Indoor Harvest Corp - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2018

For the transition period from ___________ to ___________

Commission File Number:

INDOOR HARVEST CORP

(Exact name of registrant as specified in its charter)

Indoor Harvest Corp

5300 East Freeway Suite A

Houston, Texas 77020

(Address of principal executive offices)

(346) 310-3427

(Registrant’s telephone number, including area code)

(832) 649-3998

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

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and 2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

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

As of May 15, 2018,  there were 24,987,471 shares issued and outstanding of the registrant’s common stock.

INDOOR HARVEST CORP

FORM 10-Q

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

Except for any historical information contained herein, the matters discussed in this quarterly report on Form 10-Q contain certain “forward-looking statements’’ within the meaning of the federal securities laws. This includes statements regarding our future financial position, economic performance, results of operations, business strategy, budgets, projected costs, plans and objectives of management for future operations, and the information referred to under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

These forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may,’’ “will,’’ “expect,’’ “intend,’’ “estimate,’’ “anticipate,’’ “believe,’’ “continue’’ or similar terminology, although not all forward-looking statements contain these words. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements. Important factors that may cause actual results to differ from projections include, for example:

Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made in this quarterly report on Form 10-Q.

When considering these forward-looking statements, you should keep in mind the cautionary statements in this quarterly report on Form 10-Q and in our other filings with the SEC. We cannot assure you that the forward-looking statements in this quarterly report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may prove to be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time-frame, or at all.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

INDOOR HARVEST CORP

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

The Accompanying Notes are an Integral Part of these Financial Statements

INDOOR HARVEST CORP

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

The Accompanying Notes are an Integral Part of these Financial Statements

INDOOR HARVEST CORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT  

(UNAUDITED)

The Accompanying Notes are an Integral Part of these Financial Statements

INDOOR HARVEST CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The Accompanying Notes are an Integral Part of these Financial Statements

INDOOR HARVEST CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Nature of Operations and Organization

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

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

Basis of Presentation

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

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

Use of Estimates

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

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

Principles of Consolidation

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

Cash and Cash Equivalents

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

Accounts Receivable and Work in Progress

Work in progress consists of costs recorded and revenue earned on projects recognized on the percentage of completion method for work performed on contracts in progress at March 31, 2018 and December 31, 2017. The Company records revenue based on contractual agreements entered into at the inception of construction contracts. Amounts are payable from customers based on milestones established in each contract. Amounts are billed at milestone completion and are reflected as accounts receivable when billed. Costs and estimated earnings are accumulated on projects in process and compared to amounts billed based on the percentage of completion method of accounting (cost to cost). Costs incurred in excess of amounts billed and related profit recognized are reflected as an asset on the balance sheet as costs and estimated earnings in excess of billings. Unearned billings are reflected in the balance sheet as a liability as billings in excess of costs and estimated earnings on projects in process.

Stock Based Compensation

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

Loss per Share

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

Fair Value of Financial Instruments

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

Income Taxes

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

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

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

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

Property and Equipment

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

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

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

Goodwill 

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

Intangible Assets

In accordance with ASC 350 Goodwill and Other Intangible Assets, indefinite-lived intangible assets are not amortized but are evaluated for impairment annually or more often if indicators of a potential impairment are present. Indefinite-lived intangible assets consist of the Company’s domain name. Finite-lived intangible assets include software and is amortized over a 3 to 5-year period.

Patent and Patent Application Expenses

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

Research and Development

Research and development expenditures are charged to expense as incurred. Research and development expense for the three months ended March 31, 2018 and 2017 are as follows:

Advertising Expense

Advertising and promotional costs are expensed as incurred. Advertising expense for the three months ended March 31, 2018 and 2017 are as follows:

Recent Accounting Pronouncements

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

The FASB has issued 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.

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 March 31, 2018 and December 31, 2017, 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.

Reclassification

Certain expense items have been reclassified in the statement of operations for the three months ended March 31, 2017, to conform to the reporting format adopted for the three months ended March 31, 2018.

NOTE 2 - GOING CONCERN

As reflected in the accompanying financial statements, the Company had a net loss of $127,216, net cash used in operations of $185,663 and has an accumulated deficit of $8,536,038, for the three months ended March 31, 2018. 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.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

Depreciation expense for the three months ended March 31, 2018, totaled $2,609.

NOTE 4 – INTANGIBLE ASSETS

There were no impairment charges taken for the domain name during the three months ended March 31, 2018 and 2017.

Intangible assets consist of the following as of March 31, 2018 and December 31, 2017:

NOTE 5 - COMMITMENTS & CONTINGENCIES

On February 20, 2014, the Company signed a 60-month lease on a 10,000 sq. ft. office/warehouse facility and paid a deposit of $12,600. The monthly base rent is $4,200 increasing 6% every two years for the term of the lease. The property is adequate for all of the Company’s currently planned activities. On January 22, 2018, the Company entered into a 6-month sublease agreement for a portion of the 10,000 sq. ft. office/warehouse facility. The term of the sublease is February 1, 2018 through July 31, 2018 at $2,000 per month. The Company records the sublease income as a reduction of rent expense in the Consolidated Statements of Operations within general and administrative expenses.

Deferred rent payable at March 31, 2018 was $5,667. Deferred rent payable is the sum of the difference between the monthly rent payment and the straight-line monthly rent expense of an operating lease that contains escalated payments in future periods.

Rent expense, net of sublease payments received, for the three months ended March 31, 2018 and 2017 were as follows: 

NOTE 6 - FAIR VALUE MEASUREMENTS

Carrying amounts reported on the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to their relatively short maturity. Debt classified as Level 2 in the fair value hierarchy represent convertible notes payable of $778,725 and $122,383 at March 31, 2018 and December 31, 2017, respectively. Financial instruments classified as Level 3 in the fair value hierarchy represents derivative liability of $25,006 and $554,916 March 31, 2018 and December 31, 2017, respectively.

NOTE 7 - NOTE PAYABLE

On June 5, 2015, the Company entered into a five-year loan agreement totaling $36,100. The loan carries interest at a rate of 10.25%.

NOTE 8 - DEBT AND CONVERTIBLE LOAN PAYABLE

Convertible Note Payable

On March 24, 2017, the Company entered into a securities purchase agreement with Tangiers Global, LLC (“Tangiers”) relating to the issuance and sale of notes (“Note 1”) in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. Note 1 is convertible into shares of common stock at a price equal to $0.30 per share; provided, however that if Note 1 is not retired on or before the maturity date, defined in Note 1 as a “Maturity Default” the conversion price shall be adjusted to be equal to the lower of: (i) $.30 or (ii) 65% multiplied by the lowest trading price of the Company’s common stock in the fifteen (15) consecutive trading day period immediately preceding the date that the Company receives a notice of conversion. The Tangiers Note 1 carries interest on the unpaid principal amount at the rate of 8% per annum and is due and payable eight months from the effective date of each payment. As of March 31, 2018, the balance under Note 1 is $369,000, which includes $44,000 guaranteed interest. As of March 31, 2018, Note 1 can be converted into 1,768,738 shares of the Company’s common stock.

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

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

On October 10, 2017, the Company executed Amendment #1 to the Tangiers Note 1 for a final draw of $250,000 payment plus a 10% original issue discount (“Note 2”). Amendment #1 modified the maturity date for the Tangier Note from eight months to six months from the effective date of each payment. All other terms and conditions of the Tangiers Note 1 remain effective.

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

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

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

On January 9, 2018, the Company issued 899,685 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of $100,000 of Note 1 at a conversion price of $0.11.

On January 16, 2018, the Company issued and sold an 8% Fixed Convertible Promissory Note (“Note 3”) to Tangiers (the “Buyer”), in the aggregate principal amount of up to $550,000, which includes a 10% original issue discount. Note 3 is convertible into shares of the Company’s common stock at a conversion price of $0.30 per share. However, if Note 3 is not paid back on or before the maturity date, defined in Note 3 as a “Maturity Default”, the conversion price of Note 3 shall then be adjusted to be equal to the lower of: (i) $0.30 or (ii) 65% multiplied by the lowest trading price of the Company’s common stock in the fifteen (15) consecutive trading day period immediately preceding the trading day that the Company receives a notice of conversion of Note 3. As of March 31, 2018, the balance under Note 3 is $231,660, which includes $17,160 guaranteed interest. As of March 31, 2018, Note 3 can be converted into 650,000 shares of the Company’s common stock. Note 3 Amendment #1 has a maturity date of August 13, 2018.

On March 5, 2018, the Company issued 269,716 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $25,000 of Note 1 at a conversion price of $.09.

On March 21, 2018, the Company issued 295,631 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $25,000 of Note 1 at a conversion price of $.08.

For the three months ended March 31, 2018, the Company accrued $17,160 in guaranteed interest related to the outstanding the notes.

Debt Discount and Original Issuance Costs for Convertible Note

During the three months ended March 31, 2018 and for the year ended December 31, 2017, the Company recorded debt discounts totaling $24,228 and $69,541, 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 2018 and 2017, 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.

During the three months ended March 31, 2018 and for the year ended December 31, 2017, the Company amortized $80,563 and $466,862 to interest expense, respectively.

Debt Issuance Costs for Convertible Note

During the three months ended March 31, 2018 and for the year ended December 31, 2017, the Company did not pay any debt issue costs.

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 following schedule shows the change in fair value of the derivative liabilities for the three months ended March 31, 2018:

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

NOTE 10 - RELATED PARTY TRANSACTIONS

On January 15, 2018 Ms. Sandra Fowler, was appointed as the Chief Marketing Officer of the Company. Pursuant to the terms of the Fowler Employment Agreement, Ms. Fowler shall serve as Chief Marketing Officer of the Company. The initial term of the agreement will expire on January 15, 2019 and commencing on January 15, 2019 and on each anniversary of such date thereafter, the term of the Fowler Employment Agreement shall automatically renew for a one-year period, unless earlier terminated by either party pursuant to the terms of the Fowler Employment Agreement. In consideration for Ms. Fowler’s services, under the Fowler Employment Agreement, Ms. Fowler shall receive (i) an annual base salary of $48,000 and (ii) 200,000 shares of restricted common stock of the Company. Further, pursuant to the Fowler Employment Agreement, the Company agreed to revise the annual base compensation for Ms. Fowler to $65,000, after 90 days of the execution of the Fowler Employment Agreement, or after the Company raises not less than $1,000,000 from sales of its equity securities subsequent to the execution of the Fowler Employment Agreement, whichever may come first. In addition, Ms. Fowler shall be eligible to participate in any equity-based incentive compensation plan or programs adopted by the Company’s board of directors. 

On February 5, 2018, Dr. Coleman and Benjamin Coleman voluntarily returned and canceled an aggregate of 3,280,470 common shares in order to prevent dilution to the shareholders during the Company’s efforts to secure new senior management, provide additional incentive equity and to form an advisory board. The return of common stock by Dr. Coleman and Benjamin Coleman was a non-cash transaction.

On February 20, 2018, Mr. Daniel Weadock was appointed Chief Executive Officer and Director of the Company. On February 20, 2018, the Company entered into an executive employment agreement with Mr. Weadock (the “Weadock Employment Agreement”), pursuant to which Mr. Weadock agreed to act as the Company’s chief executive officer. Pursuant to the terms of the Weadock Employment Agreement, Mr. Weadock initial will not receive a salary. However, effective on the business day after the date on which the Company achieves Capitalization (as hereinafter defined) of $2,000,000 or more, Mr. Weadock’s annual base salary will be $100,000. For purposes of the Weadock Employment Agreement, “Capitalization” means aggregate net cash proceeds received by the Company from (a) the Company’s sale of common stock pursuant to Puts (as such term is defined in the Investment Agreement dated as of October 12, 2017 by and between the Company and Tangiers Global, LLC (the “Investment Agreement”)) under the Investment Agreement, and/or (b) any other sale by the Company of common stock or preferred stock, whether in a public offering or a private placement. In addition, pursuant to the terms of the Weadock Employment Agreement, the Company agreed to grant Mr. Weadock (i) 300,000 shares of restricted stock as soon as administratively practicable following execution of the Weadock Employment Agreement, and (ii) 1,584,202 shares of restricted common stock, consistent with the grant and vesting schedule set forth in the agreement; provided, however, that no grant will be made and no shares will be issued with respect to any grant if Mr. Weadock is not employed by the Company as an executive on the respective Date of Grant as set forth in the agreement. The Weadock Employment Agreement has a term of one year, unless Mr. Weadock’s employment is terminated sooner by the board of directors, and the term will be extended for additional one-year periods unless the Company or Mr. Weadock gives the other party at least 30 days’ prior written notice of its intent not to renew. On February 20, 2018, the Company also entered into a compensation agreement with Mr. Weadock (the “Director Compensation Agreement”).Pursuant to the terms of the Director Compensation Agreement, the Company agreed to grant Mr. Weadock an aggregate of 240,000 shares of restricted common stock, consistent with the grant and vesting schedule set forth in the agreement; provided, however, that no grant will be made and no shares will be issued with respect to any grant, if Mr. Weadock is not a member of the Company’s board of directors on the respective Date of Grant as set forth in the agreement. If the Company is acquired by, or merged into and with, another entity prior to the last Date of Vesting set forth in the agreement (i.e. February 23, 2022), all shares issuable to Mr. Weadock under the Director Compensation Agreement will become fully vested and non-forfeitable. The Company also agreed to reimburse Mr. Weadock for all reasonable travel and incidental expenses incurred by Mr. Weadock in performing his services and attending meetings as approved in advance by the Company. Also, on February 20, 2018, the Company also entered into an indemnity agreement with Mr. Weadock (the “Weadock Indemnity Agreement”). Pursuant to the terms of the Indemnity Agreement, the Company agreed to use reasonable efforts to obtain and maintain in full force and effect directors’ and officers’ liability insurance (“D&O Insurance”) in reasonable amounts from established and reputable insurers; provided, however, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage is reduced by exclusions so as to provide an insufficient benefit, or Mr. Weadock is covered by similar insurance maintained by a subsidiary of the Company. In addition the foregoing, the Company will indemnify Mr. Weadock from certain third party actions, derivative actions and actions where Mr. Weadock is decreased; provided, however, the Company shall not be obligated to indemnify Mr. Weadock for actions including, but not limited to, actions initiated by Mr. Weadock, for any action in which it is determined that the material assertions made by Mr. Weadock in such proceeding were not made in good faith or were frivolous, for any settlements not authorized by the Company, for any actions on the account of Mr. Weadock’s willful misconduct, and for any expenses and the payment of profits arising from the purchase and sale Mr. Weadock of securities in violation of Section 16(b) of the Securities Exchange Act, or any similar successor statute; provided, further that, that the Company shall not be obligated to indemnify Mr. Weadock for expenses or liabilities of any type whatsoever which have been paid directly to Mr. Weadock pursuant to the Company’s D&O Insurance policy.

NOTE 11 - STOCKHOLDERS’ DEFICIT

Series A Convertible Preferred Stock

During the third quarter of fiscal 2016, the Company initiated a subscription agreement to offer accredited investors up to 1,000,000 units (“Units”) of securities, each Unit consists of one (1) share of Series A Convertible Preferred Stock and one (1) Series A Warrant (“Warrant”). The price per Unit was $0.50 for a maximum aggregate proceeds of $500,000. There are no dividends on the Series A Convertible Preferred Stock. The Warrants were exercisable at $0.50 per share for a period of one year. As of March 31, 2018, the warrants were not exercised. Therefore, the Company has disclosed the expiration of the Warrants.

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

Common Stock

On January 9, 2018, the Company issued 899,685 shares of its common stock to Tangiers pursuant to Tangiers’ conversion of $100,000 of Note 1 at a conversion price of $0.11.

On January 15, 2018, the Company issued 200,000 shares of common stock related to an Employment Agreement with Sandra Fowler, Chief Marketing Officer. The Company recorded a fair value of $66,000 ($0.33 per share) based upon the most current trading price of the Company’s stock.

On February 5, 2018, Dr. Coleman and Benjamin Coleman voluntarily returned and canceled an aggregate of 3,280,470 common shares in order to prevent dilution to the shareholders during the Company’s efforts to secure new senior management, provide additional incentive equity and to form an advisory board. The return of common stock by Dr. Coleman and Benjamin Coleman was a non-cash transaction and reduces the common stock outstanding as of March 31, 2018.

On February 20, 2018, the Company issued 43,387 shares of common stock related to an Employment Agreement with Daniel Weadock, Chief Executive Officer. The Company recorded a fair value of $7,810 ($0.18 per share) based upon the most current trading price of the Company’s stock.

On February 23, 2018, the Company issued 12,135 shares of common stock related to an Director Agreement with Daniel Weadock, Chief Executive Officer. The Company recorded a fair value of $2,063 ($0.17 per share) based upon the most current trading price of the Company’s stock.

On March 5, 2018, the Company issued 269,716 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $25,000 of Note 1 at a conversion price of $.09.

On March 20, 2018, the Company issued 30,000 shares of its common stock to members of the Company’s Advisory Board. The Company recorded a fair value of $4,200 ($0.14 per share) based upon the most recent trading price of the Company’s stock.

On March 21, 2018, the Company issued 295,631 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $25,000 of Note 1 at a conversion price of $.08.

Common Stock Warrants

For the three months ended March 31, 2018 and the year ended December 31, 2017, no warrants were outstanding.

NOTE 12 - SUBSEQUENT EVENTS

On April 10, 2018, the Company defaulted on Amendment #1, the second draw due under Note 1, as the maturity date expired. As of May 1, 2018, Tangiers has informed the Company that they have elected at this time not to enforce the default interest rate under Note 1 and also not to enforce the fees, reserving its rights to enforce the foregoing in their discretion.  The default allows Tangiers to demand payment in cash equal to 150% of the outstanding principal and interest, which is automatically added to the outstanding principle, and convert all or a portion of the outstanding principal into shares of common stock of the Company. The default conversion rate of Note 1 is now the lower of the conversion rate then in effect or 65% of the lowest trading price for the 15 days prior to Tangiers’ notice of conversion. 

On April 13, 2018, the Company issued 769,231 shares of its common stock to Tangiers pursuant to Tangier’s conversion of $50,000 of Note 1 at a conversion price of $.07.

On April 17, 2018, the Company executed Amendment #2 to the Tangiers Note 3 for a draw of $120,00 payment plus a 10% original issue discount. All terms and conditions of the Tangiers Note 3 remain effective. As of May 15, 2018, the balance under Note 3 is $374,220, which includes $27,720 guaranteed interest. As of May 15, 2018, Note 3 can be converted into 1,155,000 shares of the Company’s common stock. Note 3 Amendment #2 has a maturity date of October 13, 2018.

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

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

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

We, under our brand name Indoor Harvest®, are a technology company focused on enabling the production of bio pharma grade cannabis for research and development of true pharma grade personalized medicines. We are also a provider of advanced cultivation methods and processes for the cannabis industry. Our integrated technology platform design allows us to manipulate the environment of the plant to influence its phenotypic expression. Among other things, we are also seeking to use the relationships and technology we have developed to become a registered producer and seller under the federal Controlled Substances Act (“CSA”) of pharmaceutical grade cannabis for research by third parties developing targeted treatment for specific medical symptoms.

We have developed a patent pending aeroponic high pressure process of growing cultivars in an air or mist environment without the use of soil or an aggregate growing medium. Aeroponic production 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 by suspending plant roots in the air and spraying them with a nutrient-laden mist. Because water is used in aeroponics to transmit nutrients, it is sometimes considered a type of hydroponics. Our high pressure aeroponic process and production methods provide an ability to test the phenotypic plasticity of cannabis and to test and develop specific phenotypic response. Phenotypic plasticity refers to the changes in cannabis morphology and physiology due to its adaption to a unique environment and its impact on phytochemical production.

We have also developed a significant set of industry partnerships and relationships over the last 7 years uniquely positioning us to create fully integrated facilities designs for fully controlled and automated growing environments that would include not only our patent pending high pressure aeroponic systems but also a patent pending HVAC system design, leading LED lighting technology plus controls and sensors.

We, through our wholly owned subsidiary Alamo CBD, have applied to produce and dispense low-tetrahydrocannabinol (“THC”) cannabis under the Texas Compassionate Use Program (“TCUP”). THC is a psychotropic cannabinoid and is the principal psychoactive constituent of cannabis. We have signed a binding Letter of Intent (“LOI”) with Zoned Properties outlining three independent pending agreements to complete research and development projects for licensed medical cannabis facilities to be located in Tempe, Arizona, Parachute, Colorado and Stockdale, Texas or other location to be determined after approval of a provisional license under the TCUP.

At the same time, we continue to explore other avenues of opportunity to deploy our technology in partnership with license holders in attractive jurisdictions.

The Company intends to generate revenue from the manufacture or co-manufacturing and sales of pharma grade cannabis to research and development organizations, through related engineering, project management, equipment leasing and technology licensing from constructed facilities in Tempe, Arizona and Parachute, Colorado and through the development and licensing of related environmental and climate recipes. We are an “emerging growth company” (“EGC”) that is exempt from certain financial disclosure and governance requirements for up to five years as defined in the Jumpstart Our Business Startups Act (“the JOBS Act”), that eases restrictions on the sale of securities; and increases the number of shareholders a company must have before becoming subject to the SEC’s reporting and disclosure rules. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. Because of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

Our operational expenditures are primarily related to developing our technology, sources and methods, developing research partnerships and collaborations and the costs related to being a fully reporting company with the SEC.

Current Projects

On May 31, 2017, the Company notified Canopy Growth that it had completed the majority of work under Phase Two of its Cannabis Pilot. The Company installed 13 HPA Table systems and 1 custom built Nutrient Pump Skid at Canopy Growth for an internal economic pilot. During Phase Two, the Company submitted proposals to Canopy Growth for three designs for potential New IP development. Canopy Growth did not pursue these proposals to develop New IP and chose to procure only the Company’s HPA Table system and a custom built Nutrient Pump Skid that was integrated into existing fertigation and mechanical systems at Canopy Growth. As a result of this integration into existing facilities, the Company provided Canopy Growth with a limited warranty. The Company additionally informed Canopy Growth that it would not seek continued development under the Cannabis Pilot. As a result, the Cannabis Pilot expired on December 18, 2017.

On July 10, 2017, Indoor Harvest Corp entered into a Cultivation Design Agreement with Bright Orchard Developments, Ltd., for the design of an aeroponic cannabis production facility by a pending licensed producer in Canada.

On October 11, 2017, the Company entered into a binding LOI with Zoned Properties outlining three pending independent agreements to complete research and development projects for licensed medical cannabis facilities to be located in Tempe, Arizona, Parachute, Colorado and Stockdale, Texas or other location to be determined after approval of a provisional license under the TCUP. Zoned Properties is an OTCQX quoted Company and strategic real estate development firm whose primary mission is to identify, develop, and lease sophisticated, safe, and sustainable properties in emerging industries, including the licensed medical cannabis industry.

Under the terms of the binding LOI, the two companies plan to work together to mutually agree upon terms, provisions and obligations of three simultaneous, independent agreements.

Execution of any of the three individual agreements is subject to, among other things, satisfactory due diligence and the negotiation and execution of definitive agreements, each of which will contain customary representations, warranties, covenants and closing conditions. There is no assurance that any or all of the agreements will be executed.

The binding LOI includes non-refundable payments totaling $50,000 by Indoor Harvest to Zoned Properties. The payments are consideration for entering into the binding LOI and represents a 20% deposit to be applied towards the assignment of the Parachute Development Rights which have been valued at $250,000 within the binding LOI.

On October 26, 2017, the Company entered into a LOI with Harvest Air and on November 1, 2017, entered into a LOI with BIOS Lighting. The three companies plan to collaborate with Indoor Harvest towards the development of a fully integrated platform designed to provide cannabis producers the ability to manage and record phenotypic plasticity in the cannabis plant. By combining Indoor Harvest’s proven aeroponic methods, Harvest Air’s HVAC designs, and customized lighting solutions from BIOS Lighting, the three Companies plan to demonstrate an ability to manipulate and control phenotypic expression in the cannabis plant for the purpose of research and production of pharmaceuticals.

In addition to collaborative research and development, the group plans to develop advanced automation strategies to control the growth of cultivars with high pressure aeroponics by integrating power generation, HVAC, LED lighting systems, phytometric devices, and near-infrared technologies, into a fully integrated facilities package. By using real time measurements of plant physiological processes and precision management of the production facility environment, the group intends to offer scalable solutions and production methods designed specifically for cannabis phytochemistry and precise phytochemical production.

Prototype development will take place in Tempe, Arizona, as part of Indoor Harvest’s planned cannabis technology development described below. In exchange for Harvest Air and BIOS Lighting support and services, Indoor Harvest has agreed to exclusively utilize any developed hardware or strategies provided by both companies in its future developments in Parachute, Colorado and Stockdale, Texas, or other location in Texas approved under the TCUP as described in more detail below.

Tempe Arizona Research Cultivation Site

The Company plans to install 20 HPA Tables at an existing licensed medical cannabis production facility at Zoned Properties’ Tempe Medical Marijuana Business Park. The purpose of this project is to conduct a demonstration of the Company’s aeroponic technology while integrating LED and HVAC designs, provided by BIOS Lighting and Harvest Air, respectively. The resulting demonstration will be compared to traditional flood irrigation, HVAC and lighting methods. The Company plans to prepare a case study and white paper to showcase industry adoption value and to serve as a proof of concept for the construction of larger facilities in Parachute, Colorado and Stockdale, Texas, or other location in Texas approved under the TCUP.

Both Zoned Properties and Indoor Harvest plan to work together in good faith to mutually agree upon the terms, provisions and obligations of an agreement for the development, installation, and research of Indoor Harvest’s cultivation technology and equipment within at most 2,500 square feet of space at Zoned Properties’ Tempe Medical Marijuana Business Park located at 410 S. Madison Dr. Tempe, Arizona 85281. The Company expects to generate revenue from the Tempe, Arizona facility through future leasing and licensing agreements. The 20 HPA Table installation is expected to produce over 206 pounds of cannabis annually at under $150 per pound in cost of goods with an expected breakeven point of 430 pounds for the equipment. There is no assurance that any or all of the agreements will be executed.

Parachute Colorado Production Facility

The Company has secured rights to develop Zoned Properties Parachute Medical Marijuana Business Park. The Company intends to construct a 25,000 square foot facility based on the technology developed and tested at the Tempe Arizona Research Cultivation Site and to generate revenue through the leasing of the facility and licensing of the Company’s technology to either a medical or recreational licensee, which has yet to be determined. The Company would additionally conduct research and development towards creating specific environmental and climate recipes for the production of cannabis in order to produce and replicate a desired phenotypic response. The Company also expects to file an application with the Drug Enforcement Administration (“DEA”) to register the facility under the CSA and to obtain rights to acquire the operating license from the licensee upon changes in Colorado law, which currently does not allow direct ownership by a publicly traded Company.

Both Zoned Properties and Indoor Harvest plan to work together in good faith to mutually agree upon the terms, provisions and obligations of an agreement for the assignment and/or sale of Zoned Properties’ Parachute Development Rights for the Parachute Marijuana Business Park located at Lot #7 N. Diamond Loop Rd, Parachute, Colorado 81635. The agreement would include: (a) the assignment and/or sale of the Parachute Development Rights from Zoned Properties to Indoor Harvest, and (b) the engagement by Indoor Harvest of Zoned Properties as the exclusive Strategic Development Advisor for the Parachute Property. The Company has paid a $25,000 deposit towards securing these rights. There is no assurance that any or all of the additional agreements will be executed or that the Company will be successful in registering the facility with the DEA.

Texas Compassionate Use Program Applicant

We, through our wholly owned subsidiary Alamo CBD, have applied to produce and dispense Low-THC cannabis under the TCUP to treat intractable epilepsy. The Company plans to partner with Zoned Properties, Harvest Air and BIOS Lighting to develop a 50,000 square foot facility in Stockdale, Texas or other location to be determined after approval of a provisional license under the TCUP. Zoned Properties and Indoor Harvest plan to work together in good faith to mutually agree upon the terms, provisions and obligations of an Agreement for Indoor Harvest to engage Zoned Properties as the exclusive Strategic Development Advisory for Indoor Harvest’s development in Texas under the TCUP. The Company also expects to file an application with the DEA to register the facility under the CSA. The Company expects to generate revenue through the production and sale of cannabis under the TCUP. There is no assurance that any or all of the agreements will be executed or that the Company will be successful in obtaining a license to produce cannabis in Texas or in registering the completed facility with the DEA.

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

In late 2016, the DPS modified its approach to restrict the number of licenses to three. This necessitated the development of a competitive review process, where three applicants were conditionally approved based on the review of the submitted application materials. Upon successful onsite inspection of their facilities, qualified applicants will be issued licenses. Because of this competitive review process, Alamo CBD placed 16th out of 43 applicants and its application is currently considered pending by the DPS. The Company and other pending applicants have questioned the last-minute modification in approach by the DPS and the lack of transparency in the reviewing process.

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

The Company intends to generate revenue from the manufacture or co-manufacturing and sales of pharma grade cannabis to research and development organizations, through related engineering, project management, equipment leasing and technology licensing from constructed facilities in Tempe, Arizona and Parachute, Colorado and through the development and licensing of related environmental and climate recipes.

Results of Operations

Three months ended March 31, 2018 compared to the three months ended March 31, 2017

The following table presents our operating results for the three months ended March 31, 2018 compared to March 31, 2017:

Revenues

There was no revenue for the three months ended March 31, 2018 and March 31, 2017.

Cost of Sales 

There were no costs of sales for the three months ended March 31, 2018 and March 31, 2017.

Operating Expenses

Total operating expenses for the three months ended March 31, 2018 and March 31, 2017 were $272,603 and $726,828 respectively, for an aggregate decrease of $454,225 or 62%. The decrease is primarily related to stock issued to consultants and directors for services performed of $461,930 during the first quarter of 2017 compared to $80,073 during the first quarter of 2018.

Other Income (Expense)

Total other income for the three months ended March 31, 2018 was $145,387 and total other expense for the three months ended March 31, 2017 was ($329,425), for an improvement of $474,812 or 144%. The improvement is primarily related to a positive change in the fair value of the embedded derivative liability of $243,615 or 100% related to the Tangiers convertible notes payable, a decrease in interest expenses of $95,016 or 84% related to the paydown of the FirstFire Notes and Chuck Rifici Notes and a decrease in amortization of debt discount of $124,444 or 61%.

Net Loss

As a result of the factors discussed above, net loss for the three months ended March 31, 2018 and March 31, 2017 was $127,216 and $1,056,253, respectively, for a decrease in net loss of $929,037 or 88%.

Liquidity and Capital Resources

As of March 31, 2018, we had $92,981 in total current assets and current liabilities of $716,959. Accordingly, our working capital deficit at March 31, 2018 was $623,978. We have the ability to raise additional capital as needed through external equity financing transactions.

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2018 and March 31, 2017 were $185,663 and $352,103, respectively, for a decrease of $166,440 or 47%. The improvement in net cash used in operating activities is primarily related to a decrease in our net loss of $929,037, offset by a decrease in the amortization of debt discount of $124,444 or 61%, a decrease in the change in fair value of embedded derivative liability of $243,6156 or 100%, a decrease in stock issued for services of $381,857 or 83%.

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2018 and March 31, 2017 were $0 and $250,550, respectively, for a decrease of $250,550 or 100%. The decrease is primarily due to the investment in the Vyripharm joint venture of $250,000 in the first quarter 2017.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2018 and March 31, 2017 were $193,191 and $671,868, respectively, for a decrease of $478,677 or 71%. The decrease is primarily related a decrease in the issuance of common stock for cash of $824,000 or 100% and a decrease in proceeds from demand note payable, less OID costs paid, of $250,000 or 100%, offset by a decrease in repayments of note payable of $225,323 or 99%, an increase in proceeds from convertible notes payable, less offering costs and OID costs paid, of $195,000 or 100% and a decrease in the repayment of convertible note of $175,000 or 100%.

Cash Requirements: Potential Future Planned Operational Activities

During the next 12 months, we anticipate engaging in the additional planned operational activities set forth in the table below, although we may vary our plans depending upon operational conditions and available funding.

Existing Cash and Operational Cash Flow

During the next twelve months, we anticipate that we will incur a minimum of approximately $560,000 of general and administrative expenses and $1,000,000 in development expenses in order to execute our current business plans. We also plan to incur significant sales, marketing, research and development expenses during the next 12 months. We must obtain additional financing to continue our operations. We may not be able to obtain additional funding on terms that are favorable to us or at all. We may not be able to obtain sufficient funding to continue our operations, or if we do receive funding, to generate adequate revenues in the future or to operate profitably in the future. These conditions raise substantial doubt about our ability to continue as a going concern.

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. During March 2017, the Company laid-off two employees and as cost cutting measures in anticipation of our ultimate combination with Alamo CBD.

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 have an accumulated deficit and have incurred operating losses since our inception and expect losses to continue during 2018. Our auditor has indicated in their Report that these conditions raise substantial doubt about our ability to continue as a going concern.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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

Item 3. Quantitative and Qualitative Disclosure about Market Risk.

Not required for smaller reporting companies.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2018. Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2018, the disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. This conclusion by the Company’s Chief Executive Officer and the Chief Financial Officer do not relate to reporting periods after March 31, 2018.

Changes in Internal Control over Financial Reporting

On February 20, 2018, Mr. Rick Gutshall resigned as Interim Chief Executive Officer of the Company and on the same date Mr. Daniel Weadock was appointed Chief Executive Officer and Director of the Company.

Other than the foregoing, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the three months ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors

We are a Smaller Reporting Company and are not required to provide the information under this item.

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

On January 9, 2018, the Company issued 899,685 shares of its common stock pursuant to a conversion of a portion of a convertible promissory note. The issuance of the above securities was exempt from the registration requirements of the Securities Act in reliance upon Section 4(a)(2) of the Securities Act.

On January 15, 2018, the Company issued 200,000 shares of common stock to Sandra Fowler, Chief Marketing Officer, pursuant to an employment agreement. The securities were issued pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Rule 506 of Regulation D promulgated thereunder.

On January 16, 2018, the Company issued a fixed convertible promissory note for the principal sum of $50,000 as a commitment fee. The promissory note maturity date is May 12, 2018. On February 13, 2018, the Company and the lender entered into Amendment #1 to this promissory note. Pursuant to the amendment, the lender agreed to make a payment to the Company in the amount of $132,000 ($120,000 in cash and $12,000 in original issue discount). On April 17, 2018, the Company and the lender entered into Amendment #2 to this promissory note, and pursuant to this amendment the Lender agreed to make a payment to the Company in the amount of $132,000 ($120,000 in cash and $12,000 in OID) under the note. The issuances of the above securities were exempt from the registration requirements of the Securities Act in reliance upon Section 4(a)(2) of the Securities Act.

On February 20, 2018, the Company issued 300,000 shares of common stock to Dan Weadock, Chief Executive Officer, pursuant to an employment agreement. The securities were issued pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Rule 506 of Regulation D promulgated thereunder. 

On March 5, 2018, the Company issued 269,716 shares of its common stock pursuant to a conversion of a portion of a convertible promissory note. The issuance of the above securities was exempt from the registration requirements of the Securities Act in reliance upon Section 4(a)(2) of the Securities Act.

On March 20, 2018, the Company issued 30,000 shares of its common stock to members of the Company’s Advisory Board. The Company recorded a fair value of $4,200 ($0.14 per share) based upon the most recent trading price of the Company’s stock.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

(a) Not applicable.

(b) During the quarter ended March 31, 2018, there have not been any material changes to the procedures by which security holders may recommend nominees to the Board of Directors.

Item 6. Exhibits. 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.