyripharm which uses cannabis oil or processes supplied to Vyripharm by Indoor Harvest. If Indoor Harvest should fail to pay the third $1,000,000 payment within thirty (30) days following the third anniversary of the Effective Date, then this Agreement shall terminate and Indoor Harvest shall forfeit three-fifths (3/5) of its revenue share as set forth in Paragraph 7 from any product that has been developed or is subsequently developed by Vyripharm which uses medical cannabis oil or processes supplied to Vyripharm by Indoor Harvest. If Indoor Harvest should fail to pay the fourth $1,000,000 payment within thirty (30) days following the fourth anniversary of the Effective Date, then this Agreement shall terminate and Indoor Harvest shall forfeit two-fifths (2/5) of its revenue share as set forth in Paragraph 7 of the Agreement from any product that has been developed or is subsequently developed by Vyripharm which uses medical cannabis oil or processes supplied to Vyripharm by Indoor Harvest. If Indoor Harvest should fail to pay the fifth $1,000,000 payment within thirty (30) days following the fifth anniversary of the Effective Date, then the Agreement shall terminate and Indoor Harvest shall forfeit one-fifth (1/5) of its revenue share as set forth in Paragraph 7 from any product that has been developed or is subsequently developed by Vyripharm which uses medical cannabis oil or processes supplied to Vyripharm by Indoor Harvest. Except for cost sharing for the filing of, prosecuting and maintaining any joint patent applications pursuant to Paragraph 6 of the Agreement, and unless the Parties mutually agree, Indoor Harvest shall have no further financial obligations under this Agreement during the Initial Term. The Parties shall otherwise bear their own costs in carrying out their respective responsibilities under this Agreement.

Due to the Fees and schedule that Vyripharm must attain with the institutions in the Texas Medical Center the only pay out structure that we can approve is the following: The first $1,000,000 shall be paid as follow: Option 1) Upfront all the $1,000,000 for the year if excess funds are raised (Over the $10,250,000), Option 2) 5% of funds up to $10,250,000, which are raised from presentations to investors in which Vyripharm participates; Option 3) if less than $10,250,000 is raised in 2017, then Indoor Harvest will/should make a $250,000 down payment to Vyripharm, and pay another $250,000 at the end of the 2nd quarter of 2017. If Indoor Harvest does not have the funds to pay another $250,000 in the 3rd quarter of 2017, then that payment can be pushed back to the 4th quarter with the final payment of $500,000 owed to Vyripharm in or at the end of the 4th quarter of 2017.

Intellectual Property

Pursuant to the Agreement, Vyripharm has agreed that any patent application that is originated by Vyripharm that specifically uses Alamo CBD’s cannabis oil, or Indoor Harvest's aeroponic process, as licensed to Alamo CBD, as part of the invention shall list Alamo CBD and Indoor Harvest as additional inventors. The parties have further agreed that the cost to prepare and file, prosecute and maintain any such patent application, shall be shared between Vyripharm and Alamo CBD 85%/15% unless the combination between Alamo CBD and Indoor Harvest is not consummated, at which time Vyripharm, Alamo CBD and Indoor Harvest will share costs 85%/7.5%/7.5% respectively. Should any party fail to pay its obligation for costs of any patent application when due and is not able to work out an arrangement with Vyripharm concerning such failure to pay the invoice, such party shall forfeit its ownership interest in such patent or pending patent application and forthwith execute an assignment of its interest in such patent or patent application to Vyripharm.

Responsibility for Management, Costs and Revenues of the Joint Venture

The Parties have agreed that Vyripharm shall hire an independent contractor, an account management firm, to manage The Joint Venture Project, and that the costs of such firm will share on an 85% to Vyripharm/15% to Alamo basis.

All revenue from the licensure or the sale of any product developed by Vyripharm which utilizes medical cannabis oil and processes supplied by Alamo CBD and Indoor Harvest under the Agreement shall be shared between Vyripharm and Alamo CBD 85%/15%, respectively, unless the proposed combination between Alamo CBD and Indoor Harvest is not consummated, in which case all such revenue shall be shared between the parties on and 85%/7.5%/7.5% basis. Any revenues received by Vyripharm under the Agreement shall be distributed to Alamo CBD and Indoor Harvest on a calendar quarter basis, with each distribution being made by Vyripharm to Alamo CBD and Indoor Harvest within fifteen (15) days following the last day of each calendar quarter.

Vyripharm shall appoint two (2) members to the “Management Committee” and Alamo shall appoint one (1) member to the Management Committee. For Vyripharm, Jerry Bryant shall be the Chairman of the Management Committee unless Mr. Bryant should elect to appoint the second Vyripharm member as the Chairman. The Management Committee shall meet in person two (2) times each year and telephonically two (2) times each year. Meetings shall take place quarterly and in-person meeting shall occur every other meeting. If Alamo CBD wishes to add items to the meeting agenda, then Alamo CBD shall submit such changes to Vyripharm within one (1) week of receiving Vyripharm’s proposed agenda. The purpose of each meeting shall be to summarize activities during the previous quarter regarding the Joint Venture and address projected work for the next quarter. The Parties shall endeavor, in good faith, to reach consensus regarding work planned for the following quarter in deference to achieving the goals of the Joint Venture. If agreement cannot be reached, then the decision of the Chairman shall be conclusive regarding the matter requiring decision.

Exclusivity

During the term of the Joint Venture, the Parties have agreed to work exclusively with one another with respect to any purpose related, directly or indirectly, to the purpose of the Joint Venture.

Our Current Products

There are currently several different growing technologies being deployed in vertical indoor farming operations. The most common of these technologies include the following: nutrient film technology, ebb and flow systems (flood and drain), drip irrigation, water culture systems, raft systems and aeroponic systems. Aeroponics is a method of growing plants in a sealed environment by suspending plant roots in an automated atomized liquid nutrient environment. Hydroponics is a subset of hydroculture and is a method of growing plants using mineral nutrient solutions, in water, without soil.

As part of our proposed spin-off described above, the Company would license the use of the Company’s branding, products and services to The Harvest Group exclusively for all cultivars except for cannabis.

The Indoor Harvest® Modular HP-Aeroponics Platform

Initially designed to produce leafy greens, micro-greens, fruiting plants and herbs, our fixtures can be easily adapted for a variety of other uses, such as horticultural research, medicinal plant production, plant cloning and hardwood propagation. Our platform has been independently tested and has shown the following benefits over a more traditional hydroponic system:

The Indoor Harvest® Low Tide VFRack™ Platform

The Low Tide VFRack system is designed specifically for flood and drain operation and provides the following benefits:

The Indoor Harvest® Shallow Raft VFRack™ Platform

The Shallow Raft VFRack system is designed specifically for flood and drain operation and provides the following benefits:

Design-Build, Engineering, Procurement and Construction Services

In addition to the products above, the Company also offers both design build and engineering, procurement and construction management services. Design-Build ("DB"), or Engineering, Procurement, and Construction Management ("EPCM") are both common forms of contracting arrangement to design, construct and deliver large infrastructure and facility projects. Under a DB/EPCM arrangement, the client would engage the Company to coordinate all design, procurement and construction work to ensure that the whole project is completed as required.

As part of our proposed spin-off and combination with Alamo CBD described above, the Company would cease all DB/EPCM operations. The proposed spin-off Company, the Harvest Group, would be provided exclusive license for the use of the Company’s branding, products and services for use in DB/EPCM projects.

DB/EPCM agreements offer the following benefits:

Our two-phase DB/EPCM process offers complete design, engineering, procurement and construction services. We discuss with clients their space and crop selections before we offer guidance on production platforms. Our DB/EPCM agreements are designed to begin a risk assessment, production design, including space design if no client side architect is involved. The first phase of a project, also known as the execution phase, which normally follows what is known as a FEED, or Front End Engineering Design phase. The FEED is a basic engineering design used as the basis for the second phase and is required to produce price estimates or a purchase order. The FEED can be divided into separate packages covering different portions of a project and generally requires an upfront deposit to begin. In some cases, the DB/EPCM contract requires us to execute and deliver the project within an agreed time and budget, commonly known as a Lump Sum Turn Key ("LSTK") Contract. In other cases where projects may have many unknown risks, are research and development heavy, or where first-of-its kind equipment is being specified. In these cases, Cost Plus (CP) agreements, which require reimbursement of expenses plus a percent for profit, may be used to spread risk to the client.

Once Phase One design work is complete, we deliver the client a manufacturing and construction estimate and plans. Phase Two includes construction and construction management services. Under a phase two DB/EPCM agreement, our engineers provide detailed engineering design of the project, procure all the equipment and materials necessary, and then construct to deliver a functioning facility or asset to the client. Our platform architects, engineers and project managers examine every aspect of a potential build-out (or upgrade from a legacy platform). We design for a client’s crop selection using various hydroponic production methods with a specialty in High Pressure Aeroponic systems. We rigorously test every individual system component (whether designed by us or by one of our technology partners) in our Texas-based R&D facility.

Financing for Products and Services

We can provide financing for our products and services to qualified clients under agreements with Noesis and OneWorld Business Finance, through its division US Energy Capital (“OneWorld”) to assist with financing for its customers and projects. Noesis is the chosen financing partner for over 200 industry-leading companies who collectively sell billions of dollars of equipment and services annually. Noesis provides specialized financing with online sales tools to help business grow. OneWorld is an Austin, Texas-based independent business finance company founded in 1995 that provides various forms of commercial finance to companies throughout the United States. Although focused on equipment finance and working capital, OneWorld also works with service companies, manufacturers, healthcare providers and municipalities to help its customers plan for and acquire funding for capital acquisitions, refinancing and operational expansion.

Current Operational Activities

The Company has several pending and active projects. As part of the proposed combination with Alamo CBD and the separation of the Company’s cannabis and produce related operations, it is currently expected that the spin-off group, The Harvest Group, will assume responsibility of the Pasadena Texas CLARA Project, Design Partnership with Freight Farms and the MOA with IGES Canada Ltd. and its associated projects. The Company would continue to be responsible for the Tweed Cannabis Pilot.

Pasadena Texas CLARA Project

On March 31, 2015, the Company signed a LOI with the City of Pasadena, Texas to fund the establishment and provisioning of an indoor agricultural facility (vertical farm) to be in Pasadena Texas. Under the LOI, the City was to provide Indoor Harvest, or a partner of their designation with City approval, with two facilities owned by the City for the sum of ten dollars ($10.00) per annum for a period not to exceed twenty (20) years as well as provide tax abatements on these properties for use in the construction of a Community Located Agricultural Research Area ("CLARA") project. On December 1, 2015, the City of Pasadena, Texas, unanimously voted in favor of a Chapter 380 Economic Development Agreement with Indoor Harvest for establishing CLARA, an open source, vertical farm and education campus on the City’s north side.

The agreement supporting the construction of an indoor vertical farming facility to be utilized in research, testing and prototyping of hydroponic and aeroponic plant nutrient growing systems, and as a showroom of the various equipment/technology used in these environments. Plans called for such growing areas as deemed appropriate to provide proof-of-concept for Indoor Harvest design and engineering, and education facilities, classrooms or other areas where training in vertical farm management could be accomplished. In collaboration with the Houston Food Bank, Harris County Public Health, PeopleFund, the Pasadena Health Center (FQHC) and others, the CLARA project strives to produce and distribute local sources of produce in the north Pasadena community in Harris County. Additionally, the CLARA project is intended to increase consumption of these healthy foods by implementing "food prescriptions" to people in need and develop a need-based Food Scholarship Program which will provide free food at a Houston Food Bank partner agency, called a “Scholarship Pantry.”

In the first quarter of 2016, the Company completed environmental testing of the properties to be provided by the City of Pasadena and the presence of high levels of both asbestos and lead contamination was detected. The cost of abatement and remediation required to bring the properties up to safe conditions was determined to be cost prohibitive. In the first quarter of 2017, a new 1.9 acre, open land site was provided by the City of Pasadena which passed environmental inspections in March 2017. With these new developments, the company is currently negotiating with commercial partners and lenders to deploy the project as originally agreed.

On October 11, 2016, the CLARA project was announced as a winner of General Electric’s (“GE”) HealthyCities Leadership Academy, a part of GE’s healthymagination commitment to mentor and support leaders in their communities as they develop and support new strategies to tackle population health challenges. The goal of the initiative is for community and business leaders to work together to help the cities, towns and communities where they live and work to address significant health challenges. The CLARA project was one of nine projects chosen after a thorough evaluation of all eligible entries based on their ability to demonstrate a clear potential to improve the health of all socioeconomic strata of the targeted community. Selections were determined by a panel of distinguished judges who have expertise in the fields of population health, public health, and healthcare. The CLARA project will receive an initial award of $25,000 in prize money to help develop population health improvements through partnerships with public and private entities, and will be eligible for a final prize award of $250,000 after a year of collaborative learning and support.

Design Partnership with Freight Farms

On December 17, 2015, we entered a design partnership with Freight Farms to jointly explore new cultivar platforms. Freight Farms, makers of the Leafy Green Machine shipping container farms, will leverage Indoor Harvest’s unique expertise as the leading design-build firm of indoor farms to explore innovative new applications for its Leafy Green Machine. The companies intended to work together to explore how Freight Farms’ containerized approach to indoor farming could be deployed in new ways to reach into untapped markets, including those internationally, as well as applications for non-profits and pharmaceutical research. As of December 31, 2016, no projects were developed under the agreement and it is not currently expected that either party will perform projects under this agreement due to changes in both parties’ business plans.

MOA with IGES Canada Ltd.

On January 27, 2016, the Company entered into a Memorandum of Agreement ("MOA") with IGES Canada Ltd. ("IGESCA"), a Canadian company that is a technology solution integrator in the vertical farming market. The MOA sets forth terms for a relationship between the Company and IGESCA to grow, market and sell vertical farming solutions globally.

Subject to the terms of the MOU, IGESCA and Indoor Harvest agree to partner to market and sell Indoor Harvest's solutions in conjunction with the IGESCA business platform to clients globally. Our responsibilities include Delivering Turnkey Engineering, Procurement and Construction (EPC) solutions for CEA facilities, ongoing support and access to financing options through Noesis for designated projects. The responsibilities of IGESCA include identifying new and concluding project engagements from the current potential portfolio of 15 facilities, ongoing operations and regulatory navigation.

Both Indoor Harvest and IGESCA agree that any intellectual property, which is jointly developed and filed through activities covered under this MOA, can be used by either party for sales/marketing purposes with the consent of the other party which can be set forth in initial guidance. All other intellectual property used in the implementation of the MOA will remain the property of the party that provided it. This property can be used by either party for purposes covered by the MOA but consent will be obtained from the owner of the property before using it for purposes not covered by the MOA. The MOA shall remain in effect for a period of three (3) years from that date signing unless earlier terminated. The project is currently active and one project in Johnstown Ontario has been signed and there currently are five additional projects pending.

Vertical Farm Project in Johnstown Ontario Canada

On July 13, 2016, we entered into a design-build, EPCM, maximum guaranteed price agreement, for a 40,000-sq. ft. vertical farm project in Johnstown Ontario Canada with IGES Canada ltd., the project included 676 Low Tide VFRack platforms, integrated LED lighting, facilities mechanical, electrical and plumbing, construction management and equipment start-up and commissioning. Total contract maximum guaranteed price is $11,374,500 with 5% of the total, $568,725 due upon the start of design work. Originally contracted to begin on September 23, 2016, the project start date has been delayed by the client for administrative reasons as they close additional funding to expand their farm deployment plans for 2017.

Tweed Cannabis Pilot

On September 28, 2015, the Company and Tweed (through its parent company, Canopy Growth Corporation (“Canopy Growth”), formerly Tweed Marijuana Inc.) extended its existing Cannabis Production Pilot Agreement (“Cannabis Pilot”) signed on December 18, 2014 for an additional two years. From February 19 through March 7, 2015, the Company completed installation of three mobile research labs at Canopy Growth's, subsidiary Tweed located in Smith Falls Canada as part of the Cannabis Pilot between the two Companies.

The Cannabis Pilot will test the production of Cannabis using an aeroponics system designed by Indoor Harvest. The Cannabis Pilot will make a record of the growth rate, phytocannabinoid production, water usage, fertilizer usage and labor using the aeroponics system(s) provided by Indoor Harvest. The recorded data from the Cannabis Pilot will be compared to Tweed's existing production methods. At the conclusion of the Cannabis Pilot, upon review of the data, Canopy Growth and Indoor Harvest shall jointly secure intellectual property rights for the resulting aeroponics system(s) (at each Party's discretion as to whether they wish to participate in intellectual property filings) and Indoor Harvest will be provided manufacturing rights.

The Cannabis Pilot is broken into two separate phases, as follows:

Indoor Harvest will be responsible for providing all the equipment related to the aeroponics system being tested, to include a temporary partitioned testing lab structure to be used within Canopy Growth's existing facilities and the cost associated with delivery and installation of the aeroponics system and testing lab, including design changes and subsequent changes based on feedback from Phase One testing.

Canopy Growth will be responsible for providing adequate space in a Controlled Environment for testing purposes to include water service, local area drain and electrical service. Canopy Growth will also provide the personnel and labor to operate and maintain the equipment provided by Indoor Harvest. Canopy Growth will make a reasonable effort to provide Indoor Harvest with weekly updates to include photographs of the plants being grown and their root development as well as all associated data required under the Agreement.

Upon completion of the Cannabis Pilot, Indoor Harvest and Canopy Growth will jointly apply for patents ("New IP") on the technology developed under the Cannabis Pilot. Canopy Growth will be provided exclusive rights to cultivate cannabis using the New IP in Canada and other jurisdictions outside the United States, at a royalty-free rate for the duration of the patent (including any extension of the patent). Indoor Harvest will have exclusive royalty-free rights to cultivate cannabis using the New IP in the United States for the duration of the patent (including any extension of the patent) and will be provided rights to use the New IP in all jurisdictions, royalty-free, for the cultivation of all other species of cultivars, to specifically exclude cultivation of cannabis using the New IP. Indoor Harvest will only have rights to cultivate cannabis in the United States using the New IP. All of these rights are intended to be for commercial production of cultivars.

Indoor Harvest will be provided exclusive manufacturing rights for a period of 10 years on the New IP developed under the agreement. All equipment manufactured by Indoor Harvest will be provided to Canopy Growth by way of a "cost plus agreement" not to exceed 15% allowable for profit.

Both parties are responsible for the costs associated with meeting their obligations outlined in this Agreement. Under no circumstance, do Canopy Growth's costs exceed those associated with the cost of plants, labor and general costs of production including water and electricity. However, any costs related to third party laboratory analysis and testing of phytocannabinoids will be shared equally by both parties.

On July 6, 2016, we entered into Phase Two of our Cannabis Pilot with Canopy Growth Corporation and signed a design-build, EPCM, cost plus contract with Tweed, a subsidiary of Canopy Growth, to construct a High Pressure Aeroponic (“HPA”) production system to include facility integration and controls for the purpose of an economic pilot. The production system will include 13 HPA units and a Nutrient Dispensing System (pump skid). Additional costs for mechanical, electrical, plumbing and controls will be invoiced prior to hardware shipment and onsite installation under a cost-plus agreement. As of March 31, 2017, installation of the 13 HPA units had begun at Tweed’s facility with an expected completion in late April 2017. Once complete, Tweed will complete a series of final economic pilots under the terms of the Cannabis Production Pilot Agreement.

Research and Development

In January 2015, we began construction of a controlled environment testing facility. The facility will be used to test production yields for a variety of cultivars using both our aeroponic and vertical farm framing designs. This data will then be used to develop business plans and marketing materials for our product and services. As of the date of this report, we had completed the walls and partitions, area drainage and flooring. No additional work has been completed as of December 31, 2016. It is currently expected that no further work will be completed or approved until the combination with Alamo CBD is consummated.

Under our Cannabis Pilot with Canopy Growth, we conducted an initial test between March and August 2015. A sativa dominant strain, Ghost Train Haze, was selected and 8 plants were grown in a 4' X 8' X 2' system using a "Screen of Green" cultivation method, in which plants are cropped and trained to produce a higher yield from a single plant. The Company's patent pending aeroponic system showed a significant increase in growth rate during the vegetative stage, as compared to more traditional production methods such as drip irrigation using coco.

Fertilizer usage was reduced by as much as 68% over Canopy Growth's existing production with the aeroponic system averaging 8 gallons a day under high pressure sodium and 9 gallons a day under LED, operating drain to waste. As tuning of the system progressed, average water use was reduced to approximately 5 gallons per day drain to waste. The Company believes that through additional tuning, more water savings for drain to waste and under recirculated operation can be achieved, and water use could be reduced by as much as 98% overall. Under 2,000 watts of high-pressure sodium lighting, the aeroponic system produced 3.1 pounds of dried flowers and under 1,040 watts of LED lighting produced 2.8 pounds of dried flowers in its initial test. The Company believes that with additional tuning, yield can be increased. On December 10, 2015, we began a second pilot under our Cannabis Pilot with Canopy Growth and similar results were achieved.

On July 6, 2016, we entered into Phase Two of our Cannabis Pilot with Canopy Growth Corporation and signed a design-build, EPCM, cost plus contract with Tweed, a subsidiary of Canopy Growth, to construct a High Pressure Aeroponic (“HPA”) production system to include facility integration and controls for the purpose of an economic pilot. The production system will include 13 HPA units and a Nutrient Dispensing System (pump skid). Additional costs for mechanical, electrical, plumbing and controls will be invoiced prior to hardware shipment and onsite installation under a cost-plus agreement. As of March 31, 2017, installation of the 13 HPA units had begun at Tweed’s facility with an expected completion in late April 2017. Once complete, Tweed will complete a series of final economic pilots under the terms of the Cannabis Production Pilot Agreement.

Potential Customers

We believe, based on our own formal and informal research that our current products and services appeal to three distinct markets. Those markets include business-to-business clients, commercial growers and horticulture researchers who are currently using aeroponics or other indoor growing technologies. We intend to market our products to these markets simultaneously. Pending the consummation of the proposed combination with Alamo CBD, the Company would maintain exclusive right to market and sell all products and services related to cannabis and the spin-off group, The Harvest Group, would maintain exclusive right to market and sell all products and services related to all cultivars except cannabis. The following is a description of these markets.

Business-to-Business Clients - We currently have business-to-business ("B2B") relationships with Illumitex, Inc., Freight Farms, Inc. and IGES Canada Ltd. B2B is a type of commerce transaction that exists between businesses, such as those involving a manufacturer and wholesaler, or a wholesaler and a retailer. B2B refers to business that is conducted between companies, rather than between a company and individual consumers. The Company expects to add additional B2B clients as well as expand its reseller and authorized dealer programs.

Commercial Growers - Commercial agriculture is beginning to migrate to CEA and BIA. We believe that our products and services provide an affordable vertical farming and turn-key facility solutions for urban commercial growers who produce for local restaurants, hotels, wholesale and retail markets. Our systems can also be used in re-forestation projects or other revitalization projects through the system's ability to clone and propagate a variety of plant cuttings and hardwood cuttings.

Horticulture Researchers - The modular nature of our system design and custom fabrication abilities allow for numerous configurations from the same system. Our platform provides a variety of aeroponic delivery methods and plant support structures from the same system. This provides maximum flexibility to researchers who are experimenting with different plant species and are attempting to keep costs down.

We believe that cannabis has the potential to be a large market for our equipment. Our proposed combination with Alamo CBD would cause us to become a producer of cannabis. Alamo CBD, which would become a wholly owned subsidiary, is seeking to produce cannabis under the Texas Compassionate Use Program and to apply with the Drug Enforcement Agency, to become a registered producer of cannabis under the Controlled Substances Act. We are currently developing and offering products which could be specifically used in the production of cannabis under our agreement with Canopy Growth in Canada, where medical cannabis is legal throughout the country. We will only directly enter markets where cannabis is legal and only then if we do not believe there is any material likelihood that we could be found in violation of federal law in the U. S. through the sale of our products. See "Government Regulation and Certification," below.

Marketing

The Company currently offers its products to B2B clients, through authorized dealer groups and resellers, as well as offering direct commercial sales and design-build, engineering, procurement and construction services from our website. Pending the consummation of the proposed combination with Alamo CBD, the Company would maintain exclusive right to market and sell all products and services related to cannabis and the spin-off group, The Harvest Group, would maintain exclusive right to market and sell all products and services related to all other cultivars except cannabis. As of the date of this filing, we have one oral agreement with a distributor and four written agreements with B2B clients. We are currently developing our marketing plan, which may include some or all of the following marketing methods:

Direct Mail - The use of direct mail allows us to reach a wide audience within a targeted market. A direct mail campaign may consist of a letter of introduction and a brochure featuring the products and services provided by the Company.

Internet Marketing - The Company intends to utilize social networks such as YouTube and Facebook as well as reaching out to industry bloggers and news sites in order to reach potential customers. The company can also sponsor, or advertise with hydroponic and other related horticulture online forums, social networks and online magazines. The Company, in the future, plans to offer its products for sale via the internet.

The Company intends to launch a social media network under the domain name aerofarmer.com. The company intends to host forums, articles and blogs related specifically to aeroponic indoor farming while also offering a retail sales point for its products and services.

Trade Shows and Special Events - The Company intends to participate in industry trade shows and events to create market awareness for its products and services.

We market our products to customers desiring to grow all varieties of agricultural products. We do not intend to exclude the growers of any agricultural products, including cannabis, from our marketing efforts. As of the date of this report, we are developing and offering fixtures specifically for cannabis production in Canada under our agreement with Canopy Growth. All our current fixtures can be adapted for use by cannabis growers. In the future, we may develop additional fixtures, or be contracted to design additional systems, specifically for cannabis production. Marketing our products in the U.S. in state and local jurisdictions where marijuana is legal is still uncertain due to the uncertain legal status of the growth, sale and use of cannabis due to conflicting laws under which what is illegal federally is to varying extents legal under certain state laws to the contrary [and even greater uncertainty as to what would constitute ancillary illegal activities such as aiding or abetting if any such direct actions are deemed illegal; and even if direct illegality laws were enforced, whether any ancillary related laws such as aiding and abetting would, if ever, be enforced]. We believe that if the cannabis industry were to become fully legal under both U.S. federal and state law, then this industry may well be where the most advances in technology related to our products could come from. We are also working on developing cannabis-specific products in Canada under our agreement with Canopy Growth. Thus, it is not unreasonable, but is not certain, to assume that the cannabis industry will become the biggest market for the type of equipment that we manufacture.

Our Competition and Our Market Position

The vertical farming industry is estimated to reach $3.88 Billion by 2020, at a CAGR of 30.7% between 2015 and 2020 based on a report by MarketsandMarkets, the world's No. 2 firm in terms of annually published premium market research reports. There are several Companies operating vertical farms that are offering licensing and franchises based on proprietary systems and production methods. These Companies include Aerofarms, Truleaf, FarmedHere, UrbanBarns, Green Sense Farms and Green Spirit Farms. These Companies offer a turn-key platform and operation. We believe that this approach limits a client’s options and burdens them with licensing and branding restrictions. We approach every client as an individual project and can offer a wide range of technologies and production methods. It is imperative that these competitors maintain control over production data to justify licensing. We believe the industry is moving towards open data and open source technologies that will reduce the advantage of individual licensing of production methods and platforms. We believe our design-build approach and utilization of open data of production and flexibility in system design provides us a competitive advantage.

There are two main manufacturers that currently manufacture high pressure aeroponic systems. They are Agrihouse™ and Aerofarms™. These companies are currently engaged in the manufacture and sales of commercial aeroponic vertical farming systems. These systems can only be used in a single mode with high pressure aeroponics and offer limited sizing options. Our system can operate in dual modes, both LPA and HPA, and our AGT fixture is available in optional sizes that our competitors currently do not offer. There are also companies such as general Hydroponics® and Botanicare® that manufacture aeroponic and hydroponic growing systems for the hobbyist. These systems are only available in low pressure aeroponics and require individual reservoirs. They also are offered in limited sizes and are not designed for vertical operation. These systems only provide a single mode of operation.

We will be a small competitor in the industry. Many of our competitors have substantially greater financial, marketing, personnel and other resources than we do.

We believe based upon management's knowledge of the industry that we are the first company to develop and offer a fixture based vertical farming platform. Instead of relying on a complete engineered system, we have developed individual fixtures that can be used in whole, or in part, to create a variety of modular vertical farming systems of any scale, or size. By breaking our platform down into individual, independent fixtures, we offer a level of custom ability that currently is not offered by our competitors.

Our fixtures can be used individually, or incorporated into do-it-yourself designed systems that many smaller commercial operators chose to build. This allows us to not only compete for sales to commercial growers who are developing their own systems, but also with growers who are looking for a complete system. We believe this will allow us to increase our market share and allows us to benefit from both commercial and retail sales. When combined with our engineering, procurement and construction management services, we can offer custom, turn-key facilities.

Current Projects

Late in the third quarter of 2015, the Company began offering its products and services to clients in the indoor farming industry.

Equipment Sales

In October 2015, we received a $16,220 equipment package order for a custom designed shallow raft platform for a research project in Michigan. At September 30, 2016, this project was 100% completed.

In November 2015, we received an order for an $89,200 equipment and installation package for our Low Tide VFRack system for a small owner-operator indoor microgreen farm. Installation was completed in December 2015.

In February 2016, we received an equipment order for $3,765. At June 30, 2016, this project was 100% complete.

In March 2016, we received an order for discounted equipment to be used by the Department of Agricultural and Biosystems Engineering department at the University of Arizona. We agreed to provide equipment at cost for this project with a total of $18,627 invoiced. At September 30, 2016, this project was 100% completed.

On April 5, 2016, we received a $27,600 equipment package order for a custom designed flood and drain and nutrient film technology platform for UB Farms in Poland. As of June 30, 2016, this project was 100% complete.

Design-Build, EPCM Agreements

On March 8, 2016, we entered a design-build, EPCM contract with OD Farms for a 7,000 sq. ft. cannabis production facility in Alaska. The contract includes an EPCM agreement for HVAC, LED lighting and facility controls. On April 21, 2016, we completed initial design work and provided the client with a ROM estimate of $2,009,308 for HVAC, LED lighting, facility controls and equipment schedule. As of September 30, 2016, the Company had closed this project and recorded $35,000 in other revenue for design services and removed the project from current projects pending further instructions from the client.

On July 6, 2016, we entered into Phase Two of our Cannabis Production Pilot Agreement with Canopy Growth Corporation and signed a design-build, EPCM, cost plus contract with Tweed, a subsidiary of Canopy Growth, to construct a High Pressure Aeroponic (“HPA”) production system to include facility integration and controls for the purpose of an economic pilot. The production system will include 13 HPA units and a Nutrient Dispensing System (pump skid). Additional costs for mechanical, electrical, plumbing and controls will be invoiced prior to hardware shipment and onsite installation under a cost-plus agreement. The Company has received $100,796 in purchase orders as of March 31, 2017. This project is expected to be completed in late April 2017.

On July 13, 2016, we entered into a design-build, EPCM, maximum guaranteed price agreement, for a 40,000 sq. ft. vertical farm project in Johnstown Ontario with IGES Canada ltd., the project includes 676 Low Tide VFRack platforms, integrated LED lighting, facilities mechanical, electrical and plumbing, construction management and equipment start-up and commissioning. Total contract maximum guaranteed price is $11,374,500 with 5% of the total, $568,725 due upon the start of design work. Originally contracted to begin on September 23, 2016, the project start date has been delayed by the client for administrative reasons as they close additional funding to expand their farm deployment plans for 2017.

On July 27, 2016, we entered into a design-build, EPCM, cost plus agreement, with TexAg Ventures, LLC, to provide full design and engineering, system prototyping and system testing of a custom vertical farming platform. An initial deposit of $35,000 is required to begin prototyping. Design and engineering services were to be provided free and remaining project costs will be deemed construction coordination services and billed at cost plus. As of September 30, 2016, 100% of the design work had been completed and we are awaiting further instructions from the client to begin prototyping. There is no assurance that we will begin prototyping or that the Company will receive revenue from this project.

Manufacturing

We will source our products and accessories from third party manufacturing companies that manufacture products in part using tooling we own, in accordance with our specifications, and subject to our patent pending intellectual property rights.

We currently own tooling to produce HDPE aeroponic trays in 48"X96"X12" and 48"X96"X24" sizes through a process known as rotational molding and thermoforming. We also own tooling to produce thermoformed molds in 24"X48" for ABS plastic. We currently outsource our rotational molding to Freeman Engineered Products and thermoforming to Robinson Industries. We are currently capable of manufacturing our VFRack framing systems in-house, though we may choose to sub contract to third parties depending on project location and number of fixtures purchased. We currently have no agreements with third parties to manufacture our products. We can produce up to 800 frames per month currently in -house.

All our products and fixtures are made using very common fabrication and manufacturing methods. We have access to numerous companies around the world that offer metal fabrication, powder coating and plastic thermoforming and rotational molding. We contract and source from companies based on geographic location and volume ability. We can transport our tooling from one manufacturer to another and in some cases, we contract to have new tooling built depending on the volume of a client's order. Because we use common manufacturing methods and because our products are designed with these common manufacturing methods in mind, we can meet any scale or project size. Any volume limits or lead times based on available manufacturing is discussed with the client during the design phase and pricing phase. The capacity limits are those of our suppliers and manufacturers, not of ours. So, if we have more orders than these suppliers and manufacturers can supply parts and/or complete third party manufacturing in any month, we will advise our client of a delay in the delivery time. 

Pending the consummation of the proposed combination with Alamo CBD, the Company would maintain exclusive right to manufacture and sell all products and services related to cannabis and the spin-off group, The Harvest Group, would maintain exclusive right to manufacture and sell all products and services related to produce and all cultivars except cannabis.

Intellectual Property

We rely on a combination of patent law, trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights, which are primarily our brand names, product designs and marks.

On December 6, 2011, a U.S. federal trademark registration was filed for Indoor Harvest (Serial Number 85488194) and the United States Patent and Trademark Office ("USPTO") granted a first 6-month extension for use on January 5, 2013 and were granted a fifth extension for use on January 8, 2015. On August 18, 2015, we registered Indoor Harvest as a trademark for use.

On May 15, 2013, the Company filed a provisional application for patent on a "modular aeroponic system and related methods" (Serial Number 61/823,330) with the USPTO. The inventor was recorded as Chad Sykes, our CEO and sole Founder and Indoor Harvest Corp was named as the assignee. To obtain our patent, the Company will need to convert its provisional application for patent, into a non-provisional application for patent. On May 15, 2014, the Company converted its provisional patent into a non-provisional patent and recorded an expense of $1,730.

On September 22, 2015, we received our first office action from the USPTO. We responded to comments on our patent application and received a second office action on February 1, 2017 and are preparing our response. We do not currently have a patent, the USPTO will conduct a further review of our patent application and provide us with comments. We must satisfy all comments before the USPTO will grant us a patent. There is no guarantee that a patent will be granted. While our patent application is under review, we may use the term "patent pending" on all published materials regarding our process applied for patent.

It is anticipated that we will retain all rights to this IP but it will be licensed to The Harvest Group as part of the spin-off transaction.

Governmental Regulation and Certification

We are not aware of any governmental regulations or approvals for any of our products or services.

As the possession and use of cannabis is illegal under the Federal Controlled Substances Act, we could be deemed to be aiding and abetting illegal activities through the equipment we intend to sell in the U.S. if such equipment is used by customers who intend to purchase and use our aeroponic and vertical farm framing systems to grow cannabis. Under Federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal. Our equipment could be used by persons or entities engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, could seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another's criminal activities. The Federal aiding and abetting statute provides that anyone who "commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal." 18 U.S.C. §2(a). However, we do not believe that the Company's current and intended business as described in this report violates federal law and believe we would prevail if any such action were brought against us.

Additional Information

We are a public company and file annual, quarterly and special reports and other information with the SEC. We are not required to, and do not intend to, deliver an annual report to security holders. You may read and copy any document we file at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference room. Our filings are also available, at no charge, to the public at http://www.sec.gov.

Item 2. Description of Property

On February 20, 2014, we entered into a 62-month lease with Daniel R. Davis, commencing on March 1, 2014 through April 30, 2019, for a total of 10,000 sq ft. of warehouse and office space located at 5300A East Freeway, Houston, Texas 77020. 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.

Item 3. Legal Proceedings

We are not a party to any material legal proceedings nor are we aware of any circumstance that may reasonably lead any third party to initiate material legal proceedings against us.

Item 4. Mine Safety Disclosures

None

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 

Trading History

Our common stock has an Over-The-Counter Market symbol of "INQD" and currently trades on the OTCQB. The following table sets forth, for the quarters indicated, the high and low closing sales prices per share for the Company's common stock as reported on the OTCQB. The Company began trading on the OTCQB on February 27, 2015.

On March 31, 2017, the closing bid price on the OTC Markets Group, Inc.’s OTCQB tier for our Common Stock was $0.40.

Dividends

We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of the Board of Directors and will be dependent upon then existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that the Board of Directors considers relevant.

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Texas Statutes, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:

Recent Sales of Unregistered Securities

On January 17, 2016, the Company issued 20,820 shares of Common Stock related to a Director Agreement with John Zimmerman, of common stock with a fair value of $9,369 ($0.45/share) based upon the most recent trading price per share of the Company's stock.

On January 19, 2016, we 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 a fair value of $120,000 ($0.40/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 an S-1 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 weighted average price for any trading day during the valuation period, which is the five days from the Put Notice to the Put Date. The Registration Statement has now been withdrawn.

On January 22, 2016, we 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/share) based upon the most recent trading price per share of the Company's stock.

On February 29, 2016, we issued 41,640 shares of Common Stock related to a Director Agreement with John Choo and William Jamieson. The Company recorded fair value of $14,574 ($0.35/share) based upon the most recent trading price per share of the Company's stock.

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

On March 25, 2016, we issued 5,000 shares to a consultant for services rendered, of common stock with a fair value of $1,800 ($0.36/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/share).

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 April 14, 2016, we issued 100,000 shares of Common Stock related to an Executive Employment Agreement with John Zimmerman. The Company recorded fair value of $66,000 ($0.66/share) based upon the most recent trading price per share of the Company's stock.

On April 18, 2016, we issued 20,820 shares of Common Stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $14,782 ($0.71/share) based upon the most recent trading price per share of the Company's stock.

On May 9, 2016, we issued 83,280 shares of Common Stock related to an agreement with a previous Director, William Jamieson. The Company recorded fair value of $54,132 ($0.65/share) based upon the most recent trading price per share of the Company's stock.

On June 29, 2016, we issued 125,000 shares of Common Stock to the Company's legal counsel as part of legal fees having a fair value of $68,738 ($0.55/share) based upon the recent trading price per share of the Company's common stock.

On July 11, 2016, we issued 50,403 shares of Common Stock to a consultant for services rendered having a fair value of $25,000 ($0.496044/share) based upon the three-day average price prior to the issuance date of the Company's stock.

On July 19, 2016, we issued 20,820 shares of Common Stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $14,366 ($0.6946/share) based upon the most recent trading price per share of the Company's stock.

On August 9, 2016, we issued 20,820 shares of Common Stock related to a Director Agreement with Paul Hardej. The Company recorded fair value of $13,512 ($0.64950/share) based upon the most recent trading price per share of the Company's stock.

On August 11, 2016, we issued 48,704 shares of Common Stock to a consultant for services rendered having a fair value of $25,000 ($0.513355/share) based upon the three-day average price prior to the issuance date of the Company's stock.

On August 31, 2016, we issued 20,820 shares of Common Stock related to a Director Agreement with John Choo. The Company recorded fair value of $12,287 ($0.590246/share) based upon the most recent trading price per share of the Company's stock.

September 11, 2016, we issued 62,846 shares of Common Stock to a consultant for services rendered having a fair value of $25,000 ($0.3978/share) based upon the three-day average price prior to the issuance date of the Company's stock.

During the nine months ended September 30, 2016, the Company converted debt and accrued interest, totaling $103,351 into 1,303,341 shares of common stock.

During the month of October 2017, the Company converted debt and accrued interest, totaling $100,000 into 1,278,220 shares of common stock.

October 11, 2016, the Company issued 89,928 shares of Common Stock to a consultant for services rendered having a fair value of $19,784 ($0.22/share) based upon the most recent trading price per share of the Company's stock.

October 17, 2016, the Company issued 9,800 shares of Common Stock to a consultant for services rendered having a fair value of $2,940 ($0.30/share) based upon the most recent trading price per share of the Company's stock.

October 19, 2016 the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund, LLC, relating to the issuance and sale of a note of $137,500 in aggregate principal amount including $125,000 actual payment of purchase price, plus a 10% original issue discount.

October 20, 2016, we issued 20,820 shares of Common Stock related to a Director Agreement with John Zimmerman. The Company recorded fair value of $11,035 ($0.53/share) based upon the most recent trading price per share of the Company's stock.

November 11, 2016, the Company issued 41,118 shares of Common Stock to a consultant for services rendered having a fair value of $22,615 ($0.55/share) based upon the most recent trading price per share of the Company's stock.

December 11, 2016, the Company issued 58,411 shares of Common Stock to a consultant for services rendered having a fair value of $24,533 ($0.42/share) based upon the most recent trading price per share of the Company's stock.

December 12, 2016 the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund, LLC, relating to the issuance and sale of a note of $137,500 in aggregate principal amount including $125,000 actual payment of purchase price, plus a 10% original issue discount.

We relied upon Section 4(2) of the Securities Act of 1933, as amended for the above issuances to US citizens or residents. We believed that Section 4(2) of the Securities Act of 1933 was available because:

In connection with the above transactions, although some of the investors may have also been accredited, we provided the following to all investors:

Prospective investors were invited to review at our offices at any reasonable hour, after reasonable advance notice, any materials available to us concerning our business. Prospective Investors were also invited to visit our offices.

Securities Authorized for Issuance under Equity Compensation Plans

On January 21, 2015, we filed a 2015 Stock Incentive Plan (Plan) on Form S-8 with the SEC. Under the Plan, we were authorized to issue up to 980,000 shares of common stock to employees and consultants. As of December 31, 2015 we had discontinued use of our 2015 Stock Incentive Plan.

As of December 31, 2015 we issued 272,600 shares of common stock to 10 individuals who were employees or consultants to the Company. No shares were issued under this plan in fiscal year 2016.

Item 6. Selected Financial Data

Not required.

Item 7. Management's Discussion and Analysis of Financial Condition and Results 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-K. 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 this Form 10-K.

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.

Overview

Indoor Harvest Corp, through its brand name Indoor Harvest®, is a full service, state of the art design-build, engineering, procurement and construction firm for the indoor and vertical farming industry. The company provides production platforms, mechanical systems and complete custom designed build outs for both Controlled Environment Agriculture ("CEA") and Building Integrated Agriculture ("BIA"), tailored to the specific needs of virtually any cultivar.

CEA is the process of manipulating any agricultural technology to allow the farmer an ability to manipulate a crop's environment to desired conditions. Technologies include greenhouse production, hydroponics, aquaculture, aquaponics and aeroponics. Controlled variables may include temperature, lighting, humidity, pH and nutrient analysis.

BIA is the process of locating CEA methods on, or in, mixed use buildings to provide synergy with the buildings infrastructure and the agriculture process. Earliest examples of BIA include the use of hydroponics, aeroponics and aquaponics, where waste heat is captured through the building's existing heating, ventilation and air conditioning system as well as the combined use of solar, rainwater collection and evaporative systems. Current operating examples include such buildings as Eli Zabar's rooftop greenhouse, The Sun Works Center for Environmental Studies, Gotham Greens, Sky Vegetables, Top Sprouts, Cityscape Farms, Dongtan, Masdar City, AeroFarms, Solar 2, Lufa Farms, BrightFarms, FarmedHere, Green Sense Farms, Green Spirit Farms and Big Box Farms. The term building-integrated agriculture was coined by Dr. Ted Caplow in a paper delivered at the 2007 Passive and Low Energy Cooling Conference in Crete, Greece.

We currently offer a vertical farm racking system with integrated LED lighting. Our vertical farm racking system was designed to be used for both aeroponic and hydroponic layered crop production within a CEA or BIA operation. Our racking system will work with any standard 48" X 96" or 24" X 48" third party flood table or aeroponic system. We also offer patent pending aeroponic fixtures that are compatible with our vertical farm racking system. We offer our vertical farm racking system and aeroponic fixtures for use by both horticulture enthusiasts and commercial operators who seek to utilize vertical farming methods within a controlled indoor environment.

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.

The Company generates revenue from vertical farm rack system sales, aeroponic fixture sales and design build construction management services. Our products are designed to produce aeroponic and hydroponic leafy greens, micro-greens, fruiting plants and herbs. Our fixtures and systems can also be adapted for a variety of other uses such as horticulture research, medicinal plant production, pharmaceutical plant production, plant cloning and hardwood propagation.

In addition to these products, the Company also generates revenue from engineering, procurement and construction management services. Engineering, procurement, and construction management" (EPCM) is a common form of contracting arrangement for very large infrastructure and facility projects. Under an EPCM arrangement, the client would engage the Company to coordinate all design, procurement and construction work to ensure that the whole project is completed as required.

We are currently a party to a pending combination with Alamo CBD which will alter our current business plan as follows:

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. Because of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

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

Current Projects

Late in the third quarter of 2015, the Company began offering its products and services to clients in the indoor farming industry.

Equipment Sales

In October 2015, we received an $8,110 deposit towards a $16,220 equipment package for a custom designed shallow raft platform for a research project in Michigan. At September 30, 2016, this project was 100% completed.

In November 2015, we received an order for an $89,200 equipment and installation package for our Low Tide VFRack system for a small owner-operator indoor microgreen farm. Installation was completed in December 2015.

In March 2016, we received an order for discounted equipment to be used by the Department of Agricultural and Biosystems Engineering department at the University of Arizona. We agreed to provide equipment at cost for this project with $13,637 invoiced to date. At September 30, 2016, this project was 100% completed.

On April 5, 2016, we received a $27,600 equipment package order for a custom designed flood and drain and nutrient film technology platform for UB Farms in Poland. As of June 30, 2016, this project was 100% complete.

Design-Build, EPCM Agreements

On March 8, 2016, we entered into a design-build, EPCM contract with OD Farms for a 7,000 sq. ft. cannabis production facility in Alaska. The contract includes an EPCM agreement for HVAC, LED lighting and facility controls. On April 21, 2016, we completed initial design work and provided the client with a ROM estimate of $2,009,308 for HVAC, LED lighting, facility controls and equipment schedule. As of September 30, 2016, the Company had closed this project and recorded $35,000 in other revenue for design services and removed the project from current projects pending further instructions from the client.

On July 6, 2016, we entered into Phase Two of our Cannabis Production Pilot Agreement with Canopy Growth Corporation and signed a design-build, EPCM, cost plus contract with Tweed, a subsidiary of Canopy Growth, to construct a High Pressure Aeroponic (“HPA”) production system to include facility integration and controls for an economic pilot. The production system will include 13 HPA units and a Nutrient Dispensing System (pump skid). Additional costs for mechanical, electrical, plumbing and controls will be invoiced prior to hardware shipment and onsite installation under a cost-plus agreement. The Company has received $100,796 in purchase orders under this agreement as of December 31, 2016. This project is expected to be completed in late April 2017.

On July 13, 2016, we entered into a design-build, EPCM, maximum guaranteed price agreement, for a 40,000 sq. ft. vertical farm project in Johnstown Ontario with IGES Canada ltd., the project includes 676 Low Tide VFRack platforms, integrated LED lighting, facilities mechanical, electrical and plumbing, construction management and equipment start-up and commissioning. Total contract maximum guaranteed price is $11,374,500 with 5% of the total, $568,725 due upon the start of design work. Originally contracted to begin on September 23, 2016, the project start date has been delayed by the client for administrative reasons as they close additional funding to expand their farm deployment plans for 2017.

On July 27, 2016, we entered into a design-build, EPCM, cost plus agreement, with TexAg Ventures, LLC, to provide full design and engineering, system prototyping and system testing of a custom vertical farming platform. An initial deposit of $35,000 is required to begin prototyping. Design and engineering services were to be provided free and remaining project costs will be deemed construction coordination services and billed at cost plus. As of September 30, 2016, 100% of the design work had been completed and we are awaiting further instructions from the client to begin prototyping. There is no assurance that we will begin prototyping or that the Company will receive revenue from this project.

Our current projects involve both Equipment Sales and Design-Build/Engineering, Procurement and Construction Projects, with the status of each as of December 31, 2016 as set forth below.

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Current EPCM Sales Pipeline

Our current sales pipeline consists of 6 facility build discussions with 4 in early to mid-stage discussions and 2 in late stage negotiations. The Company removed 3 projects as of December 31, 2016 due to lack of activity by the client or incomplete financing for the project. The company is pursuing final agreements applicable for the stage of development the client is in. There is no guarantee of success regarding these agreements or that applicable project revenue will be fully recognized until the agreements and final budget negotiations are complete.

Below is a table showing the Company's current sales pipeline status update as of December 31, 2016:

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Results of Operations

For the fiscal year ended December 31, 2016 we generated revenue of $163,996 with cost of sales of $111,581 resulting in gross income of $52,415 and gross margin of 32%. For the fiscal year ended December 31, 2015 we generated revenue of $89,200 with cost of sales of $64,668 resulting in gross income of $24,532 and gross margin of 28%. This represents an 84% increase in revenue year over year and an increase of 4% in gross margin year over year.

For the fiscal year ended December 31, 2016 and December 31, 2015, we incurred $1,305,472 and $1,279,597, respectively, in operating expenses. This represents a 2% increase year over year. The increase in our operating expenses are due to increases in costs related to additional payroll costs, building lease, increased operational activities and professional expenses related to being a publicly traded Company.

Our expenses related to research and development for the fiscal year ended December 31, 2016 and December 31, 2015 were $16,184 and $20,518, respectively, representing a 21% decline year over year. The decrease in research and development expenses was due to decreased costs associated with our collaborative R&D partnerships, in which we share some costs associated with R&D with our partners.

As of December 31, 2016, we had total liabilities of $450,908, while at December 31, 2015, we had total liabilities of $110,147, representing a 309% increase year over year. The increase was the result of accrued payroll expenses from hiring new employees, accounts payable and accrued expenses, billings in excess of costs and estimated earnings, and deferred rent on our building lease.

Deferred rent payable at December 31, 2016 was $8,513. Deferred rent payable is the sum of the difference between the monthly rent payment and the straight-line monthly rent expense of an operating lease that contains escalated payments in future periods.

Liquidity and Capital Resources

As of December 31, 2016, we had $122,755 in total current assets. We had current liabilities of $423,776 as of December 31, 2016. Accordingly, we had a working capital deficit of $301,021 as of December 31, 2016.

Operating activities used $662,170 in cash for the year ended December 31, 2016, as compared with $704,230 used for the year ended December 31, 2015, representing a 21% decline year over year. Our reduction in cash sued in operating activities was due to increased revenue generated year over year. Our negative operating cash flow for the year ended December 31, 2016, was mainly a result of our net loss for the period, offset by the effects of depreciation, loss on the sale of the asset, stock issued for services, increase in accounts receivable, inventory and prepaid expense, the increase in accounts payable and accrued liabilities and decrease in costs and estimated earnings in excess of billings for the ongoing projects, decrease in accrued compensation and a decrease in deferred rent.

Investing activities for the year ended December 31, 2016 used $2,294 in cash, as compared with using $60,795 for the year ended December 31, 2015.

Financing activities for the year ended December 31, 2016 generated $641,777 in cash, as compared with $312,699 for the year ended December 31, 2015. Proceeds from financing activities consisted primarily of proceeds from issuance of common stock for cash.

Cash Requirements: Current Operational Activities

Our estimated minimum day-to-day operational costs, exclusive of those costs in our Plan of Potential Future Operations for the next 12 months, as set forth before, are estimated to be approximately $434,112 to maintain current operational activities during the next 12 months. Our minimal annual operating expenses includes $352,000 in payroll expenses, our lease agreement for our 10,000 sq. ft. facility of $58,512 per year, our estimated annual utility expenses of $10,800 and $12,800 in miscellaneous operating expenses. In addition, we will have $125,000 in costs related to maintaining our publicly traded status over the next 12 months.

Cash Requirements: Potential Future Planned Operational Activities

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

The initial term of the Joint Venture shall be five (5) years following the Effective Date, and the Agreement may be extended beyond the Initial Term by mutual consent of the Parties. A total of $5,000,000 will be paid to Vyripharm over the five year period at $1,000,000 annually. The Company has paid an initial $250,000 under the Joint Venture and will be required to make an additional payment of $250,000 by June 30, 2017 and $500,000 by December 31, 2017.

There is no assurance that the Company will have sufficient working capital to maintain payments under the Joint Venture. If a payment is not made, the Company may lose some or all of its rights under the Joint Venture.

Existing Cash and Operational Cash Flow

As of April 5, 2017, we had $139,894 in cash and $3,316 in available credit facilities. We are actively engaged in a number of current projects which are generating cash flow. In addition to the key projects already discussed, our current sales pipeline consists of 6 facility build discussions. However, we have no final agreements concerning these potential future projects and we may not ever secure final agreements.

Kodiak Capital Group LLC Investment Agreement for $2,000,000

On January 30, 2016, the Company entered into an Equity Purchase Agreement (the "Purchase Agreement") and a Registration Rights Agreement (the "Registration Rights Agreement") with Kodiak Capital Group, LLC (the "Purchaser"). On May 12, 2016, the SEC declared our registration statement effective. On June 28, 2016, we requested that the SEC withdraw the registration statement. No shares were issued under the Purchase Agreement. Pursuant to Rule 477(c), the Company advised the Commission that it may, upon consideration of its financing and strategic options under discussion, undertake a subsequent private offering in reliance on Rule 155(c) promulgated under the Securities Act.

FirstFire and Rockwell Bridge Financing for $250,000

On March 22, 2016, the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund, LLC (“FirstFire”), and Rockwell Capital Partners Inc. (“Rockwell”), 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/share). The notes carry 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 matured on September 22, 2016. The Company defaulted on the Notes on September 23, 2016.

On September 27, 2016, the Company paid $203,441 in cash to Rockwell to settle debts owed and issued 2,581,561 shares of common stock at $0.08 per share, pursuant to the terms of the Note, to FirstFire to settle $203,351 in debts owed. This share issuance was treated as a conversion of debt to equity.

Chuck Rifici Holdings Note for $204,000

On September 26, 2016, we entered into a Promissory Note and Warrant Purchase Agreement with Chuck Rifici Holdings, Inc, a Canadian Corporation. The note consisted of $225,500 in aggregate principal amount including $204,000 actual payment of purchase price plus a 10% original issue discount. The Warrant Purchase Agreement consisted of an aggregate total of 250,000 common stock warrants to purchase common stock for $0.30 for a period of 12 months, to the Buyer, in accordance with and in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended and/or Regulation S of the Securities Act of 1933, as amended for the above issuances to non-US citizens or residents.

On March 20, 2017, the Company settled $269,498 in principal and interest, plus 115% multiplied by the Principal Amount of $225,500 plus accrued interest of $8,846 on the Principal Amount of a Promissory note with Chuck Rifici Holdings, Inc originally dated September 26, 2016. 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.

FirstFire October Note for $125,000

On October 19, 2016, the Company entered into a securities purchase agreement with FirstFire relating to the issuance and sale of a promissory note of $137,500 in aggregate principal amount including $125,000 actual payment of purchase price plus a 10% original issue discount.

On March 20, 2017, the Company settled $177,604 in principal and interest, plus 125% multiplied by the Principal Amount of $137,500 plus accrued interest of $4,583 on the Principal Amount of a Promissory note with FirstFire originally dated October 19, 2016. The Company settled the amount owed by paying $77,604 in cash and by issuing 333,333 shares of Common Stock at the fixed conversion price of $0.30 per share for a total value of $100,000. The Company was released from any further liability under the FirstFire Note upon delivery of these amounts of cash and stock.

FirstFire December Note for $125,000

On December 14, 2016, the Company entered into a securities purchase agreement with FirstFire relating to the issuance and sale of a promissory note of $137,500 in aggregate principal amount including $125,000 actual payment of purchase price plus a 10% original issue discount.

On March 20, 2017, the Company settled $175,313 in principal and interest, plus 125% multiplied by the Principal Amount of $137,500 plus accrued interest of $2,750 on the Principal Amount of a Promissory note with FirstFire originally dated December 14, 2016. The Company settled the amount owed by paying $175,313 in cash. The Company was released from any further liability under this FirstFire Note upon payment of this amount.

Rule 506(b) Private Stock Offering

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 17 U.S. accredited investors at $0.40 per share for cash totaling $824,000.

Tangiers 8% Fixed Convertible Promissory Note for $550,000

On March 24, 2017, the Company issued and sold an 8% Fixed Convertible Promissory Note to Tangiers Global, LLC (“Tangiers”), a Wyoming limited liability Company, in the aggregate principal amount of up to $550,000, with an initial consideration of $275,000 in aggregate principal amount including $250,000 actual payment of purchase price plus a 10% original issue discount.

Convertible Note

On the Closing Date, the Company issued a Note in the aggregate $550,000 in face value, which will, by the principal terms:

Bears guaranteed interest at 8% (the “Interest”) on the unpaid principal amount. Any Principal Amount or Interest which is not paid when due shall bear interest at the rate of 18% per annum or the highest rate permitted by law per annum from the due date until the same is paid (the “Default Interest”);

Mature on November 28, 2017 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 Note, the Company shall make payment to the Buyer of an amount in cash equal to the sum of 115% under 90 days, 120% within 91-135 days, 125% within 136-180 days from the effective date, multiplied by the Principal Amount plus accrued and unpaid interest on the Principal Amount to the optional prepayment date plus default interest, if any.

Convert into shares of Common Stock at a price equal to $0.30; provided, however that if the Note is not retired on or before the Maturity Date, the Maturity Default Conversion Price shall be equal to the lower of: (i) the Fixed Conversion Price 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 (as defined in the Note).

Events of Default

Subject to applicable cure periods and delivery of written notice to the Company if applicable, the Notes shall become immediately due and payable upon occurrence of an Event of Default (as defined in the Note) and the conversion price shall be adjusted as set forth in the Notes if applicable.

Meeting Cash Requirements

Based upon the assumption of our monthly current operational burn rate remaining unchanged during the fiscal year, exclusive of those costs in our Additional Planned Operations for the next 12, months as set forth above, the Company currently has sufficient funds through a combination of the Sources of Funding above to continue our current operations for the next 12 months. There is no assurance we will obtain the anticipated funds from our Sources of Funding. If we don't obtain additional funding, and we don't take other measures such as cutting back operational activities, we may not have sufficient funds to continue operations for the next 12 months. As of March 22, 2017, the Company had laid-off two employees and had begun cost cutting measures in anticipation of our potential combination with Alamo CBD, LLC.

The ability to fund our Operational Activities is contingent upon us obtaining additional financing. If we don't obtain the anticipated funds from our Sources of Funding beyond those needed for Current Operational Activities, we may be able to finance our Additional Planned Operations and continue growing our business.

We cannot guarantee we will be successful in our business operations, both current and potential future operations as described above. We cannot guarantee that we will have sufficient financial resources to fund Current Operational Activities and Additional Planned Operational Activities. 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 continue to execute our business plan as described above.

We began offering our products and services during the 3rd Quarter of 2015. We have an accumulated deficit and have incurred operating losses since our inception and expect losses to continue during 2017. 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 8.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 8. Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Indoor Harvest Corp

We have audited the accompanying financial statements of Indoor Harvest Corp, which comprise the balance sheets as of December 31, 2016 and 2015, and the related statements of operations, changes in shareholders' equity (deficit) and cash flows for the years then ended, and the related notes to the financial statements. Indoor Harvest Corp's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Indoor Harvest Corp as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years ended December 31, 2016 and 2015 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that Indoor Harvest Corp will continue as a going concern. As discussed in Note 2 to the financial statements, the Company's significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.

/S/ Thayer O’Neal Company, LLC

Thayer O’Neal Company, LLC

Sugar Land, TX

April 17, 2017

INDOOR HARVEST CORP

BALANCE SHEETS

December 31, 2016 and 2015

The Accompanying Notes are an Integral Part of these Financial Statements

INDOOR HARVEST CORP

STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2016 and 2015

The Accompanying Notes are an Integral Part of these Financial Statements

INDOOR HARVEST CORP

STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

For the Years Ended December 31, 2016 and 2015

The Accompanying Notes are an Integral Part of these Financial Statements

INDOOR HARVEST CORP

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2016 and 2015

The Accompanying Notes are an Integral Part of these Financial Statements

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 aeroponics fixtures and supporting systems for use in urban Controlled Environment Agriculture ("CEA") and Building Integrated Agriculture ("BIA").

Indoor Harvest Corp is a Design-Build contractor for the vertical farming and indoor farming industry. The Company’s principal lines of business are engineering, procurement and construction services as well as manufactures a variety of indoor farming fixtures and equipment. The Company provides its products and services worldwide for controlled environment and building integrated agricultural operators.

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).

Use of Estimates

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

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

Cash and Cash Equivalents

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

Accounts Receivable and Work in Progress

Work in process consists of costs recorded and revenue earned on projects recognized on the percentage of completion method for work performed on contracts in progress at December 31, 2016 and December 31, 2015. The company records revenue based on contractual agreements entered into at the inception of construction contracts. Amounts are payable from customers based on milestones established in each contract. Amounts are billed at milestone completion and are reflected as accounts receivable when billed. Costs and estimated earnings are accumulated on projects in process and compared to amounts billed based on the percentage of completion method of accounting (cost to cost). Costs incurred in excess of amounts billed and related profit recognized are reflected as an asset in the balance sheet as costs and estimated earnings in excess of billings. Unearning billings are reflected in the balance sheet as a liability as billings in excess of costs and estimated earnings on projects in process (See Note 6).

Inventories

Inventory consists primarily of raw materials and packaging materials and is valued at the lower of cost or market. Cost is determined using the weighted average method and average cost is recomputed after each inventory purchase or sale. Inventory is periodically reviewed in order to identify obsolete or damaged inventory and impaired values. Inventory is comprised of raw materials such as steel for our framing systems and packaging materials such as boxes and pallets valued at $2,360 and $7,001 at December 31, 2016 and December 31, 2015, respectively.

NOTES TO FINANCIAL STATEMENTS

Revenue Recognition

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

Revenue from construction contracts are reported under the percentage-of-completion method for financial statement purposes. The estimated revenue for each contract reflected in the financial statements represent that percentage of estimated total revenue that costs incurred to date bear to estimated total costs, based on the Company’s current estimates. With respect to contracts that extend over one or more accounting periods, revisions in costs and revenue estimates during the course of 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. With the exception of 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 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).

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.

The Company has the following common stock equivalents for the years ended December 31, 2016 and 2015, respectively:

NOTES TO FINANCIAL STATEMENTS

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:

No assets, liabilities or equity instruments were presented at fair value as of December 31, 2015, and as of December 31, 2016, the only liabilities presented at fair value were notes payable of $209,786 and convertible notes payable of $122,383 which have been discounted for embedded derivatives using the binomial lattice model and as such are treated as level II in the hierarchy of fair value measures.

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 2016, 2015, 2014, 2013, 2012 and 2011, remain subject to examination by the IRS and respective states.

NOTES TO FINANCIAL STATEMENTS

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.

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"). It also includes software and is amortized over a 3-5 year period.

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 years ended December 31, 2016 and 2015.

Patent and Patent Application Expenses

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

Research and Development

Research and development expenditures are charged to expense as incurred. Research and development expense for the years ended December 31, 2016 and 2015 were:

Advertising Expense

Advertising and promotional costs are expensed as incurred. Advertising expense for the years ended December 31, 2016 and 2015, were:

NOTES TO FINANCIAL STATEMENTS

Reclassifications

Certain expense items have been reclassified in the statement of operations for the year ended December 31, 2015, to conform to the reporting format adopted for the year ended December 31, 2016.

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 will significantly impact future reporting of financial positon 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.

NOTES TO FINANCIAL STATEMENTS

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, 2016 and December 31, 2015, the Company did not have any derivative instruments that were designated as hedges.

Beneficial Conversion Feature

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

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

NOTE 2 - GOING CONCERN

As reflected in the accompanying financial statements, the Company had a net loss of $2,075,000, net cash used in operations of $662,170 and has an accumulated deficit of $3,996,772, for the year ended December 31, 2016. 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.

NOTES TO FINANCIAL STATEMENTS

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 2016 and December 31, 2015:

Depreciation expense for the years ended December 31, 2016 and 2015, totaled $51,484 and $46,444, respectively.

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. During the year ended December 31, 2015, the Company sold $19,300 of other assets in exchange for $9,300 and recorded a loss on the sale of equipment of $10,050. The remaining balance of Other Assets as of December 31, 2016 is $0.

NOTE 4 – COMMITMENTS & CONTINGENCIES

A Cannabis Production Pilot Agreement ("Agreement") was entered into as of the 18th day of December 2014 by and between Indoor Harvest Corp. ("Indoor Harvest"), a Texas Corporation, and Tweed Marijuana Inc. ("Tweed"), a Canadian company.

Tweed Marijuana Inc. is a TSX Venture Exchange listed company. Its wholly owned subsidiaries Tweed Inc. and Tweed Farms Inc. (formerly Prime1 Construction Services Corp.) are licensed producers of medical cannabis in Canada. The principal activities of Tweed are the production and sale of cannabis through its wholly owned subsidiaries out of Tweed Inc.'s facility in Smiths Falls, Ontario and Tweed Farms Inc.'s facility in Niagara-on-the-Lake, Ontario as regulated by the Marihuana for Medical Purposes Regulations.

Indoor Harvest will be provided exclusive manufacturing rights for a period of 10 years on the New IP developed under the Agreement. All equipment manufactured by Indoor Harvest will be provided to Tweed by way of a "cost plus agreement" not to exceed 15% allowable for profit.

Both parties are responsible for the costs associated with meeting their obligations outlined in this Agreement. Under no circumstance, do Tweed's costs exceed those associated with the cost of plants, labor and general costs of production including water and electricity. However, any costs related to third party laboratory analysis and testing of phytocannabinoids will be shared equally by both parties.

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, 2016 was $8,513. 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.

NOTES TO FINANCIAL STATEMENTS

Rent expense for the years ended December 31, 2016 and 2015, were:

At December 31, 2016, rental commitments are as follows:

NOTE 5 - 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, 2016 the Company repaid $6,130 of the principal and the remaining balance is $27,132.

NOTE 6 - CONCENTRATIONS

At December 31, 2016 and December 31, 2015, the Company had concentrations of accounts receivable of:

For the years ended December 31, 2016 and December 31, 2015, the Company had a concentration of sales of:

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

For the year ended December 31, 2015, the Company had a purchasing concentration of $44,970 with Illumitex, a manufacturer of LED lighting totaling 71%.

NOTES TO FINANCIAL STATEMENTS

NOTE 7 - WORK IN PROCESS

Work in progress as of December 31, 2016 and December 31, 2015, consisted of the following:

NOTE 8 - DEBT AND CONVERTIBLE LOAN PAYABLE

Convertible Note Payable

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/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 Note, 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 Note). For the year ended December 31, 2016, the Company received $272,500 proceeds less the $20,000 in debt issue costs and $22,501 in original issuance discount fee pursuant to the terms of this convertible note. For convertible debt, the convertible feature indicated a rate of conversion that was not below market value. As a result, the Company will record a BCF and related debt discount.

On September 22, 2016 the Company identified the embedded derivatives related to the FirstFire Global Opportunities note. Due to the default provisions, the principal was increased by 125% and interest to 15% per annum. During the year ended December 31, 2016, the Company converted debt and accrued interest, totaling $203,351 into 2,581,561 shares of common stock. The remaining outstanding principal balance as of December 31, 2016 is $0.

On September 22, 2016 the Company entered into a default provision with Rockwell Capital Partners, Inc. Due to the default provisions, the principal was increased by 125% and interest to 15% per annum. During the year ended December 31, 2016, the Company repaid debt and accrued interest, totaling $203,441. As of December 31, 2016, the loan is fully repaid.

NOTES TO FINANCIAL STATEMENTS

On September 26, 2016 the Company entered into a promissory note with Chuck Rifici Holdings, Inc., relating to the issuance of $225,500 in aggregate principal amount including $204,000 actual payment of purchase price plus a 10% original issue discount. In conjunction with the issuance of the Note, the company also issued one year warrants to purchase 250,000 shares of common stock at an exercise price of $0.30 per share, the warrants were fair valued at $12,612 based upon the fair value of the proceeds received and allocated as debt discount to the total proceeds. During the year ended the Company amortized $18,398 of debt discount related to the warrants (See Note 8). The note bears an interest on the unpaid principal amount at the rate of 8% per annum. The note mature on March 23, 2017 and may be prepaid in whole or in part at any time prior to the due date. If the Company exercises its right to prepay or repay the Note, the Company shall make payment to the note holders of an amount in cash equal to the sum of 115% multiplied by the Principal Amount plus accrued and unpaid interest on the Principal Amount to the Optional Prepayment Date plus Default Interest, if any. In the event of the default the note is convertible into shares of Common Stock. The conversion price equals to 65% multiplied by the lowest sales price of the common stock during the ten consecutive trading days period immediately preceding the trading day that the Company receives a notice of conversion.

On October 19, 2016 and December 12, 2016 the Company entered into a securities purchase agreements with FirstFire Global Opportunities Fund, LLC, and Rockwell Capital Partners Inc, relating to the issuance and sale of notes of $275,000 in aggregate principal amount including $240,000 actual payment of purchase price plus a 10% original issue discount,.

The notes carry an interest on the unpaid principal amount at the rate of 8% per annum. Any Principal Amount or Interest which is not paid when due shall bear interest at the rate of 15% per annum from the due date until the same is paid. The October 19, 2016 note matures on April 19, 2017 and the December 12, 2016 note matures on June 12, 2017 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 Note, 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) 55% 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 Note). For the year ended December 31, 2016, the Company received $240,000 proceeds less the $10,000 in debt issue costs and $25,000 in original issuance discount fee pursuant to the terms of this convertible note. For convertible debt, the convertible feature indicated a rate of conversion that was not below market value. As a result, the Company will record a BCF and related debt discount.

For the year ended December 31, 2016, the Company accrued $10,334 in accrued interest related to outstanding the notes.

Debt Discount and Original Issuance Costs

During the year end December 31, 2016 and 2015, the Company recorded debt discounts totaling $451,946 and $0, 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 2016 and 2015, 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.

NOTES TO FINANCIAL STATEMENTS

The Company amortized $283,615 and $0 to interest expense during the years ended December 31, 2016 and 2015, as follows:

Debt Issuance Costs

During the year ended December 31, 2016, the Company paid debt issue costs totaling $20,000. During the years ended December 31, 2016 and 2015, the Company amortized $20,000 and $0 of debt issue costs, respectively. The following is a summary of the Company’s debt issue costs for the years ended December 31, 2016 and 2015:

NOTE 9 - 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 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, 2016 of $66,980.

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:

NOTES TO FINANCIAL STATEMENTS

NOTE 10 - RELATED PARTY TRANSACTIONS