UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-1321002
| AGRITEK HOLDINGS, INC. |
| (Exact name of registrant as specified in its charter) |
| Delaware | 20-1321002 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 777 Brickell Ave. Suite 500 | ||
| Miami, FL | 33131 | |
| (Address of principal executive offices) | (Zip Code) |
| (305) 721-2727 |
| (Registrant’s telephone number, including area code) |
Securities registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
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 ☑
Indicate by check mark whether the issuer (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 has 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☑ 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☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) 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.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer☐ (Do not check if a smaller reporting company) | Smaller reporting company ☑ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes Yes ☐ No ☑
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. $630,142 on June 30, 2016.
The number of shares outstanding of the registrant’s $0.0001 par value Common Stock as of March 31, 2017, was 455,036,146.
Table of Contents
| PART I | Page | |
| Item 1 | Business | 4 |
| Item 1A | Risk Factors | 12 |
| Item 1B | Unresolved Staff Comments | 20 |
| Item 2 | Properties | 20 |
| Item 3 | Legal Proceedings | 21 |
| Item 4 | Mine Safety Disclosures | 21 |
| PART II | ||
| Item 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 22 |
| Item 6 | Selected Financial Data | 24 |
| Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 |
| Item 7A | Quantitative and Qualitative Disclosures About Market Risk | 32 |
| Item 8 | Financial Statements and Supplementary Data | 32 |
| Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 32 |
| Item 9A | Controls and Procedures | 32 |
| Item 9B | Other Information | 33 |
| PART III | ||
| Item 10 | Directors, Executive Officers and Corporate Governance | 34 |
| Item 11 | Executive Compensation | 36 |
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 37 |
| Item 13 | Certain Relationships and Related Transactions, and Director Independence | 37 |
| Item 14 | Principal Accountant Fees and Services | 39 |
| PART IV | ||
| Item 15 | Exhibits and Financial Statement Schedules | 39 |
| Signatures | 42 |
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This report and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “project”, “believe”, “anticipate”, “plan”, “expect”, “estimate”, “intend”, “should”, “would”, “could”, or “may”, or other such words, verbs in the future tense and words and phrases that convey similar meaning and uncertainty of future events or outcomes to identify these forward–looking statements. There are a number of important factors beyond our control that could cause actual results to differ materially from the results anticipated by these forward–looking statements. While we make these forward–looking statements based on various factors and using numerous assumptions, you have no assurance the factors and assumptions will prove to be materially accurate when the events they anticipate actually occur in the future. Factors that could cause our actual results of operations and financial condition to differ materially are discussed in greater detail under Item 1A, “Risk Factors” of this annual report on Form 10-K.
The forward–looking statements are based upon our beliefs and assumptions using information available at the time we make these statements. We caution you not to place undue reliance on our forward–looking statements as (i) these statements are neither predictions nor guaranties of future events or circumstances, and (ii) the assumptions, beliefs, expectations, forecasts and projections about future events may differ materially from actual results. We undertake no obligation to publicly update any forward–looking statement to reflect developments occurring after the date of this report.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General Business Development
Corporate History
Agritek Holdings, Inc. (referred to hereafter as “AGTK,” or, the “Company”), was initially incorporated under the laws of the State of Delaware in 1997 under the name Easy Street Online, Inc.
In 1997, the Company changed its name to Frontline Communications Corp. (“Frontline”) and operated as a regional Internet service provider (“ISP”) providing Internet access, web hosting, website design, and related services to residential and small business customers throughout the Northeast United States and, through a network partnership agreement, Internet access to customers nationwide.
On April 3, 2003, the Company acquired Proyecciones y Ventas Organizadas, S.A. de C.V. (“Provo Mexico”) and in December 2003 the Company changed the name to Provo International Inc. (“Provo”).
In 2008, Provo changed its name to Ebenefits Direct, Inc., which, through its wholly-owned subsidiary, L.A. Marketing Plans, LLC, engaged in the business of direct response marketing. The Company’s principal business was to market and sell non-insurance healthcare programs designed to complement medical insurance products and to provide savings for those who cannot afford or qualify for traditional health insurance products.
On October 14, 2008, Ebenefits Direct, Inc. changed its name to Seraph Security, Inc. (“Seraph”).
On April 25, 2009, Seraph acquired Commerce Online Technologies, Inc., a credit and debit card processing company.
On May 20, 2009, Seraph Security, Inc. changed its name to Commerce Online, Inc. to more accurately reflect its core business of merchant processing, and financial services.
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As of February 18, 2010, Commerce Online, Inc. changed its name to Cannabis Medical Solutions, Inc. (“CMSI”) as a provider of merchant processing payment technologies for the medical marijuana and wellness sector.
On March 8, 2010, the Company completed the acquisition of 800 Commerce, Inc. (“800 Commerce”) a Florida Corporation incorporated by the Company’s Chief Executive Officer. The company issued 1,000,000 shares of common stock to 800 Commerce for all the issued and outstanding stock of 800 Commerce, Inc.
In June 2010, 31,288,702 shares of common stock were issued as dividend shares (the “dividend”) to all existing shareholders of common stock of record.
On June 14, 2011, Cannabis Medical Solutions, Inc. changed its merchant name to MediSwipe Inc. (“MWIP”) as a result of its focus on the processing and financial services related to medical marijuana business.
On June 26, 2013, the Company formed American Hemp Trading Company, a wholly owned subsidiary.
On June 26, 2013, the Company formed Agritech Innovations, Inc. (“AGTI”), a wholly owned subsidiary. On September 3, 2013, AGTI changed its name to Agritech Venture Holdings, Inc. (“AVH”).
On November 12, 2013, the Board of Directors of the Company approved a 1-for-10 reverse stock split (the “Reverse Stock Split”) and a decrease in the authorized common stock of the Company to 250,000,000. Pursuant to the Reverse Stock Split, each 10 shares of the Company’s common stock automatically converted into one share of Company common stock.
On November 12, 2013, the Financial Industry Regulatory Authority (“FINRA”) approved the Reverse Stock Split with an effective date of December 11, 2013. All the share amounts in this annual report on Form 10-K reflect the Reverse Stock Split.
On April 23, 2014, MWIP changed its name to Agritek Holdings, Inc. (“AGTK”) to more properly reflect the Company’s current business model.
On May 27, 2014, AVH changed its names to Agritek Venture Holdings, Inc. (“AVHI”).
On August 27, 2014, American Hemp Trading Company changed its name to Prohibition Products, Inc. (“PPI”)
On May 23, 2016, the Company filed a certificate of amendment (a “Certificate of Amendment”), increasing the authorized capital of the Company to 1,001,000,000 shares of capital stock; consisting of 1,000,000,000 shares of common stock par value $0.0001 and 1,000,000 shares of preferred stock, par value $0.01. The majority of the Company’s shareholders consented to the Certificate of Amendment increasing the authorized capital.
On November 7, 2016, the Company issued 5,000,000 shares of common stock and completed the stock purchase for the acquisition of Sterling Classic Compassion, LLC. (“Sterling”). The two (2) year old California based non-profit set up to do business specifically for the cannabis sector in California, now a wholly owned subsidiary of the Company. The company has begun the process to seek licensure in California under new recreational legislation set to begin in 2017. The Company named entertainment guru, Russ Regan, a 50 year veteran of the music and film industry, as Sterling's President and Director, as well as to the advisory board of the Company. With over fifty years in the entertainment industry, Mr. Regan has played a major role in the careers of the biggest names in the music industry. Luminaries such as Elton John, Neil Diamond, Barry White, and Olivia Newton-John all credit Regan as a major force behind their success.
On December 1, 2016, the Company signed a Manufacturing Services Agreement with a third party, for the manufacturing and distribution of the Company’s California Premiums brand. The Company will provide packaging and use of the brand name to the manufacturer, licensed in the regulated jurisdiction of California. The manufacturer will distribute the product and pay the Company for the packaging and use of the brand name.
Unless otherwise noted, references in this Form 10-K to “Seraph,” “Commerce Online, Inc.,” “Cannabis Medical Solutions,” “Mediswipe,” the “Company,” “we,” “our” or “us” means Agritek Holdings, Inc.
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Description of Business
Agritek Holdings and its wholly-owned subsidiaries, MediSwipe, Inc., Prohibition Products Inc., and Agritek Venture Holdings, Inc. provide turnkey support solutions to the legal cannabis industry. We provide key business services to the legal cannabis sector including:
| • | Funding and Financing Solutions for Agricultural Land and Properties zoned for the regulated Cannabis Industry. | |
| • | Compliance Consulting and Certification Solutions | |
| • | Dispensary and Retail Solutions | |
| • | Commercial Production and Equipment Build Out Solutions | |
| • | Banking and Payment Processing Solutions | |
| • | Multichannel Supply Chain Solutions | |
| • | Branding, Marketing and Sales Solutions of proprietary product lines | |
| • | Consumer Product Solutions |
The Company is expanding throughout California, Colorado and Puerto Rico and presently intends to bring its’ array of services to each new state that legalizes the use of cannabis according to appropriate state and federal laws. Our primary objective is acquiring commercial properties to be utilized in the commercial marijuana industry as cultivation facilities in compliance with Colorado and additional jurisdictions including California, Nevada and Puerto Rico in accordance with state law. This is an essential aspect of our overall growth strategy because once acquired and re-zoned, the value of such real property is substantially higher than under the previous zoning and use.
Once properties are identified and acquired to be used for purposes related to the commercial marijuana industry as provided for by state law, and we plan to create vertical channels within that legal jurisdiction including equipment financing, payment processing and marketing of exclusive brands and services to retail dispensaries
Agritek’s business focus is primarily to hold, develop and manage real property. The Company shall also provide oversight on every property that is part of its portfolio. This can include complete architectural design and subsequent build-outs, general support, landscaping, general up-keep, and state of the art security systems. At this time, Agritek does not grow, process, own, handle, transport, or sell marijuana as the Company is organized and directed to operate strictly in accordance with all applicable state and federal laws. As the legal environment changes in Colorado, California and other states, the Company’s management may explore business opportunities that involve ownership interests in dispensaries and growing operations if and when such business opportunities become legally permissible under applicable state and federal laws.
Services and Markets
To date, we have purchased eighty (80) acres approved for licenses and cultivation in Pueblo, Colorado. We have also entered a Letter of Intent to purchase an additional thirty-five (35) acre property in Pueblo, Colorado. We have multiple manufacturing and service contracts in place in areas in the following sectors:
Funding and Financing Solutions
Our goal is to become the funding and financing service partner of choice in the legal Colorado and California cannabis market before expanding nationwide if and when applicable state and federal laws allow us to do so. We offer financing and financial aid to cultivators, collectives, dispensaries and product businesses in the legal cannabis industry with alternative funding and financing solutions. In the evolving legal cannabis industry, where traditional banking opportunities are grossly limited, we step in to provide the “traditional” bank lending services; lines of credit, property financing, and/or commercial loans. Businesses and individuals seeking funding and financing solutions are qualified and scored based on their experience, current operations, financial records, and compliance grades given by our proprietary banking partners and credit lines that comply with all state governance rules.
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Agritek Holdings Certification and Compliance Solutions
We guide our clients through the complex and ever-changing legal landscape regarding the legal cannabis industry. Legal cannabis retail, production, and product manufacturers must comply with all regulations in the highly governed legal cannabis industry, as local and state laws dictate different business requirements. Since complying with applicable laws can be complex, we help service our clients through each jurisdiction with our team of legal, accounting and technology partners who are experts in areas such as entity selection, internal bookkeeping, government reporting, and inventory and patient records tracking in order to help our clients be compliant.
Commercial Build Out and Dispensary Solutions
We offer turnkey build-out and commercial services to our clients. Whether it is financial assistance, real estate consulting, operations design, or building construction, our Company can design and rollout customized services for our clients. We also offer traditional business services to dispensaries as well. These services include infrastructure investment, technology partners, donation accounting, payment processing and succession strategies. It is important to note that we are not a “one size fits all” organization, but are committed to custom tailored solutions for legal cannabis industry participants.
Finance and Real Estate
Real Estate Leasing
Our real estate leasing business primarily includes the acquisition and leasing of cultivation space and related facilities to licensed marijuana growers and dispensary owners for their operations. Management anticipates that these facilities will range in size from 5,000 to 50,000 square feet. These facilities will only be leased to tenants that possess the requisite state licenses to operate cultivation facilities. The leases with the tenants will provide certain requirements that permit us to continually evaluate our tenants’ compliance with applicable laws and regulations.
As of the date of this report, we own one cultivation property that is located in a suburb of Pueblo, Colorado (the “Pueblo West Property”). The property consists of approximately eighty (80) acres of land. The property is currently zoned for cultivating cannabis and is expected to be leased to a medical cannabis cultivator or manufacturer this year. We are currently evaluating strategic options for this property.
Shared Office Space, Networking and Event Services
In January 2017, we leased two floors located in downtown San Juan, Puerto Rico 00901, which we have branded as GreenWorkx . The building consists of a 6,056 square feet, which will be converted to serve as unique shared workspace for entrepreneurs, doctors, professionals and others serving the cannabis industry. Clients will be able to lease space to use as offices, meeting rooms, lecture, educational and networking facilities, and individual workstations.
The GreenWorx facility will hold up to 25-30 tenants. Puerto Rico recently has passed favorable medicinal cannabis laws combined with multiple tax incentives for residents and public companies.
We plan to continue to acquire commercial real estate and lease office space to participants in the cannabis industry. These participants include media, internet, packaging, lighting, cultivation supplies, and financial services. In exchange for certain services that may be provided to these tenants, we expect to receive rental income in the form of cash. In certain cases, we may acquire equity interests or provide debt capital to these businesses and eventually acquire a specific business as a wholly owned subsidiary of Agritek.
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Industry Finance and Equipment Leasing Services
We plan to lease cultivation equipment and facilities to customers in the cannabis industry. We expect we will enter into sale lease-back transactions of land zoned for cultivation, green houses, grow lights, tenant improvements and other grow equipment. Since Colorado State law does not allow entities operating under a cannabis license to pledge the assets or the license of the cannabis operation for any type of general borrowing activity, we intend to provide loans to individuals and businesses in the cannabis industry on an unsecured basis. Equipment will only be leased to tenants that possess the requisite state licenses to operate such facilities. The leases with the tenants will provide certain requirements that permit us to continually evaluate its tenants’ compliance with applicable laws and regulations.
We are exploring lending opportunities in Colorado, California, Nevada and Puerto Rico. Our finance strategy will include making direct term loans and providing revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products. These loans will generally be secured to the maximum extent permitted by law. We believe there is a significant demand for this financing. We are pursuing other finance services including customized finance, capital formation, and banking, for participants in the cannabis industry.
Competitive Strengths
We believe we possess certain competitive strengths and advantages in the industries which we operate:
Range of Services: We are able to leverage our breadth of services and resources to deliver a comprehensive, integrated solution to companies in the cannabis industry – from operational and compliance consulting to security and marketing to financing needs.
Strategic Alliances. We are dedicated to rapid growth through acquisitions, partnerships and agreements that will enable us to enter and expand into new markets. Our strategy in pursuing these alliances are based on the target’s ability to generate positive cash flow, effectively meet customer needs, and supply desirable products, services or technologies, among other considerations. We anticipate that strategic alliances will play a significant role as more states pass legislation permitting the cultivation and sale of hemp and cannabis.
Industry’s Access to Capital. In February 2014, the Treasury Department issued guidelines for financial institutions dealing with cannabis-related businesses, (see “FinCEN” under “Federal Regulations and Our Business” of this document). In March 2015, legislation was introduced in the U.S. Senate proposing to change federal law such that states could regulate medical use of cannabis without risk of federal prosecution. A key component of the proposed Compassionate Access, Research Expansion, and Respect States Act (the “CARERS Act”) is to reclassify cannabis under the Controlled Substances Act to Schedule II, thereby changing the plant from a federally-criminalized substance to one that has recognized medical uses. Many banks and traditional financial institutions refuse to provide financial services to cannabis-related business. We plan to provide finance and leasing solutions to market participants using the FinCEN guidelines as a primary guide for compliance with federal law.
Regulatory Compliance. The state laws regulating the cannabis industry are changing at a rapid pace. Currently, there are twenty-six U.S. states and the District of Columbia that have created a legislative body to manage the medical cannabis industry. There are also five states that have allowed recreational use. In Colorado and Washington states, cannabis is heavily regulated. It is a critical component of our business plan both to ensure that all aspects of our operations are in compliance with all laws, policies, guidance and regulations to which we are subject and to provide an opportunity to our customers and allies to use our services to ensure that they, too, are in full compliance.
Industry Breadth. We continue to create, share and leverage information and experiences with the purpose of creating awareness and identifying opportunities to increase shareholder value. Our management team has extensive knowledge of the cannabis industry and closely monitors changes in legislation. We work with partners who enhance our industry breadth.
Intellectual Property
On November 17, 2016, we filed with the United States Patent and Trademark Office (“USPTO”) a federal trademark registration for “Hemp Pops” in the category of Staple Food Products.
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Market Conditions
In Colorado, the cannabis market was expanded in January 2014 to permit “recreational use”. Generally, this means adults over the age of twenty-one, including visitors from other states, can purchase cannabis from licensed retailers, subject to certain daily limits. Voters in the states of Washington, Oregon, California, Nevada and Alaska have approved ballot measures to legalize cannabis for adult recreational use.
According to the Colorado Department of Revenue, Colorado’s cannabis industry reported the following estimated monthly cannabis sales during 2015:
| Estimated Sales | ||||||||||||||
| Medical | Recreational | Total | ||||||||||||
| January | $ | 27,096,276 | $ | 35,263,000 | $ | 62,359,276 | ||||||||
| February | 28,297,759 | 37,897,034 | 66,194,793 | |||||||||||
| March | 30,868,724 | 41,307,172 | 72,175,896 | |||||||||||
| April | 30,869,138 | 40,995,724 | 71,864,862 | |||||||||||
| May | 31,326,069 | 41,109,138 | 72,435,207 | |||||||||||
| June | 34,072,690 | 48,510,414 | 82,583,104 | |||||||||||
| July | 38,500,517 | 54,560,069 | 93,060,586 | |||||||||||
| August | 40,038,931 | 57,240,414 | 97,279,345 | |||||||||||
| September | 37,014,759 | 54,574,448 | 91,589,207 | |||||||||||
| October | 30,332,517 | 47,476,897 | 77,809,414 | |||||||||||
| November | 28,622,207 | 49,360,655 | 77,982,862 | |||||||||||
| December | 37,835,414 | 60,140,724 | 97,976,138 | |||||||||||
| Total | $ | 394,875,001 | $ | 568,435,690 | $ | 963,310,691 | ||||||||
Competition
Currently, there are a number of other companies that provide similar products and/or services, such as direct finance, leasing of real estate, including shared workspace, warehouse sales, and consulting services to the cannabis industry. In the future we fully expect that other companies will recognize the value of ancillary businesses serving the cannabis industry and enter into the marketplace as competitors.
The cannabis industry in the United States is highly fragmented, rapidly expanding and evolving. The industry is characterized by new and potentially disruptive or conflicting legislation propounded on a state-by-state basis. Our competitors may be local or international enterprises and may have financial, technical, sales, marketing and other resources greater than ours. These companies may also compete with us in recruiting and retaining qualified personnel and consultants.
Our competitive position will depend on our ability to attract and retain qualified underwriters, investment banking partners and loan managers, consultants and advisors with industry depth, and talented managerial, operational and other personnel. Our competitive position will also depend on our ability to develop and acquire effective proprietary products and solutions, personal relationships of our executive officers and directors, and our ability to secure adequate capital resources. We compete to attract and retain customers of our services. We expect to compete in this area on the basis of price, regulatory compliance, vendor relationships, usefulness, availability, and ease of use of our services.
Government Regulation
As of March 31, 2017, there are 26 states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation. Conversely, the federal government regulates drugs through the Controlled Substances Act (“CSA”), which does not recognize the difference between medical and recreational use of cannabis. Under federal law, cannabis is treated like every other controlled substance, such as cocaine and heroin. The federal government places every controlled substance in a schedule, in principle according to its relative potential for abuse and medicinal value. Under the CSA, cannabis is classified as a Schedule I drug, which means that the federal government views medical cannabis as highly addictive and having no medical value. Pursuant to the CSA, it is unlawful for any person (1) to sell or offer for sale drug paraphernalia; (2) to use the mails or any other facility of interstate commerce to transport drug paraphernalia; or (3) to import or export drug paraphernalia.
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The extent to which the regulation of drug paraphernalia under the CSA is applicable to our business and the sale of our product is found in the definition of drug paraphernalia. Drug paraphernalia means any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing processing, preparing, injecting ingesting, inhaling or otherwise introducing into the human body a controlled substance, possession of which is unlawful. Our products are primarily designed for general agricultural use.
In an effort to provide guidance to federal law enforcement, the Department of Justice (the “DOJ”) has issued Guidance Regarding Marijuana Enforcement to all United States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole (the “Cole Memo”) on August 29, 2013. Each memorandum provides that the DOJ is committed to enforcement of the CSA but the DOJ is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent and rational way.
The Cole Memo provides updated guidance to federal prosecutors concerning marijuana enforcement in light of state laws legalizing medical and recreational marijuana possession in small amounts. The memorandum sets forth certain enforcement priorities that are important to the federal government:
| • | Distribution of marijuana to children; |
| • | Revenue from the sale of marijuana going to criminals; |
| • | Diversion of medical marijuana from states where is legal to states where it is not; |
| • | Using state authorized marijuana activity as a pretext of other illegal drug activity; |
| • | Preventing violence in the cultivation and distribution of marijuana; |
| • | Preventing drugged driving; |
| • | Growing marijuana on federal property; and |
| • | Preventing possession or use of marijuana on federal property. |
The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but relied on state and local law enforcement to address marijuana activity. If the Department of Justice (the “DOJ”) Guidance Regarding Marijuana Enforcement to all United States Attorneys from Deputy Attorney General David Ogden on October 19, 2009, and from Deputy Attorney General James Cole on June 29, 2011 and again from Deputy Attorney General James Cole on August 29, 2013, were reversed and it was determined that the Company violated the regulation of drug paraphernalia under the CSA, then the Company would need to make appropriate modifications to its products to avoid violation of the CSA. Until Congress amends the CSA with respect to medical marijuana, there is a risk that federal authorities may enforce current federal law. Active enforcement of the current federal regulatory position on cannabis may thus indirectly, adversely and materially affect revenues and profits of the Company. The risk of strict enforcement of the CSA in light of congressional activity, judicial holdings and stated federal policy remains uncertain.
FinCEN
The Financial Crimes Enforcement Network (“FinCEN”) provided guidance on February 14, 2014 about how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations. For purposes of the FinCEN guidelines, a “financial institution” includes any person doing business in one or more of the following capacities:
| • | Bank (except bank credit card systems); |
| • | Broker or dealer in securities; |
| • | Money services business; |
| • | Telegraph company; |
| • | Casino; |
| • | Card club; and |
| • | A person subject to supervision by any state or federal bank supervisory authority. |
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In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution. These factors may include its particular business objectives, an evaluation of the risks associated with offering a particular product or service, and its capacity to manage those risks effectively. Thorough customer due diligence is a critical aspect of making this assessment.
In assessing the risk of providing services to a cannabis-related business, a financial institution should conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its cannabis-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.
As part of its customer due diligence, a financial institution should consider whether a cannabis-related business implicates one of the Cole Memo priorities or violates state law. This is a particularly important factor for a financial institution to consider when assessing the risk of providing financial services to a cannabis-related business. Considering this factor also enables the financial institution to provide information in BSA reports pertinent to law enforcement’s priorities. A financial institution that decides to provide financial services to a cannabis-related business would be required to file suspicious activity reports.
While we believe we do not qualify as a financial institution in the United States, we cannot be certain that we do not fall under the scope of the FinCEN guidelines. We plan to use the FinCEN Guidelines, as may be amended, as a basis for assessing our relationships with potential tenants, clients and customers. As such, as we engage in financing activities, we intend to adhere to the guidance of FinCEN in conducting and monitoring our financial transactions. Because this area of the law is uncertain but expected to evolve rapidly, we believe that FinCEN’s guidelines will help us best operate in a prudent, reasonable and acceptable manner. There is no assurance, however, that our activities will not violate some aspect of the CSA. If we are found to violate the federal statute or any other in connection with our activities, our company could face serious criminal and civil sanctions.
We intend to conduct rigorous due diligence to verify the legality of all activities that we engage in. We realize that there is a discrepancy between the laws in some states, which permit the distribution and sale of medical and recreational cannabis, from federal law that prohibits any such activities. The CSA makes it illegal under federal law to manufacture, distribute, or dispense cannabis. Many states impose and enforce similar prohibitions. Notwithstanding the federal ban, as of the date of this filing, twenty-six states and the District of Columbia have legalized certain cannabis-related activity.
Moreover, since the use of cannabis is illegal under federal law, we may have difficulty acquiring or maintaining bank accounts and insurance and our stockholders may find it difficult to deposit their stock with brokerage firms.
Employees
Other than the Company’s sole officer and director, we do not have any full-time employees. The Company relies on several independent contractors and other agreements it has with other companies to provide the services needed. Each contractor has been carefully selected to address immediate needs in particular functional areas, but also with consideration of the Company’s future needs during a period of expected rapid growth and expansion. Value is placed not only on outstanding credentials in specific areas of functional expertise, but also on cross-functionality, a strong knowledge of content acquisition and distribution, along with hands-on experience in scaling operations from initial beta and development stage through successful commercial deployment.
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Corporate Contact Information
Our principal executive offices are located at 777 Brickell Avenue Suite 500, Miami, Florida 33131; Telephone No.: (305) 721-2727. Our website is located at http://www.AgritekHoldings.com. The content on our website is available for informational purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K.
Available Information
The public may read and copy any materials we file with the SEC, including our annual reports, quarterly reports, current reports, proxy statements, information statements and other information, at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Through December 31, 2016, we operated in one reportable segment, wholesale sales.
ITEM 1A – RISK FACTORS
You should carefully consider the risks described below, as well as other information provided to you in this document, including information in the section of this document entitled “Forward-Looking Statements.” The risks and uncertainties described below are not the only ones facing the Company. If any of the following risks actually occur, the Company’s business, financial condition or results of operations could be materially adversely affected.
Investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. Our business, financial condition and/or results of operation may be materially adversely affected by the nature and impact of these risks. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations 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.
Risk Related to Our Company
Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.
We incurred a net loss of $2,977,889 and $2,074,161 for the years ending December 31, 2016 and 2015, respectively. Because of our continued operating losses, negative cash flows from operations and working capital deficit, in their report on our financial statements for the year ended December 31, 2016, our independent auditors included an explanatory paragraph regarding their substantial doubt about our ability to continue as a going concern. We will continue to experience net operating losses in the foreseeable future. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loan from various financial institutions where possible. Our continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.
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Federal regulation and enforcement may adversely affect the implementation of medical marijuana laws and regulations may negatively impact our revenues and profits.
Currently, there are 26 states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation. Conversely, under the Controlled Substances Act (the “CSA”), the policy and regulations of the Federal government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited. Until Congress amends the CSA with respect to medical marijuana, there is a risk that federal authorities may enforce current federal law, and we may be deemed to be facilitating the selling or distribution of drug paraphernalia in violation of federal law. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect revenues and profits of the Company. The risk of strict enforcement of the CSA in light of congressional activity, judicial holdings and stated federal policy remains uncertain.
Federal authorities have not focused their resources on such tangential or secondary violations of the Act, nor have they threatened to do so, with respect to the leasing of real property or the sale of equipment that might be used by medical cannabis gardeners, or with respect to any supplies marketed to participants in the emerging medical cannabis industry. We are unaware of such a broad application of the CSA by federal authorities, and we believe that such an attempted application would be unprecedented.
The Company may provide services to and potentially handle monies for businesses in the legal cannabis industry.
Selling or distributing medical or retail cannabis is deemed to be illegal under the Federal Controlled Substances Act even though such activities may be permissible under state law. A risk exists that our lending and services could be deemed to be facilitating the selling or distribution of cannabis in violation of the federal Controlled Substances Act, or to constitute aiding or abetting, or being an accessory to, a violation of that Act. Such a finding, claim, or accusation would likely severely limit the Company’s ability to continue with its operations and may result in our investors losing all of their investment in our Company.
The legal cannabis industry faces an uncertain legal environment on state, federal, and local levels.
Although we continually monitor
the most recent legal developments affecting the legal cannabis industry, the legal environment in California and elsewhere could
shift in a manner not currently contemplated by the Company. For example, while we think there will always be a place for compliance-related
services, broader state and federal legalization could render the compliance landscape significantly less technical, which would
render our suite of compliance services less valuable and marketable. Lending money to legal cannabis participants could also
be subject to legal challenge if the federal government or another jurisdiction decides to more actively enforce applicable laws.
These unknown legal developments could directly and indirectly harm our business and results of operations.
Profit sharing, distributions, and equity ownership in California medical marijuana dispensaries and growing operations are not permissible.
The Company does not currently maintain an ownership interest
in legal cannabis dispensaries or growing operations in California or elsewhere. We believe such ownership is not permitted by
applicable law. Investors should be aware that the Company will not engage in such activity until such time as it is legally permissible.
If the applicable laws make it so that the Company is unable to own interests in legal cannabis dispensaries in growing operations
ever, the Company may not be able to attain its financial projections, and thus, this would directly and indirectly harm our business
and results of operations.
We depend on third party providers for a reliable Internet infrastructure and the failure of these third parties, or the Internet in general, for any reason would significantly impair our ability to conduct our business.
We outsource all of our data center facility management to third parties who host the actual servers and provide power and security in multiple data centers in each geographic location. These third party facilities require uninterrupted access to the Internet. If the operation of our servers is interrupted for any reason, including natural disaster, financial insolvency of a third party provider, or malicious electronic intrusion into the data center, our business would be significantly damaged. If either a third party facility failed, or our ability to access the Internet was interfered with because of the failure of Internet equipment in general or we become subject to malicious attacks of computer intruders, our business and operating results will be materially adversely affected.
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The gathering, transmission, storage and sharing or use of personal information could give rise to liabilities or additional costs of operation as a result of governmental regulation, legal requirements, civil actions or differing views of personal privacy rights.
We transmit and plan to store a large volume of personal information in the course of providing our services. Federal and state laws and regulations govern the collection, use, retention, sharing and security of data that we receive from our customers and their users. Any failure, or perceived failure, by us to comply with U.S. federal or state privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business, operating results and financial condition. Additionally, we may also be contractually liable to indemnify and hold harmless our customers from the costs or consequences of inadvertent or unauthorized disclosure of their customers’ personal data which we store or handle as part of providing our services.
The interpretation and application of privacy, data protection and data retention laws and regulations are currently unsettled particularly with regard to location-based services, use of customer data to target advertisements and communication with consumers via mobile devices. Such laws may be interpreted and applied inconsistently from country to country and inconsistently with our current data protection policies and practices. Complying with these varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business, operating results or financial condition.
As privacy and data protection have become more sensitive issues, we may also become exposed to potential liabilities as a result of differing views on the privacy of personal information. These and other privacy concerns, including security breaches, could adversely impact our business, operating results and financial condition.
In the U.S., we have voluntarily agreed to comply with wireless carrier technological and other requirements for access to their customers’ mobile devices, and also trade association guidelines and codes of conduct addressing the provision of location-based services, delivery of promotional content to mobile devices and tracking of users or devices for the purpose of delivering targeted advertising. We could be adversely affected by changes to these requirements, guidelines and codes, including in ways that are inconsistent with our practices or in conflict with the rules or guidelines in other jurisdictions.
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. During the fourth quarter of fiscal year 2016, management identified material weaknesses in our internal control over financial reporting as discussed in Item 9A of this Annual Report on Form 10-K. As a result of these material weaknesses, our management concluded that our internal control over financial reporting was not effective based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-An Integrated Framework. We are planning to engage in developing a remediation plan designed to address these material weaknesses. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and legal fees and shareholder litigation.
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.
We monitor our capital adequacy on an ongoing basis. To the extent that our funds are insufficient to fund future operating requirements, we may need to raise additional funds through corporate finance transactions or curtail our growth and reduce our liabilities. Any equity, hybrid or debt financing, if available at all, may be on terms that are not favorable to us. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition and operating results could be adversely affected.
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Risks Relating to Ownership of Our Common Stock
Although there is presently a market for our common stock, the price of our common stock may be extremely volatile and investors may not be able to sell their shares at or above their purchase price, or at all. We anticipate that the market may be potentially highly volatile and may fluctuate substantially because of:
| • | Actual or anticipated fluctuations in our future business and operating results; |
| • | Changes in or failure to meet market expectations; |
| • | Fluctuations in stock market price and volume |
Our Chief Executive Officer, B. Michael Friedman, holds Series B Preferred Stock which will provide him continuing voting control over the Company and, as a result, he will exercise significant control over corporate decisions.
B. Michael Friedman, our President, Chief Executive Office and sole Director owns 100% of Class B Preferred Stock (the “Series B Preferred Stock”). Pursuant to the Certificate of Designation, the Series B Preferred Stock has the right to vote in aggregate, on all shareholder matters equal to 51% of the total vote, no matter how many shares of common stock or other voting stock of the Company are issued or outstanding in the future. The Series B Preferred Stock has a right to vote on all matters presented or submitted to the Company’s stockholders for approval in pari passu with the common stockholders, and not as a separate class. The holders of Series B Preferred Stock have the right to cast votes for each share of Series B Preferred Stock held of record on all matters submitted to a vote of common stockholders, including the election of directors. There is no right to cumulative voting in the election of directors. The holders of Series B Preferred Stock vote together with all other classes and series of common stock of the Company as a single class on all actions to be taken by the common stockholders except to the extent that voting as a separate class or series is required by law.
As a result of the above, Mr. Friedman exercises control in determining the outcome of corporate transactions or other matters, including the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. Any investors who purchase shares will be minority shareholders and as such will have no say in the direction of the Company and the election of Directors. Investors in the Company should keep in mind that even if you own shares of the Company's common stock and wish to vote them at annual or special shareholder meetings, your shares will have no effect on the outcome of corporate decisions or the election of Directors. Furthermore, investors should be aware that Mr. Friedman may choose to elect new Directors to the Board of Directors of the Company and/or take the Company in a new business direction altogether, and, as a result, current shareholders of the Company will have little to no say in such matters.
As a public company, we will incur substantial expenses.
The U.S. securities laws require, among other things, review, audit, and public reporting of our financial results, business activities, and other matters. Recent SEC regulation, including regulation enacted as a result of the Sarbanes-Oxley Act of 2002, has also substantially increased the accounting, legal, and other costs related to becoming and remaining an SEC reporting company. If we do not have current information about our Company available to market makers, they will not be able to trade our stock. The public company costs of preparing and filing annual and quarterly reports, and other information with the SEC and furnishing audited reports to stockholders, will cause our expenses to be higher than they would be if we were privately-held. These increased costs may be material and may include the hiring of additional employees and/or the retention of additional advisors and professionals. Our failure to comply with the federal securities laws could result in private or governmental legal action against us and/or our officers and directors, which could have a detrimental effect on our business and finances, the value of our stock, and the ability of stockholders to resell their stock.
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FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.
“FINRA” has adopted rules that relate to the application of the SEC’s penny stock rules in trading our securities and require that a broker/dealer have reasonable grounds for believing that the investment is suitable for that customer, prior to recommending the investment. Prior to recommending speculative, low priced securities to their non-institutional customers, broker/dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker/dealers to recommend that their customers buy our common stock, which may have the effect of reducing the level of trading activity and liquidity of our common stock. Further, many brokers charge higher transactional fees for penny stock transactions. As a result, fewer broker/dealers may be willing to make a market in our common stock, reducing a shareholder’s ability to resell shares of our common stock.
The Company’s common stock is currently deemed to be “penny stock”, which makes it more difficult for investors to sell their shares.
The Company’s common stock is currently subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If the Company remains subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for the Company’s securities. If the Company’s securities are subject to the penny stock rules, investors will find it more difficult to dispose of the Company’s securities.
We have raised capital through the use of convertible debt instruments that causes substantial dilution to our stockholders.
Because of the size of our Company and its status as a “penny stock” as well as the current economy and difficulties in companies our size finding adequate sources of funding, we have been forced to raise capital through the issuance of convertible notes and other debt instruments. These debt instruments carry favorable conversion terms to their holders of up to 50% discounts to the market price of our common stock on conversion and in some cases provide for the immediate sale of our securities into the open market. Accordingly, this has caused dilution to our stockholders in 2016 and may for the foreseeable future. As of December 31, 2016, we had approximately $826,480 in convertible debt and potential convertible debt outstanding. This convertible debt balance as well as additional convertible debt we incur in the future will cause substantial dilution to our stockholders.
Because we are quoted on the OTCQB instead of an exchange or national quotation system, our investors may have a tougher time selling their stock or experience negative volatility on the market price of our common stock.
Our common stock is quoted on the OTCQB. The OTCQB is often highly illiquid, in part because it does not have a national quotation system by which potential investors can follow the market price of shares except through information received and generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of volatility for securities that are quoted on the OTCQB as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.
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We do not intend to pay dividends.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Our operating history and lack of profits which could lead to wide fluctuations in our share price. You may be unable to sell your common shares at or above your purchase price, which may result in substantial losses to you. The market price for our common shares is particularly volatile given our status as a relatively unknown company with a small and thinly traded public float.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.
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Federal regulation and enforcement may adversely affect the implementation of marijuana laws and regulations may negatively impact our revenues and profits.
Currently, there are twenty six states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. There are currently two states that have laws and/or regulation that permits consumer use of cannabis for commercial and recreational purposes. Many other states are considering legislation to similar effect. As of the date of this writing, the policy and regulations of the Federal government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited on the basis of federal law and may or may not be permitted on the basis of state law. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of customers of the Company to invest in or lease properties from the Company that may be used in connection with cannabis. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect revenues and profits of the Company.
We may be subject to unknown or contingent liabilities or restrictions related to properties that we acquire for which we may have limited or no recourse.
Assets and entities that we have acquired or may acquire in the future may be subject to unknown or contingent liabilities for which we may have limited or no recourse against the sellers. Unknown or contingent liabilities might include liabilities for or with respect to liens attached to properties, unpaid real estate tax, or utilities charges for which a subsequent owner remains liable, clean-up or remediation of environmental conditions or code violations, claims of customers, vendors or other persons dealing with the acquired entities and tax liabilities, among other things.
Our revenue and expenses are not directly correlated, and because a large percentage of our costs and expenses are fixed, we may not be able to adapt our cost structure to offset declines in our revenue.
Most of the expenses associated with our business, such as acquisition costs, renovation and maintenance costs, real estate taxes, personal and ad valorem taxes, insurance, utilities, employee wages and benefits and other general corporate expenses are fixed and do not necessarily decrease with a reduction in revenue from our business. Our expenses and ongoing capital expenditures will also be affected by inflationary increases and certain of our cost increases may exceed the rate of inflation in any given period. By contrast, as described above, our rental income will be affected by many factors beyond our control such as the availability of alternative rental properties and economic conditions in our target markets. As a result, we may not be able to fully offset rising costs and capital spending by higher lease rates, which could have a material adverse effect on our results of operations and cash available for distribution. In addition, state and local regulations may require us to maintain properties that we own, even if the cost of maintenance is greater than the value of the property or any potential benefit from leasing the property.
Our future portfolio consists of properties geographically concentrated in certain markets and any adverse developments in local economic conditions, the demand for commercial property in these markets or natural disasters may negatively affect our operating results.
Our future portfolio consists of properties geographically concentrated in Colorado. As such, we are susceptible to local economic conditions, other regulations, the supply of and demand for commercial rental properties and natural disasters in these areas. If there is a downturn in the economy, an oversupply of or decrease in demand for commercial rental properties in these markets or natural disasters in these geographical areas, our business could be materially adversely affected to a greater extent than if we owned a real estate portfolio that was more geographically diversified.
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We may be subject to losses that are either uninsurable, not economically insurable or that are in excess of our insurance coverage.
Our properties may be subject to environmental liabilities and we will be exposed to personal liability for accidents which may occur on our properties. Our insurance may not be adequate to cover all damages or losses from these events, or it may not be economically prudent to purchase insurance for certain types of losses. As a result, we may be required to incur significant costs in the event of adverse weather conditions and natural disasters or events which result in environmental or personal liability. We may not carry or may discontinue certain types of insurance coverage on some or all of our properties in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage discounted for the risk of loss. If we experience losses that are uninsured or exceed policy limits, we could incur significant uninsured costs or liabilities, lose the capital invested in the properties, and lose the anticipated future cash flows from those properties. In addition, our environmental or personal liability may result in losses substantially in excess of the value of the related property.
Compliance with new or existing laws, regulations and covenants that are applicable to our future properties, including permit, license and zoning requirements, may adversely affect our ability to make future acquisitions or renovations, result in significant costs or delays and adversely affect our growth strategy.
Our future properties are subject to various covenants and local laws and regulatory requirements, including permitting and licensing requirements. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. We cannot assure you that existing regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional regulations will not be adopted that would increase such delays or result in additional costs. Our failure to obtain permits, licenses and zoning approvals on a timely basis could have a material adverse effect on our business, financial condition and results of operations.
Poor tenant selection and defaults by renters may negatively affect our financial performance and reputation.
Our success will depend in large part upon our ability to attract and retain qualified tenants for our properties. This will depend, in turn, upon our ability to screen applicants, identify good tenants and avoid tenants who may default. We will inevitably make mistakes in our selection of tenants, and we may rent to tenants whose default on our leases or failure to comply with the terms of the lease negatively affect our financial performance, reputation and the quality and value of our properties. For example, tenants may default on payment of rent, make unreasonable and repeated demands for service or improvements, make unsupported or unjustified complaints to regulatory or political authorities, make use of our properties for illegal purposes, damage or make unauthorized structural changes to our properties which may not be fully covered by security deposits, refuse to leave the property when the lease is terminated, engage in violence or similar disturbances, disturb nearby residents with noise, trash, odors or eyesores, fail to comply with regulations, sublet to less desirable individuals in violation of our leases, or permit unauthorized persons to live therein. The process of evicting a defaulting renter from a commercial property can be adversarial, protracted and costly. Furthermore, some tenants facing eviction may damage or destroy the property. Damage to our properties may significantly delay re-leasing after eviction, necessitate expensive repairs or impair the rental income or value of the property, resulting in a lower than expected rate of return. In addition, we will incur turnover costs associated with re-leasing the properties such as marketing and brokerage commissions and will not collect revenue while the property sits vacant. Although we will attempt to work with tenants to prevent such damage or destruction, there can be no assurance that we will be successful in all or most cases. Such tenants will not only cause us not to achieve our financial objectives for the properties, but may subject us to liability, and may damage our reputation with our other tenants and in the communities where we do business.
Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition.
Our success will depend upon our ability to acquire rental properties at attractive valuations, such that we can earn a satisfactory return on the investment primarily through rental income and secondarily through increases in the value of the properties. If we overpay for properties or if their value subsequently drops or fails to rise because of market factors, we will not achieve our financial objectives.
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We will periodically review the value of our properties to determine whether their value, based on market factors, projected income and generally accepted accounting principles, has permanently decreased such that it is necessary or appropriate to take an impairment loss in the relevant accounting period. Such a loss would cause an immediate reduction of net income in the applicable accounting period and would be reflected in a decrease in our balance sheet assets. The reduction of net income from an impairment loss could lead to a reduction in our dividends, both in the relevant accounting period and in future periods. Even if we do not determine that it is necessary or appropriate to record an impairment loss, a reduction in the intrinsic value of a property would become manifest over time through reduced income from the property and would therefore affect our earnings and financial condition.
Increasing real estate taxes, fees and insurance costs may negatively impact our financial results.
The cost of real estate taxes and insuring our properties is a significant component of our expenses. Real estate taxes, fees and insurance premiums are subject to significant increases, which can be outside of our control. If the costs associated with real estate taxes, fees and assessments or insurance should rise significantly and we are unable to raise rents to offset such increases, our results of operations would be negatively impacted.
We may not be able to effectively manage our growth, which requires significant resources, and our results may be adversely affected.
We plan to continue our acquisition strategy, which will demand significant resources and attention and may affect our financial performance. Our future operating results depend on our ability to effectively manage this growth, which is dependent, in part, upon the ability of the Company to:
| • | Funding and Financing Solutions for Agricultural Land and Properties zoned for the regulated Cannabis Industry. | |
| • | Compliance Consulting and Certification Solutions | |
| • | Dispensary and Retail Solutions | |
| • | Commercial Production and Equipment Build Out Solutions | |
| • | Banking and Payment Processing Solutions | |
| • | Multichannel Supply Chain Solutions | |
| • | Branding, Marketing and Sales Solutions of proprietary product lines | |
| • | Consumer Product Solutions |
We cannot assure you that we will be able to achieve these results or that we may otherwise be able to manage our growth effectively. Any failure to do so may have an adverse effect on our business and financial results.
Should one or more of the foregoing risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable to a smaller reporting company.
ITEM 2. DESCRIPTION OF PROPERTY
Owned Real Estate
The Company owns 80 acres real property, including all buildings, fixtures and equipment located in Pueblo County, Colorado. The Company acquired the property for the purpose of making it suitable for use in the legal commercial cannabis industry.
Office Space
Our corporate offices are located at 777 Brickell Avenue Suite 500, Miami, FL 33131. We can be reached by phone at 1 (305) 721-2727 and by email at info@Agritekholdings.com
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In January 2017, we entered into a five (5) year lease in San Juan Puerto Rico, to be utilized as office space as well as to sublease as unique shared workspace for entrepreneurs, doctors, professionals and others serving the cannabis industry. Clients will be able to lease space to use as offices, meeting rooms, lecture, educational and networking facilities, and individual workstations.
Leased Properties
On April 28, 2014, the Company executed and closed a 10 year lease agreement for 20 acres of an agricultural farming facility located in South Florida following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing low grade marijuana specifically for the use of treating epilepsy and cancer patients. Pursuant to the lease agreement, the Company maintains a first right of refusal to purchase the property for three years. The Company prepaid the first year lease amount of $24,000. The Company is currently in default of the lease agreement, as rents have not been for the second year of the lease beginning May 2015.
On July 11, 2014, the Company signed a ten year lease agreement for an additional 40 acres in Pueblo, Colorado. The lease requires monthly rent payments of $10,000 during the first year and is subject to a 2% annual increase over the life of the lease. The lease also provides rights to 50 acres of certain tenant water rights for $50,000 annually plus cost of approximately $2,400 annually. The Company paid the $50,000 in July 2014. The Company is currently in default of the lease agreement, as rents have not been paid since February 2015.
ITEM 3. LEGAL PROCEEDINGS.
On March 2, 2015, the Company, the Company’s CEO and the Company’s CFO at the time were named in a civil complaint filed by Erick Rodriguez in the District Court in Clark County, Nevada (the “DCCC”). The complaint alleges that Mr. Rodriguez never received 250,000 shares of Series B preferred stock that were initially approved by the Board of Directors in 2012, subject to the completion of a merger of a company controlled by Mr. Rodriguez. Since the merger was never completed, the shares were never certificated to Mr. Rodriguez. On March 21, 2017, the DCC agreed to Set Aside the Entry of Default against the Defendants. Mr. Rodriguez resigned in June 2013.
On May 6, 2016, the Company, B. Michael Freidman and Barry Hollander (former CFO) were named as defendants in a Summons/Complaint filed by Justin Braune (the “Plaintiff”) in Palm Beach County Civil Court, Florida (the “PBCCC”). The complaint alleges that Mr. Braune was entitled to shares of common stock of the Company. On December 5, 2016, the PBCCC set aside a court default that had been previously issued. The defendants have answered the complaint, including the defenses that Mr. Braune advised the Company’s transfer agent and the Company in his letter of resignation dated November 4, 2015, clearly stating that he has relinquished all shares of common stock. The Company has filed a counterclaim suit against the Plaintiff, as well as sanctions against the Plaintiff and their counsel.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
| 21 |
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded in the over-the-counter market, and quoted on the OTCQB tier of the OTC Markets Group Inc. under the symbol “AGTK.”
(a) Market Information
The following table sets forth for the periods indicated the high and low bid quotations for our common stock. These quotations represent inter-dealer quotations, without adjustment for retail markup, markdown, or commission and may not represent actual transactions.
| Period | High | Low | ||||||
| Fiscal Year 2016 | ||||||||
| First Quarter (January 1, 2016 – March 31, 2016) | $ | 0.0109 | $ | 0.0011 | ||||
| Second Quarter (April 1, 2016 – June 30, 2016) | $ | 0.0072 | $ | 0.002 | ||||
| Third Quarter (July 1, 2016 – September 30, 2016) | $ | 0.0069 | $ | 0.0014 | ||||
| Fourth Quarter (October 1, 2016 – December 31,2016) | $ | 0.0586 | $ | 0.0065 | ||||
| Fiscal Year 2015 | ||||||||
| First Quarter (January 1, 2015 – March 31, 2015) | $ | 0.064 | $ | 0.017 | ||||
| Second Quarter (April 1, 2015 – June 30, 2015) | $ | 0.0234 | $ | 0.007 | ||||
| Third Quarter (July 1, 2015 - September 30, 2015) | $ | 0.0089 | $ | 0.0015 | ||||
| Fourth Quarter (October 1, 2015 – December 31, 2015) | $ | 0.0022 | $ | 0.0008 |
(b) Holders
The number of record holders of our common stock as of March 31, 2017 was approximately 261. This excludes shareholders who hold their stock in street name. The Company estimates that there are over 10,000 stockholders who hold their shares of common stock in street name.
(c) Dividends
The Company did not declare any cash dividends for the years ended December 31, 2016 and 2015. Our Board of Directors does not intend to distribute any cash dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
(d) Securities authorized for issuance under equity compensation plans
None
Recent Sales of Unregistered Equity Securities
During the year ended December 31, 2016, the Company issued the following shares of common stock upon the conversions of portions of the 2014 Company Note and portions of the 2015 Convertible Notes:
| 22 |
| Date | Principal Conversion | Interest Conversion | Total Conversion | Conversion Price | Shares Issued | Issued to | ||||||||||||||||||
| 12/28/16 | $ | 45,000 | $ | 3,511 | $ | 48,511 | $ | 0.015080 | 3,216,925 | LG | ||||||||||||||
| 12/13/16 | $ | 9,500 | $ | 400 | $ | 9,900 | $ | 0.000754 | 13,129,683 | Cerberus | ||||||||||||||
| 9/26/16 | $ | 8,613 | $ | 629 | $ | 9,242 | $ | 0.001218 | 7,587,824 | LG | ||||||||||||||
| 7/29/16 | $ | 7,500 | $ | 801 | $ | 8,301 | $ | 0.000081 | 10,222,352 | LG | ||||||||||||||
| 7/20/16 | $ | 9,500 | $ | 995 | $ | 10,495 | $ | 0.000098 | 10,644,310 | LG | ||||||||||||||
| 7/12/16 | $ | 9,000 | $ | 927 | $ | 9,927 | $ | 0.000986 | 10,068,073 | LG | ||||||||||||||
| 7/1/16 | $ | 8,000 | $ | 805 | $ | 8,805 | $ | 0.001160 | 7,590,362 | LG | ||||||||||||||
| 6/22/16 | $ | 5,000 | $ | 973 | $ | 5,973 | $ | 0.001450 | 4,119,414 | GW | ||||||||||||||
| 6/20/16 | $ | 10,500 | $ | 1,003 | $ | 11,503 | $ | 0.001450 | 7,933,377 | Cerberus | ||||||||||||||
| 6/20/16 | $ | 5,000 | $ | 967 | $ | 5,967 | $ | 0.001450 | 4,114,879 | GW | ||||||||||||||
| 6/20/16 | $ | 6,000 | $ | 589 | $ | 6,589 | $ | 0.001450 | 4,544,241 | LG | ||||||||||||||
| 6/10/16 | $ | 6,075 | $ | 1,134 | $ | 7,209 | $ | 0.001798 | 4,009,701 | GW | ||||||||||||||
| 6/9/16 | $ | 5,000 | $ | 479 | $ | 5,479 | $ | 0.001798 | 3,047,219 | LG | ||||||||||||||
| 6/2/16 | $ | 9,000 | $ | 848 | $ | 9,848 | $ | 0.002378 | 4,141,387 | Cerberus | ||||||||||||||
| 5/23/16 | $ | 5,000 | $ | 460 | $ | 5,460 | $ | 0.002436 | 2,241,490 | LG | ||||||||||||||
| 3/17/16 | $ | 9,000 | $ | 696 | $ | 9,696 | $ | 0.002436 | 3,980,431 | LG | ||||||||||||||
| 3/17/16 | $ | 3,000 | $ | 138 | $ | 3,138 | $ | 0.000638 | 4,918,624 | Service | ||||||||||||||
| 3/8/16 | $ | 7,425 | $ | 928 | $ | 8,353 | $ | 0.00174 | 4,800,354 | GW | ||||||||||||||
| 3/7/16 | $ | 6,500 | $ | 489 | $ | 6,989 | $ | 0.00174 | 4,016,471 | LG | ||||||||||||||
| $ | 174,613 | $ | 16,772 | $ | 191,385 | 114,327,117 | ||||||||||||||||||
In addition to the above, on November 7, 2016, the Company issued 5,000,000 shares of common stock and completed the acquisition of Sterling Classic Compassion, LLC.
During the year ended December 31, 2015, the Company issued the following shares of common stock upon the conversions of portions of the 2014 Company Note and portions of the 2015 Convertible Notes:
| Date | Principal Conversion | Interest Conversion | Total Conversion | Conversion Price | Shares Issued | Issued to | |||||||||||||||||
| 1/3/15 | $ | 65,460 | $ | 9,540 | $ | 75,000 | $ | .045 | 1,665,445 | Tonaquint | |||||||||||||
| 1/28/15 | $ | 54,123 | $ | 8,377 | $ | 62,500 | $ | .0334 | 1,869,187 | Tonaquint | |||||||||||||
| 2/20/15 | $ | 55,901 | $ | 9,099 | $ | 65,000 | $ | .0244 | 2,668,309 | Tonaquint | |||||||||||||
| 3/13/15 | $ | 60,000 | $ | — | $ | 60,000 | $ | .0244 | 2,463,045 | Tonaquint | |||||||||||||
| 3/31/15 | $ | 66,555 | $ | 8,445 | $ | 75,000 | $ | .0125 | 5,985,634 | Tonaquint | |||||||||||||
| 5/5/15 | $ | 66,731 | $ | 8,269 | $ | 75,000 | $ | .0125 | 6,008,171 | Tonaquint | |||||||||||||
| 6/2/15 | $ | 67,277 | $ | 7,723 | $ | 75,000 | $ | .0095 | 7,917,238 | Tonaquint | |||||||||||||
| 6/29/15 | $ | 67,483 | $ | 7,517 | $ | 75,000 | $ | .0055 | 13,678,643 | Tonaquint | |||||||||||||
| 7/29/15 | $ | 29,368 | $ | 7,262 | $ | 36,630 | $ | .003663 | 10,000,000 | Tonaquint | |||||||||||||
| 8/13/15 | $ | 27,473 | $ | — | $ | 27,473 | $ | .003663 | 7,500,000 | Tonaquint | |||||||||||||
| 9/3/15 | $ | 10,000 | $ | — | $ | 10,000 | $ | .0019 | 5,263,158 | Vis Vires | |||||||||||||
| 9/10/15 | $ | 19,800 | $ | — | $ | 19,800 | $ | .00083 | 16,500,000 | Vis Vires | |||||||||||||
| 10/1/15 | $ | 2,750 | $ | 112 | $ | 2,862 | $ | .000812 | 3,524,027 | LG | |||||||||||||
| 10/9/15 | $ | 4,500 | $ | 183 | $ | 4,683 | $ | .000638 | 7,340,834 | Service | |||||||||||||
| 10/12/15 | $ | 3,500 | $ | 150 | $ | 3,650 | $ | .000812 | 4,494,567 | GW | |||||||||||||
| 10/13/15 | $ | 5,000 | $ | 216 | $ | 5,216 | $ | .00087 | 5,995,275 | LG | |||||||||||||
| 10/16/15 | $ | 10.549 | $ | 13,924 | $ | 24,473 | $ | .001003 | 24,400,000 | Tonaquint | |||||||||||||
| 11/6/15 | $ | 5,500 | $ | 265 | $ | 5,765 | $ | .000638 | 9,036,379 | LG | |||||||||||||
| 11/16/15 | $ | 14,005 | $ | 6,792 | $ | 20,797 | $ | .001 | 21,730,000 | Tonaquint | |||||||||||||
| $ | 635,975 | $ | 87,873 | $ | 723,848 | 158,039,912 |
| 23 |
In addition to the above during the year ended December 31, 2015, the Company:
On October 14, 2015, the Company issued 12,500,000 shares of common stock to Mr. Friedman for services. The Company valued the shares of common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015.
On April 14, 2015, the Company appointed Dr. Stephen Holt to the Advisory Board of the Board of Directors of the Company. The Company issued 5,000,000 shares of restricted common stock to Dr. Holt for his appointment.
On March 20, 2015, the Company issued 15,000,000 shares of common stock to the Company’s CEO in connection with an employment and board of director’s agreement naming Mr. Braune as CEO, President and a member of our Board of Directors. The shares of common stock were to vest as follows: 5,000,000, shares on the six month anniversary of the Agreement and 10,000,000 shares on the one year anniversary of the Agreement. Mr. Braune resigned from the board of directors and as CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation.
All such shares were issued in reliance on the exemption found in Section 4(a)(2) of the Securities Act of 1933, as amended. Each share recipient was provided with access to information which would be required to be included in a registration statement and such issuances did not involve a public offering.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to a smaller reporting company.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The independent auditors’ reports on our financial statements for the years ended December 31, 2016 and 2015 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 10 to the consolidated financial statements filed herein.
While our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our auditors have raised a substantial doubt about our ability to continue as a going concern.
Results of Operations
Year ended December 31, 2016 compared to December 31, 2015
Revenues
Revenues for the years ended December 31, 2016 and 2015 were $3,228 and $7,221, respectively.
Operating Expenses
Operating expenses were $607,921 for the year ended December 31, 2016 compared to $1,375,162 for the year ended December 31, 2015. The expenses were comprised of:
| 24 |
| Year Ended December 31, | ||||||||
| Description | 2016 | 2015 | ||||||
| Administration and management fees | $ | 163,850 | $ | 225,042 | ||||
| Stock compensation expense, management | — | 50,000 | ||||||
| Stock compensation expense, other | 2,371 | 113,346 | ||||||
| Professional and consulting fees | 178,381 | 61,750 | ||||||
| Impairment of goodwill | — | 192,849 | ||||||
| Reserve for land loss | — | 55,490 | ||||||
| Bad debt expense | — | 267,082 | ||||||
| Advertising and promotional expenses | 8,321 | 37,685 | ||||||
| Rent and occupancy costs | 40,303 | 64,190 | ||||||
| Leased property for sub-lease including maintenance costs | 114,894 | 201,327 | ||||||
| Travel and entertainment | 46,380 | 36,339 | ||||||
| General and other administrative | 53,421 | 69,972 | ||||||
| Total | $ | 607,921 | $ | 1,375,162 | ||||
Stock compensation expense, management, (included in Administrative and management fees in the consolidated statements of operations) for 2015, included the issuance on October 13, 2015, of 12,500,000 shares of common stock each to Mr. Friedman and Mr. Braune for services. The Company valued the shares of common stock at $50,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015.
Stock compensation expense, other (included in professional and consulting fees in the consolidated statements of operations) was $2,371 and $113,436 for the years ended December 31, 2016 and 2015. The 2015 period was comprised of the issuance on April 1, 2016, of 5,000,000 restricted shares of common stock issued to an advisor of our board of directors for his appointment. The Company valued the 5,000,000 shares of common stock at $100,000 ($0.02 per share, the market price of the common stock) and recorded the $100,000 as stock compensation expense. The Company also agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share. Option Shares of 400,000 vested immediately and 50,000 Option Shares vest each month form April 2015 through March 2016. Accordingly, as of December 31, 2015, 850,000 Option Shares have vested and the Company recorded $13,436 as stock compensation expense, based on Black-Scholes.
Professional and consulting fees (excluding stock compensation expense, other) increased for the year ended December 31, 2016 compared to December 31, 2015, and is comprised of the following:
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Legal fees | $ | 52,608 | $ | 21,633 | ||||
| Consulting fees | 4,000 | 4,000 | ||||||
| Accounting fees | 60,442 | 18,453 | ||||||
| Investor relation costs (including related of $41,400 and $5,000 for 2016 and 2015, respectively) | 61,331 | 17,664 | ||||||
| $ | 178,381 | $ | 61,750 | |||||
Bad debt expense for the year ended December 31, 2015, includes $266,422 of related party expense for the allowance for uncollectible amount from the amount due from 80 Commerce. In February 2016, the Company agreed to accept 1,101,642 shares of common stock of 800 Commerce, Inc. (now known as Petrogress, Inc.) for the settlement of the amount due. Based on the market value of the Petrogress common stock received, the Company recorded an allowance of $266,422 for the year ended December 31, 2015.
Advertising and promotional expenses decreased for the year ended December 31, 2016 compared to the year ended December 31, 2015. During the year ended December 31, 2015, the expenses included the engagement of 2 consultants for web site development and marketing research related to the Company’s new vaporizer it was planning to launch in the quarter ending September 30, 2015. The product has not been finalized and there have been no sales.
| 25 |
Rent and occupancy costs decreased for the year ended December 31, 2016 compared to the year ended December 31, 2015. The decrease was primarily as a result of the Company not renewing a Colorado apartment lease and office lease.
Leased property available for sub-lease and property maintenance costs were $114,894 and $201,327 for the years ended December 31, 2016 and 2015, respectively. The 2016 costs were comprised of leased real estate costs. The 2015 costs were primarily comprised of $169,644 for leased real estate, $27,083 for water rights that the Company planned to lease or sub-lease to licensed marijuana operators and $10,000 for fee paid to a property manager (terminated March 1, 2015). During the year ended December 31, 2015, the Company also received a refund of $8,400 for land surveys not completed by the vendor. The Company has not sub-leased either of these properties and is delinquent in rent payments on both properties.
General and other administrative costs for the year ended December 31, 2015, decreased compared to the year ended December 31, 2014. The significant expenses is comprised of the following:
| Description | 2016 | 2015 | ||||||
| Filing fees and transfer agent fees | $ | 15,005 | $ | 18,216 | ||||
| Payroll taxes and fees | — | 7,465 | ||||||
| Other taxes | 8,158 | 13,943 | ||||||
| Insurance | — | 5,222 | ||||||
| Telephone, internet and website expenses | 20,975 | 13,082 | ||||||
| Office supplies | 2,243 | 2,056 | ||||||
| Other general and other administrative | 7,039 | 9,988 | ||||||
| Total | $ | 53,420 | $ | 69,972 |
Other Income (Expense), Net
Other expense for the year ended December 31, 2016 was $2,370,035 compared to $706,971 for the year ended December 31, 2015. Other expense for the 2016 period was from the increase on the fair value of derivatives of $1,457,071, loss on investment in subsidiary of $255,000 and interest expense of $742,041 partially offset by a gain in debt extinguishment of $84,057.
The 2015 period included a net loss on debt settlements of $183,277, an increase in the fair value of derivatives of $30,916 and interest expense of $492,777. Loss on debt settlements was comprised of a gain of $275,534 pursuant to the DLF Agreement with Tonaquint, as well as the write off of $8,700 of accounts payable to other vendors, and losses on debt settlements for the issuance of 1,000,000 shares of Series B preferred Stock, valued at $276,300, to Mr. Friedman in exchange for the extinguishment of $40,000 of accrued and unpaid management fees and $231,211 loss on the issuance of common stock to retire liabilities.
Interest expense increased in the current period and was comprised of:
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Interest on face value and other | $ | 54,251 | $ | 45,037 | ||||
| Additional true-up interest | — | 249,877 | ||||||
| Amortization of note discount | 663,031 | 207,284 | ||||||
| Amortization of deferred financing fees | 25,355 | 13,268 | ||||||
| Interest income | (616 | ) | (22,689 | ) | ||||
| Total | $ | 742,021 | $ | 492,777 | ||||
| 26 |
Year ended December 31, 2015 compared to December 31, 2014
Revenues
Revenues for the years ended December 31, 2015 and 2014 were $7,221 and $47,261, respectively, and were comprised of the following:
| Year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Wellness products | $ | 7,221 | $ | 32,045 | ||||
| Chillo products | — | 15,216 | ||||||
| Total | $ | 7,221 | $ | 47,261 | ||||
During 2013, the Company entered into an exclusive distributorship agreement with Chill Drinks, LLC for sales of Chill Drink’s products to dispensaries. Sales began in April 2013 and ceased upon the termination of the agreement.
Operating Expenses
Operating expenses were $1,375,162 for the year ended December 31, 2015 compared to $1,315,676 for the year ended December 31, 2014. The expenses were comprised of:
| Year Ended December 31, | ||||||||
| Description | 2015 | 2014 | ||||||
| Administration and management fees | $ | 225,042 | $ | 314,660 | ||||
| Stock compensation expense, management | 50,000 | — | ||||||
| Stock compensation expense, other | 113,436 | 379,000 | ||||||
| Professional and consulting fees | 61,750 | 58,532 | ||||||
| Impairment of goodwill | 192,849 | — | ||||||
| Reserve for land loss | 55,490 | — | ||||||
| Bad debt expense | 267,082 | 16,654 | ||||||
| Advertising and promotional expenses | 37,685 | 72,091 | ||||||
| Rent and occupancy costs | 64,190 | 76,235 | ||||||
| Leased property for sub-lease including maintenance costs | 201,327 | 227,088 | ||||||
| Travel and entertainment | 36,339 | 71,029 | ||||||
| General and other administrative | 69,972 | 100,387 | ||||||
| Total | $ | 1,375,162 | $ | 1,315,676 | ||||
Stock compensation expense, management, (included in Administrative and management fees in the consolidated statements of operations) included the issuance on October 13, 2015, of 12,500,000 shares of common stock each to Mr. Friedman and Mr. Braune for services. The Company valued the shares of common stock at $50,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015.
Stock compensation expense, other (included in professional and consulting fees in the consolidated statements of operations) was $113,436 and $379,000 for the years ended December 31, 2015 and 2014. The 2015 period was comprised of the issuance on April 1, 2016, of 5,000,000 restricted shares of common stock issued to an advisor of our board of directors for his appointment. The Company valued the 5,000,000 shares of common stock at $100,000 ($0.02 per share, the market price of the common stock) and recorded the $100,000 as stock compensation expense. The Company also agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share. Option Shares of 400,000 vested immediately and 50,000 Option Shares vest each month form April 2015 through March 2016. Accordingly, as of December 31, 2015, 850,000 Option Shares have vested and the Company recorded $13,436 as stock compensation expense, based on Black-Scholes. The 2014 period is comprised of $133,000 to advisories to the board of directors and $246,000 for the issuance of 2,035,895 shares of common stock for services provided.
| 27 |
Professional and consulting fees (excluding stock compensation expense, other) increased for the year ended December 31, 2015 compared to December 31, 2014, and is comprised of the following:
| Year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Legal fees | $ | 21,633 | $ | 28,882 | ||||
| Consulting fees | 4,000 | 2,000 | ||||||
| Accounting fees | 18,453 | 14,050 | ||||||
| Investor relation costs (including $5,000 related) | 17,664 | 13,600 | ||||||
| $ | 61,750 | $ | 58,532 | |||||
Bad debt expense for the year ended December 31, 2015, includes $266,422 of related party expense for the allowance for uncollectible amount from the amount due from 80 Commerce. In February 2016, the Company agreed to accept 1,101,642 shares of common stock of 800 Commerce, Inc. (now known as Petrogress, Inc.) for the settlement of the amount due. Based on the market value of the Petrogress common stock received, the Company recorded an allowance of $266,422 for the year ended December 31, 2015.
Advertising and promotional expenses decreased for the year ended December 31, 2015 compared to the year ended December 31, 2014. During the year ended December 31, 2015, the expenses included to the engagement of 2 consultants for web site development and marketing research related to the Company’s new vaporizer it was planning to launch in the quarter ending September 30, 2015. The product has not been finalized and there have been no sales.
Rent and occupancy costs decreased for the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease was primarily as a result of the Company not renewing a Colorado apartment lease.
Leased property available for sub-lease and property maintenance costs were $201,327 and $227,088 for the years ended December 31, 2015 and 2014, respectively. The 2015 costs were primarily comprised of $169,644 for leased real estate, $27,083 for water rights that the Company planned to lease or sub-lease to licensed marijuana operators and $10,000 for fee paid to a property manager (terminated March 1, 2015). During the year ended December 31, 2015, the Company also received a refund of $8,400 for land surveys not completed by the vendor. The Company has not sub-leased either of these properties and is delinquent in rent payments on both properties. The 2014 costs were comprised of $85,246 for leased real estate that the Company plans to lease or sub-lease to licensed marijuana operators, $22,917 for water rights, $15,500 for land surveys and $2,425 on land maintenance. Additionally, the Company expensed $51,000 for fees paid to a property manager and $50,000 it had advanced to MYLO Construction for the management and construction of a proposed building in the Apex Industrial Park Complex, otherwise known as Nevada’s “Green Zone”. On December 16, 2015, the Company and AVHI, the Company’s wholly owned subsidiary entered into a Deed in Lieu of Foreclosure Agreement (the “DLF Agreement”) with Tonaquint, pursuant to which the Company conveyed its’ interest in the Green Zone Property.
General and other administrative costs for the year ended December 31, 2015, decreased compared to the year ended December 31, 2014. The significant expenses is comprised of the following:
| Description | 2015 | 2014 | ||||||
| Settlement expense | $ | — | $ | 15,000 | ||||
| Payroll taxes and fees | 7,465 | 6,304 | ||||||
| Filing fees and transfer agent fees | 18,216 | 12,236 | ||||||
| Office and moving expense | — | 9,518 | ||||||
| Other taxes | 13,943 | — | ||||||
| Insurance | 5,222 | — | ||||||
| Telephone, internet and website expenses | 13,082 | 17,225 | ||||||
| Office supplies | 2,056 | 11,736 | ||||||
| Other general and other administrative | 9,988 | 28,368 | ||||||
| Total | $ | 69,972 | $ | 100,387 |
| 28 |
Other Income (Expense), Net
Other expense for the year ended December 31, 2015 was $706,971 compared to $675,083 for the year ended December 31, 2014. The 2015 period included a net loss on debt settlements of $183,277, an increase in the fair value of derivatives of $30,916 and interest expense of $492,777. Loss on debt settlements was comprised of a gain of $275,534 pursuant to the DLF Agreement with Tonaquint, as well as the write off of $8,700 of accounts payable to other vendors, and losses on debt settlements for the issuance of 1,000,000 shares of Series B preferred Stock, valued at $276,300, to Mr. Friedman in exchange for the extinguishment of $40,000 of accrued and unpaid management fees and $231,211 loss on the issuance of common stock to retire liabilities. Included in other expenses for the 2014 period was income from the decrease on the fair value of derivatives of $30,347 and interest income of $80,206, offset by interest expense of $785,636.
Interest expense increased in the current period and was comprised of:
| Year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Interest on face value and other | $ | 45,037 | $ | 133,769 | ||||
| Additional true-up interest | 249,876 | 123,572 | ||||||
| Amortization of note discount | 184,530 | 81,537 | ||||||
| Amortization of OID | 22,755 | 167,245 | ||||||
| Amortization of deferred financing fees | 13,268 | 35,378 | ||||||
| Interest income | (22,689 | ) | (80,206 | ) | ||||
| Total | $ | 492,777 | $ | 461,295 | ||||
Liquidity and Capital Resources.
For the year ended December 31, 2016, net cash used in operating activities was $445,260 compared to $472,615 for the year ended December 31, 2015. The net loss for the year ended December 31, 2016 of $2,977,889 was primarily impacted by the amortization of discounts on convertible notes of $635,780, $3,249,056 for the initial fair value of derivative liabilities and $255,000 for the loss on investment in subsidiary, offset by the change in fair values of derivative liabilities of $1,791,988 and the gain on settlements of debt of $84,057. Changes in operating assets and liabilities that reduced cash used in operating activities included increases in accounts payable and accrued expenses of $234,234 and due to related party increase of $32,935.
The net loss for the year ended December 31, 2015 of $2,115,828 was impacted by the impairment of goodwill of $192,849, bad debt expense of $267,082 the amortization of discounts on convertible notes of $207,284, stock and warrant based compensation of $163,436, reserve for land loss of $55,490, $82,239 for the initial fair value of derivative liabilities and the amortization of deferred financing fees of $13,268 related to the convertible promissory notes offset by the change in fair values of derivative liabilities of $51,323 and loss on settlements of debt of $183,277. Changes in operating assets and liabilities that reduced cash used in operating activities included an increase in accounts payable and accrued expenses of $494,047, a decrease in prepaid assets and other of $84,907 and a decrease in inventory of $42,061. Changes in operating assets and liabilities utilizing cash was the result of the return of $90,000 on tenant deposits and decrease in deferred compensation of $3,683.
During the year ended December 31, 2016, net cash used in investing activities was $20,757 compared to $46,188 for the year ended December 31, 2015. For the period ending December 31, 2016, the Company purchased furniture and equipment. The 2015 period was a result advances to a related party.
Net cash provided by financing activities was $521,731 and $411,921 for the years ended December 31, 2016 and 2015, respectively. For the year ended December 31, 2016, the Company received $521,731 for the issuance of convertible notes. The 2015 activity was comprised of proceeds received related to the Tonaquint notes and interest receivable of $233,358, the issuance of convertible promissory notes of $200,000 and payments of deferred financing fees of 13,887.
For the year ended December 31, 2015, cash and cash equivalents increased by $55,712 compared to a decrease of $106,882 for the year ended December 31, 2015. Ending cash and cash equivalents at December 31, 2016 was $67,260 compared to $11,547 at December 31, 2015.
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We do not have cash and cash equivalents on hand to meet our obligations. We presently maintain our daily operations and capital needs through the sale of our products and financings available to us from our lenders.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies
Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make certain 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. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
As such, in accordance with the use of accounting principles generally accepted in the United States of America, our actual realized results may differ from management’s initial estimates as reported. A summary of significant accounting policies are detailed in notes to the financial statements which are an integral component of this annual report on Form 10-K.
Revenue Recognition
The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” (“SAB No. 104”). SAB 104 clarifies application of generally accepted accounting principles related to revenue transactions. The Company also follows the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF Issue No. 00-21”), in arrangements with multiple deliverables.
The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.
The Company recognizes revenue during the month in which products are shipped or commissions were earned.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.
Accounts Receivable
The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectibility is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term.
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Inventory
Inventory is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving inventory is made based on management analysis or inventory levels and future sales forecasts.
Investment of Non-Marketable Securities
The Company’s investment in non-marketable securities consist of cash investments in a less than 10% interest in privately held companies that provide merchant processing services.
Impartment of Long-Lived Assets and Long-Lived Assets to be Disposed
We evaluate long-lived assets and identifiable intangible assets with finite useful lives in accordance with ASC 350-30 and ASC 360 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), and accordingly, management reviews our long-lived assets and identifiable intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize an impairment loss when the sum of the future undiscounted net cash flows expected to be realized from the asset is less than its carrying amount. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Considerable judgment is necessary to estimate the fair value of the assets and accordingly, actual results could vary significantly from such estimates. Our most significant estimates and judgments relating to the long-lived asset impairments include the timing and amount of projected future cash flows.
Fair Value of Financial Instruments
Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
Level 1 – Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.
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The Company’s financial instruments consist primarily of cash, accounts payable and accrued expenses, and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.
Earnings (Loss) Per Share
Earnings (loss) per share are computed in accordance with ASC 260, “Earnings per Share”. Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. As of December 31, 2016 there were warrants to purchase 6,059,524 shares of common stock, the Company’s outstanding convertible debt is convertible into 55,052,718 shares of common stock. These amounts are not included in the computation of dilutive loss per share because their impact is antidilutive.
Accounting for Stock-Based Compensation
The Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. Stock awards granted to non-employees are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in which services are provided.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules appearing on pages F-1 to F-12 of this annual report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), as of the end of the period covered by this annual report on Form 10-K, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report. Based on that review and evaluation, the CEO and CFO have concluded that as of December 31, 2016 disclosure controls and procedures were not effective at ensuring that the material information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in the application of SEC rules and forms.
Management’s Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
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| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and disposition of our assets; |
| • | Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our CEO and CFO have evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). As a result of this evaluation, we concluded that our internal control over financial reporting was not effective as of December 31, 2016 as described below.
We assessed the effectiveness of the Company’s internal control over financial reporting as of evaluation date and identified the following material weaknesses:
Insufficient Resources: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.
Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.
Lack of Audit Committee: We do not have a functioning audit committee, resulting in lack of independent oversight in the establishment and monitoring of required internal controls and procedures.
We are committed to improving the internal controls and will (1) consider to use third party specialists to address shortfalls in staffing and to assist us with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may consider appointing additional outside directors and audit committee members in the future.
We have discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of these material weaknesses, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10, DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Identification of directors and executive officers.
Set forth below is information regarding the Company’s current directors and executive officers. There are no family relationships between any of our directors or executive officers. The directors are elected annually by stockholders. The executive officers serve at the pleasure of the Board of Directors:
| Name | Age | Positions Held and Tenure |
| B. Michael Friedman | 50 | Chief Executive Officer and Director |
B. Michael Friedman, Chief Executive Officer. From 2009 to March 2016, Mr. B. Michael Friedman had been the Company’s Chief Executive Officer and member of the Company’s Board of Directors. On November 4, 2016, Mr. Friedman was named interim CEO and was appointed to the Board of directors. In February 2010 (inception date) Mr. Friedman founded 800 Commerce and had been the President from inception date until his resignation on February 29, 2016. Mr. Friedman has over 20 years of investment banking experience, particularly in the areas of mergers and acquisitions, manufacturing, marketing, advertising, and licensing. Since 2008 Mr. Friedman operates in a managerial capacity, First Level Capital LLC, a mergers and acquisitions and financial consulting firm located in Los Angeles, California. Mr. Friedman received his Bachelor of Science (BS) in Marketing and Management in 1986 from the University of Florida, in Gainesville, Florida.
Involvement in Certain Legal Proceedings
No director, executive officer, significant employee or control person of the Company has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.
Code of Ethics
We adopted a Code of Ethics for Senior Financial Management to promote honest and ethical conduct and to deter wrongdoing. This Code applies to our Chief Executive Officer and Chief Financial Officer and other employees performing similar functions. The obligations of the Code of Ethics supplement, but do not replace, any other code of conduct or ethics policy applicable to our employees generally.
Under the Code of Ethics, all members of the senior financial management shall:
| • | Act honestly and ethically in the performance of their duties at our company, |
| • | Avoid actual or apparent conflicts of interest between personal and professional relationships, |
| • | Provide full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submits to, the SEC and in other public communications by our company, |
| • | Comply with rules and regulations of federal, state and local governments and other private and public regulatory agencies that effect the conduct of our business and our financial reporting, |
| • | Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing the member’s independent judgment to be subordinated |
| • | Respect the confidentiality of information in the course of work, except when authorized or legally obtained to disclosure such information, |
| • | Share knowledge and maintain skills relevant to carrying out the member’s duties within our company, |
| • | Proactively promote ethical behavior as a responsible partner among peers and colleagues in the work environment and community, |
| • | Achieve responsible use of and control over all assets and resources of our company entrusted to the member, and |
| • | Promptly bring to the attention of the Chief Executive Officer any information concerning (a) significant deficiencies in the design or operating of internal controls which could adversely affect to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in our financial reporting or internal controls. |
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Corporate Governance
During the quarter ended December 31, 2016, there were no material changes to procedures by which security holders may recommend nominees to our board of directors.
We currently have no standing audit, nominating or compensation committees of our board of directors. Our entire board of directors currently performs these functions. The functions of those committees are being undertaken by our officers and directors. Because we do not have any independent directors, our officers and directors believe that the establishment of committees of the Board would not provide any benefits to our company and could be considered more form than substance.
Director Independence
None of the members of our Board of Directors qualifies as an independent director in accordance with the published listing requirements of the NASDAQ Global Market. The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director, nor any of his family members has engaged in various types of business dealings with us. In addition, our Board has not made a subjective determination as to each director that no relationships exist which, in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, though such subjective determination is required by the NASDAQ rules. Had our Board of Directors made these determinations, our Board would have reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management.
In performing the functions of the audit committee, our board oversees our accounting and financial reporting process. In this function, our board performs several functions. Our board, among other duties, evaluates and assesses the qualifications of the Company’s independent auditors; determines whether to retain or terminate the existing independent auditors; meets with the independent auditors and financial management of the Company to review the scope of the proposed audit and audit procedures on an annual basis; reviews and approves the retention of independent auditors for any non-audit services; reviews the independence of the independent auditors; reviews with the independent auditors and with the Company’s financial accounting personnel the adequacy and effectiveness of accounting and financial controls and considers recommendations for improvement of such controls; reviews the financial statements to be included in our annual and quarterly reports filed with the Securities and Exchange Commission; and discusses with the Company’s management and the independent auditors the results of the annual audit and the results of our quarterly financial statements.
Our board as a whole considers executive officer compensation, and our entire board participates in the consideration of director compensation. Our board as a whole oversees our compensation policies, plans and programs, reviews and approves corporate performance goals and objectives relevant to the compensation of our executive officers, if any, and reviews the compensation and other terms of employment of our Chief Executive Officer and our other executive officers. Our board also administers our equity incentive and stock option plans, if any.
Each of our directors participates in the consideration of director nominees. In addition to nominees recommended by directors, our board will consider nominees recommended by shareholders if submitted in writing to our secretary. Our board believes that any candidate for director, whether recommended by shareholders or by the board, should be considered on the basis of all factors relevant to our needs and the credentials of the candidate at the time the candidate is proposed. Such factors include relevant business and industry experience and demonstrated character and judgment.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based solely upon a review of such reports, and on written representations from certain reporting persons, the Company believes that, with respect to the fiscal year ended December 31, 2016, each director, executive officer and 10% stockholder made timely filings of all reports required by Section 16 of the Exchange Act.
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ITEM 11. EXECUTIVE COMPENSATION.
The following tables set forth all of the compensation awarded to, earned by or paid to: (i) each individual serving as our principal executive officer; and (ii) each other individual that served as an executive officer at the conclusion of the fiscal year ended December 31, 2016 and who received in excess of $100,000.
Summary Compensation Table
| Name & Principal Position | Year | Salary | Stock Awards (2) | Option Awards | All Other Compensation (3) | Total | ||||||||||||||||||
| B. Michael Friedman (1) | 2016 | $ | 150,000 | $ | — | $ | — | $ | — | $ | 150,000 | |||||||||||||
| Chief Executive Officer | 2015 | $ | 62,500 | $ | 25,000 | $ | — | $ | 236,300 | $ | 323,800 | |||||||||||||
| Justin Braune | 2016 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
| Former Chief Executive Officer | 2015 | $ | 46,154 | $ | — | $ | — | $ | — | $ | 46,154 |
| (1) | Mr. Friedman resigned as an officer and director of the Company effective March 20, 2015, and was named interim CEO and as a member of the BOD on November 4, 2016. The 2015 salary is for the months Mr. Friedman was CEO, based on $12,500 per month for January through March and November and December 2015. |
| (2) | Company valued the shares of common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date). |
| (3) | Relates to the issuance of 1,000 shares of Class B Preferred Stock and includes the accounting value of the shares on a basis of their voting power. The shares are not convertible into common stock. |
We do not presently have pension, health, annuity, insurance, profit sharing or similar benefit plans; however, we may adopt plans in the future. There are presently no personal benefits available to our directors and officers.
Employment Agreements; Termination of Employment and Change of Control Arrangements
There are no current employment agreements between the Company and our executive officers or understandings regarding future compensation. There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person named in the summary compensation table set out above which would in any way result in payments to any such person because of his resignation, retirement, or other termination of such person’s employment with the Company or its subsidiaries, or any change in control of the Company, or a change in the person’s responsibilities following a changing in control of the Company.
Outstanding Equity Awards at Fiscal Year-End
Other than the awards included in the Summary Compensation Table above, no executive officer received any equity awards during 2016, or holds exercisable or unexercisable options, as of December 31, 2016.
Long-Term Incentive Plans
There are no arrangements or plans in which the Company would provide pension, retirement or similar benefits for directors or executive officers.
Compensation Committee
We currently do not have a compensation committee of our Board of Directors. The Board as a whole determines executive compensation.
Director Compensation
We do not pay fees to our directors for attendance at meetings of the board; however, we may adopt a policy of making such payments in the future. We will reimburse out-of-pocket expenses incurred by directors in attending board and committee meetings.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information known to the Company with respect to the beneficial ownership (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of the outstanding common stock of the Company as of March 31, 2017 by: (1) each person known by the Company to beneficially own 5% or more of the Company’s outstanding common stock; (2) each of the named executive officers as defined in Item 402(m)(2); (3) each of the Company’s directors; and (4) all of the Company’s executive officers and directors as a group. The number of shares beneficially owned is determined under rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares.
| Common Stock | Series B Preferred Stock | |||||||||||||||
| Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class (1) | Amount and Nature of Beneficial Ownership | Percent | ||||||||||||
| B. Michael Friedman 777 Brickell Avenue, Suite 500 Miami, FL 33131 | 38,504,952 | 8.4 | % | 1,000 | 100 | % | ||||||||||
| All directors and executive officers as a group – 1 person | 38,504,952 | 8.4 | % | 1,000 | 100 | % | ||||||||||
| (1) | Based on a total of an aggregate of 456,046,136 shares of common stock outstanding. |
| (2) | Based on 1,000 shares of Series B preferred stock outstanding. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Management fees
Effective January 1, 2013, the Company agreed to an annual compensation of $150,000 for its CEO, Mr. Michael Friedman (resigned March 20, 2015, re-appointed November 4, 2015), and $96,000 for the CFO, Mr. Barry Hollander (resigned September 15, 2015). Effective March 20, 2015, Mr. Justin Braune was named CEO and President. Mr. Braune also was appointed to the Board of Directors. B. Michael Friedman resigned his role as CEO and also from the Board of Directors. The Company agreed to an annual compensation of $100,000 for Mr. Braune in his role of CEO and Director of the Company and to issue Mr. Braune 15,000,000 shares of restricted common stock. The Company also initially issued Mr. Braune 12,500,000 shares of common stock on October 13, 2015. On October 16 2015, Mr. Braune advised the Company and the Company’s transfer agent at the time to cancel the shares. Mr. Braune resigned from the board of directors and as CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation.
For the years ended December 31, 2016 and 2015, the Company recorded expenses to its officers the following amounts included in Administrative and Management Fees in the consolidated statements of operations, included herein:
| 2016 | 2015 | |||||||
| Mr. Braune | $ | — | $ | 62,821 | ||||
| Mr. Friedman | 150,000 | 62,500 | ||||||
| Total | $ | 150,000 | $ | 246,000 | ||||
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As of December 31, 2016 and 2015, the Company owed to its officers the following amounts, included in deferred compensation on the Company’s consolidated balance sheet:
| 2016 | 2015 | |||||||
| Mr. Friedman | $ | 54,246 | $ | 8,580 | ||||
| Mr. Braune | 16,667 | 16,667 | ||||||
| Total | $ | 70,913 | $ | 25,247 | ||||
Effective June 26, 2015, the Company issued 1,000 shares of Class B Preferred Stock (super voting rights, non-convertible securities) to Mr. Friedman, resulting in Mr. Friedman having majority control in determining the outcome of all corporate transactions subject to vote, including the election of officers.
On October 13, 2015, the Company issued 12,500,000 shares of common stock to Mr. Friedman for services. The Company valued the shares of common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015.
On October 13, 2015, the Company issued 12,500,000 shares of common stock to Mr. Braune for services. The Company valued the shares of common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015. On October 16, 2015, Mr. Braune advised the Company and the transfer agent at the time to cancel the shares. Since then, Mr. Braune is claiming ownership of the shares, which the Company disputes.
Agreements with prior management
In December 2011 the Company issued a $50,000 convertible promissory note as part of a guaranty fee due to a Company that is affiliated with a former officer of the Company. Terms of the note include an eight percent per annum interest rate and the note matured on the one year anniversary on December 20, 2012. Additionally, the holder of the Note has the right to convert the note into shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the lowest closing bid price of the common stock within five (5) days of the conversion. On March 31, 2013, the Company and the noteholder elected to convert the remaining balance of the note of $32,000 and accrued and unpaid interest of $6,060 into 369,928 shares of common stock.
Also in December 2011, the Company agreed to pay an additional $50,000 in common stock, which is included in accounts payable and accrued expenses on the December 31, 2016 and 2015 balance sheets.
Amounts Due from 800 Commerce, Inc.
As of December 31, 2012, the Company owned 6,000,000 shares of 800 Commerce’s (now known as Petrogress, Inc.) common stock, representing approximately 32% of 800 Commerce’s outstanding common stock. Effective September 4, 2013, Agritek distributed the 6,000,000 shares of the Company’s common stock to their shareholders of record as of September 3, 2013. Through February 29, 2016, the Company and 800 Commerce were commonly controlled due to common management and board members. 800 Commerce owes Agritek $282,947 and $236,759 as of February 29, 2016 and December 31, 2015, respectively, as a result of advances received from or payments made by Agritek on behalf of 800 Commerce. In February 2016, the Company entered into a Debt Settlement Agreement (the “Settlement Agreement”) with Petrogress, Inc. whereby the Company accepted 1,101,642 shares of common stock of Petrogress in settlement of the amount due. Based on the market value of the Petrogress common stock on the date of the Settlement Agreement, the Company recognized a loss of $266,422 for the year ended December 31, 2015. Based on the market price of the Petrogress common stock as of December 31, 2016, the Company recorded an unrealized gain on marketable securities of $23,244 for the year ended December 31, 2016.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows the fees that were billed for the audit and other services provided by L & L, CPA’s (for the reporting period beginning September 30, 2015) and D. Brooks and Associates CPA’s P.A. (through reporting period ending June 30, 2015) for the years ended December 31, 2016 and 2015.
| 2016 | 2015 | |||||||
| Audit Fees | $ | 33,000 | $ | 9,845 | ||||
| Audit-Related Fees | — | — | ||||||
| Tax Fees | — | — | ||||||
| All Other Fees | — | — | ||||||
| Total | $ | 33,000 | $ | 9,845 | ||||
Audit Fees — This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees — This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.
Tax Fees — This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice.
All Other Fees — This category consists of fees for other miscellaneous items.
Our board of directors has adopted a procedure for pre-approval of all fees charged by our independent registered public accounting firm. Under the procedure, the board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the board. All audit and permissible non-audit services provided by the auditors with respect to 2015 and 2014 were pre-approved by the board of directors.
PART IV
ITEM 15. EXHIBITS AND REPORTS.
| (a) | 1. | Financial Statements |
| The consolidated financial statements and Report of Independent Registered Public Accounting Firms are included on pages F-1 through F-26. | ||
| 2. | Financial Statement Schedules | |
| All schedules for which provisions made in the applicable accounting regulations of the Securities and Exchange Commission (the “Commission”) are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the financial statements included herein. | ||
| 3. | Exhibits (including those incorporated by reference). |
| 39 |
| Exhibit | ||
| Number | Description of Exhibit | |
| 10.1 | Form of Convertible Promissory Note by and between Agritek Holdings, Inc. and Vis Vires Group, Inc. dated February 23, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015). | |
| 10.2 | Form of 8% Convertible Redeemable Note by and between Agritek Holdings, Inc. and LG Capital Funding, LLC dated March 27, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015). | |
| 10.3 | Form of 8% Convertible Redeemable Note by and between Agritek Holdings, Inc. and GW Holding Group, LLC dated March 30, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015). | |
| 10.4+ | Employment and Board of Directors Agreement effective March 20, 2015 by and between Agritek Holdings, Inc. and Justin Braune (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on March 20, 2015). | |
| 10.5 | Deed in Lieu of Foreclosure Agreement dated December 16, 2015, by and among Agritek Holdings, Inc. and Tonaquint, Inc. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on February 12, 2016). | |
| 10.6 | Replacement Note dated January 5, 2016, issued to LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.2 as filed on Form 8-K with the SEC on February 12, 2016). | |
| 10.7 | Replacement Note dated January 5, 2016, issued to LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.3 as filed on Form 8-K with the SEC on February 12, 2016). | |
| 10.8 | Replacement Note dated January 5, 2016, issued to Cerberus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.4 as filed on Form 8-K with the SEC on February 12, 2016). | |
| 10.9 | Securities Purchase Agreement dated January 19, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.5 as filed on Form 8-K with the SEC on February 12, 2016). | |
| 10.10 | Convertible Redeemable Note dated January 19, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.6 as filed on Form 8-K with the SEC on February 12, 2016). | |
| 10.11 | Securities Purchase Agreement dated January 19, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD. (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on February 12, 2016). | |
| 10.12 | Convertible Redeemable Note dated January 19, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.8 as filed on Form 8-K with the SEC on February 12, 2016). | |
| 10.13 | Securities Purchase Agreement dated March 23, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD. (Incorporated herein by reference to Exhibit 10.13 as filed on Form 10-Q with the SEC on May 23, 2016). | |
| 10.14 | Convertible Redeemable Note dated March 23, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.14 as filed on Form 10-Q with the SEC on May 23, 2016). | |
| 10.15 | Securities Purchase Agreement dated December 13, 2016 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on December 19, 2016). | |
| 10.16 | Convertible Redeemable Note dated December 13, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.2 as filed on Form 8-K with the SEC on December 19, 2016). | |
| 10.17 | Convertible Redeemable Note Back End dated December 13, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.3 as filed on Form 8-K with the SEC on December 19, 2016). | |
| 40 |
| 10.18 | Collateralized Secured Promissory Note dated December 13, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.4 as filed on Form 8-K with the SEC on December 19, 2016). | |
| 10.19 | Termination Agreement dated December 13, 2016 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.5 as filed on Form 8-K with the SEC on December 19, 2016). | |
| 10.20 | Investor Note #1 dated October 31, 2016, by and between Agritek Holdings, Inc. and St. George Investments LLC. (Incorporated herein by reference to Exhibit 10.6 as filed on Form 8-K with the SEC on December 19, 2016). | |
| 10.21 | Warrant #2 dated October 31, 2016, by and between Agritek Holdings, Inc. and St. George Investments LLC. (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on December 19, 2016). | |
| 10.22 | Investments LLC. (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on December 19, 2016). | |
| 10.23 | Securities Purchase Agreement dated January 24, 2017 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on January 31, 2017). | |
| 10.24 | Convertible Redeemable Note dated January 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.2 as filed on Form 8-K with the SEC on January 31, 2017). | |
| 10.25 | Convertible Redeemable Note Back End dated January 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.3 as filed on Form 8-K with the SEC on January 31, 2017). | |
| 10.26 | Collateralized Secured Promissory Note dated January 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.4 as filed on Form 8-K with the SEC on January 31, 2017). | |
| 10.27 | Securities Purchase Agreement dated January 24, 2017 by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.5 as filed on Form 8-K with the SEC on January 31, 2017). | |
| 10.28 | Convertible Redeemable Note dated January 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.6 as filed on Form 8-K with the SEC on January 31, 2017). | |
| 10.29 | Convertible Redeemable Note Back End dated January 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on January 31, 2017). | |
| 10.30 | Collateralized Secured Promissory Note dated January 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.8 as filed on Form 8-K with the SEC on January 31, 2017). | |
| 10.31* | Securities Purchase Agreement dated February 1, 2017 by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD. | |
| 10.32* | Convertible Promissory Note dated February 1, 2017, by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD. | |
| 10.33* | Securities Purchase Agreement dated February 24, 2017 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. | |
| 10.34* | Convertible Redeemable Note dated February 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. | |
| 10.35* | Convertible Redeemable Note Back End dated February 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. | |
| 10.36* | Collateralized Secured Promissory Note dated February 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. | |
| 10.37* | Securities Purchase Agreement dated February 24, 2017 by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. | |
| 10.38* | Convertible Redeemable Note dated February 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. | |
| 10.39* | Convertible Redeemable Note Back End dated February 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. | |
| 41 |
| 10.40* | Collateralized Secured Promissory Note dated February 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. | |
| 10.41* | Securities Purchase Agreement dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. | |
| 10.42* | Convertible Redeemable Note dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. | |
| 10.43* | Convertible Redeemable Note Back End dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. | |
| 10.44* | Collateralized Secured Promissory Note dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. | |
| 31.1* | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive and Financial Officer | |
| 32.1* | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer | |
| 101.INS* | XBRL Instance | |
| 101.SCH* | XBRL Taxonomy Extension Schema | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB* | XBRL Taxonomy Extension Labels Linkbase | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
*Filed herewith
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
| Agritek Holdings, Inc. |
| By: | /s/ B. Michael Friedman |
| B. Michael Friedman | |
| Chief Executive Officer | |
| Date: | March 31, 2017 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ B. Michael Friedman | Chief Executive Officer, President and Director (principal executive officer and principal accounting officer) | March 31, 2017 | ||
| B. Michael Friedman | ||||
| 42 |
AGRITEK HOLDINGS, INC.
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
INDEX TO FINANCIAL STATEMENTS
| Report of Independent Registered Public Accounting Firm | F-2 |
| Consolidated Balance Sheets as of December 31, 2016 and 2015 | F-3 |
| Consolidated Statements of Operations for the years ended December 31, 2016 and 2015 | F-4 |
| Consolidated Statement of Changes in Stockholders Deficit for the years ended December 31, 2016 and 2015 | F-5 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 | F-6 |
| Notes to Consolidated Financial Statements | F-7 – F-26 |
| F-1 |
To the Board of Directors and
Agritek holdings, Inc.
We have audited the accompanying balance sheets of Agritek holdings, Inc. (the “Company”) as of December 31, 2016 and 2015 and related statements of operations, stockholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. 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 audits 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 audits 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 Agritek holdings, Inc. as of December 31, 2016 and 2015 and the results of its operations and its cash flows for year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has suffered recurring operating losses, has an accumulated stockholders’ deficit, has negative working capital, has had minimal revenues from operations, and has yet to generate an internal cash flow that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 11. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ L&L CPAS, PA
L&L CPAS, PA
Certified Public Accountants
Cornelius, NC
The United States of America
March 31, 2017
| F-2 |
| AGRITEK HOLDINGS, INC. AND SUBSIDIARIES | ||||||||||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| ASSETS | ||||||||||||||||
| Current Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 67,260 | $ | 11,548 | ||||||||||||
| Marketable Securities | 39,769 | — | ||||||||||||||
| Due from related party | — | 16,525 | ||||||||||||||
| Prepaid assets and other | 10,000 | 3,333 | ||||||||||||||
| Total current assets | 117,029 | 31,406 | ||||||||||||||
| Other | 825 | 825 | ||||||||||||||
| Property and equipment, net of accumulated depreciation of $8,308 (2016) and $4,742 (2015) | 26,280 | 9,087 | ||||||||||||||
| Investments in non-marketable securities | 50,000 | 50,000 | ||||||||||||||
| Total assets | $ | 194,134 | $ | 91,318 | ||||||||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||||||||||
| Current Liabilities: | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 534,219 | $ | 323,607 | ||||||||||||
| Due to related party | 70,913 | 37,978 | ||||||||||||||
| Customer deposits | 2,400 | — | ||||||||||||||
| Convertible notes payable, net of discount of $257,034 (2016) and $27,220 (2015) | 569,446 | 445,294 | ||||||||||||||
| Derivative liabilities | 1,613,770 | 167,014 | ||||||||||||||
| Total current liabilities | 2,790,747 | 973,893 | ||||||||||||||
| Commitments and Contingencies | ||||||||||||||||
| Stockholders' Deficit: | ||||||||||||||||
| Series B convertible preferred stock, $0.01 par value; 1,000,000 shares authorized, and 1,000 shares issued and outstanding | 10 | 10 | ||||||||||||||
| Common stock, $.0001 par value; 500,000,000 shares authorized; 400,867,449 (2016) and 281,540,332 (2015) shares issued and outstanding | 40,087 | 28,155 | ||||||||||||||
| Additional paid-in capital | 13,764,813 | 12,536,138 | ||||||||||||||
| Accumulated comprehensive gain | 23,244 | — | ||||||||||||||
| Accumulated deficit | (16,424,767 | ) | (13,446,878 | ) | ||||||||||||
| Total stockholders' deficit | (2,596,613 | ) | (882,575 | ) | ||||||||||||
| Total liabilities and stockholders' deficit | $ | 194,134 | $ | 91,318 | ||||||||||||
| See notes to consolidated financial statements. | ||||||||||||||||
| F-3 |
| AGRITEK HOLDINGS, INC. AND SUBSIDIARIES | ||||||||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Product revenue | $ | 3,228 | $ | 7,221 | ||||||||||||
| Cost of revenue | 3,161 | 40,916 | ||||||||||||||
| Gross profit (loss) | 67 | (33,695 | ) | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Administrative and management fees (including $50,000 of stock based compensation for the year ended December 31, 2015) | 163,850 | 275,042 | ||||||||||||||
| Professional and consulting fees (including $2,371 and $113,436 of stock based compensation for the year ended December 31, 2016 and 2015, respectively) | 180,752 | 175,186 | ||||||||||||||
| Impairment of goodwill | — | 192,849 | ||||||||||||||
| Reserve for land loss | — | 55,490 | ||||||||||||||
| Bad debt expense (including $266,422 related party for the year ended Decemeber 31, 2015) | — | 267,082 | ||||||||||||||
| Rent and other occupancy costs | 40,303 | 64,190 | ||||||||||||||
| Leased property expense | 114,894 | 201,327 | ||||||||||||||
| Advertising and promotion | 8,321 | 37,685 | ||||||||||||||
| Travel and entertainment | 46,380 | 36,339 | ||||||||||||||
| Other general and administrative expenses | 53,420 | 69,972 | ||||||||||||||
| Total operating expenses | 607,921 | 1,375,162 | ||||||||||||||
| Operating loss | (607,854 | ) | (1,408,857 | ) | ||||||||||||
| Other Income (Expense): | ||||||||||||||||
| Gain/(loss) on debt settlement | 84,057 | (183,277 | ) | |||||||||||||
| Loss on investment in subsidiary | 255,000 | — | ||||||||||||||
| Interest expense | (742,021 | ) | (492,777 | ) | ||||||||||||
| Derivative liability expense | (1,457,071 | ) | (30,916 | ) | ||||||||||||
| Total other expense, net | (2,370,035 | ) | (706,971 | ) | ||||||||||||
| Net loss | $ | (2,977,889 | ) | $ | (2,115,828 | ) | ||||||||||
| Unrealized gain on marketable securities | 23,244 | — | ||||||||||||||
| Net comprehensive loss | $ | (2,954,645 | ) | $ | (2,115,828 | ) | ||||||||||
| Basic and diluted loss per share | $ | (0.01 | ) | $ | (0.01 | ) | ||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Basic and diluted | 334,772,545 | 163,663,783 | ||||||||||||||
| See notes to consolidated financial statements. | ||||||||||||||||
| F-4 |
| AGRITEK HOLDINGS, INC. AND SUBSIDIARIES | ||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT | ||||||||||||||||||||||||||||||||
| Common Stock | Series B Preferred Stock | Additional Paid-in | Accumulated Comprehensive | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Gain | Deficit | Deficiency | |||||||||||||||||||||||||
| Balances, January 1, 2015 | 93,500,420 | $ | 9,351 | — | $ | — | $ | 11,084,504 | $ | — | $ | (11,331,051 | ) | $ | (237,196 | ) | ||||||||||||||||
| Common stock issued upon conversion of convertible debt and accrued interest | 158,039,912 | 15,804 | — | — | 1,014,908 | — | — | 1,030,712 | ||||||||||||||||||||||||
| Common stock issued for services | 30,000,000 | 3,000 | — | — | 147,000 | — | — | 150,000 | ||||||||||||||||||||||||
| Issuance of common stock warrants for board advisory services | — | — | — | — | 13,436 | — | — | 13,436 | ||||||||||||||||||||||||
| Preferred stock issued for payment of accrued salaries | — | — | 1,000 | 10 | 276,290 | — | — | 276,300 | ||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (2,115,828 | ) | (2,115,828 | ) | ||||||||||||||||||||||
| Balances December 31, 2015 | 281,540,332 | 28,155 | 1,000 | 10 | 12,536,138 | — | (13,446,879 | ) | (882,576 | ) | ||||||||||||||||||||||
| Common stock issued upon conversion of convertible debt and accrued interest | 114,327,117 | 11,432 | — | — | 179,953 | — | — | 191,385 | ||||||||||||||||||||||||
| Issuance of common stock for acquisition | 5,000,000 | 500 | — | — | 254,500 | — | — | 255,000 | ||||||||||||||||||||||||
| Issuance of warrants for services | — | — | — | — | 2,371 | — | — | 2,371 | ||||||||||||||||||||||||
| Reclassification for conversions of convertible debt | — | — | — | — | 791,851 | — | — | 791,851 | ||||||||||||||||||||||||
| Unrealized gain on marketable securities | — | — | — | — | — | 23,244 | — | 23,244 | ||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (2,977,889 | ) | (2,977,889 | ) | ||||||||||||||||||||||
| Balances, December 31, 2016 | 395,717,449 | $ | 39,572 | 1,000 | $ | 10 | $ | 13,764,813 | $ | 23,244 | $ | (16,424,768 | ) | $ | (2,596,614 | ) | ||||||||||||||||
| See notes to consolidated financial statements. | ||||||||||||||||||||||||||||||||
| F-5 |
| AGRITEK HOLDINGS, INC. AND SUBSIDIARIES | ||||||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Cash flow from operating activities: | ||||||||||||||||
| Net loss | $ | (2,977,889 | ) | $ | (2,115,828 | ) | ||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Stock and warrants issued for consulting services | 2,371 | 163,436 | ||||||||||||||
| Loss on investment in subsidiary | 255,000 | — | ||||||||||||||
| Amortization of deferred financing costs | — | 13,268 | ||||||||||||||
| Impairment of goodwill | — | 192,849 | ||||||||||||||
| Reserve for land loss | — | 55,490 | ||||||||||||||
| Depreciation | 3,566 | 2,766 | ||||||||||||||
| Initial expense for fair value of derivative liabilities | 3,249,056 | 82,239 | ||||||||||||||
| Amortization of discounts on convertible notes | 635,780 | 207,284 | ||||||||||||||
| Change in fair values of derivative liabilities | (1,791,988 | ) | (51,323 | ) | ||||||||||||
| (Gain) loss on debt settlement | (84,057 | ) | 183,277 | |||||||||||||
| Bad debt related party | — | 266,422 | ||||||||||||||
| Bad debt expense | — | 660 | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Decrease (increase) in : | ||||||||||||||||
| Accounts receivable | — | (487 | ) | |||||||||||||
| Inventory | — | 42,061 | ||||||||||||||
| Prepaid assets and other | (6,667 | ) | 84,907 | |||||||||||||
| Increase (decrease) in: | ||||||||||||||||
| Accounts payable and accrued expenses | 234,234 | 494,047 | ||||||||||||||
| Due to related party | 32,935 | (3,683 | ) | |||||||||||||
| Tenant deposits | 2,400 | (90,000 | ) | |||||||||||||
| Net cash used in operating activities | (445,260 | ) | (472,615 | ) | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Purchase of equipment and furniture | (20,757 | ) | — | |||||||||||||
| Advances to related party | — | (46,188 | ) | |||||||||||||
| Net cash used in investing activities | (20,757 | ) | (46,188 | ) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Payments received on notes receivable issued for convertible debt | — | 223,358 | ||||||||||||||
| Proceeds from issuance of convertible debt | 521,731 | 200,000 | ||||||||||||||
| Proceeds from issuance of note payable, shareholder | — | 2,450 | ||||||||||||||
| Payments made on note payable | — | (13,887 | ) | |||||||||||||
| Net cash provided by financing activities | 521,731 | 411,921 | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 55,711 | (106,882 | ) | |||||||||||||
| Cash and cash equivalents, Beginning | 11,548 | 118,429 | ||||||||||||||
| Cash and cash equivalents, Ending | $ | 67,260 | $ | 11,547 | ||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||
| Cash paid for interest | $ | — | $ | — | ||||||||||||
| Cash paid for income taxes | $ | — | $ | — | ||||||||||||
| Schedule of non-cash financing activities: | ||||||||||||||||
| Conversion of notes payable and interest into common stock | $ | 191,386 | $ | 1,551,341 | ||||||||||||
| Fair value of marketable securities issued in exchange for debt | $ | 16,525 | $ | — | ||||||||||||
| Change in fair value for available for sale marketable securities | $ | 23,244 | $ | — | ||||||||||||
| Conversion of deferred compensation into preferred stock | $ | — | $ | 40,000 | ||||||||||||
| Cancellation of note payable for land acquisition | $ | — | $ | (74,313 | ) | |||||||||||
| Reduction of convertible note in exchange for deed in lieu of foreclosure | $ | — | $ | 224,466 | ||||||||||||
| See notes to consolidated financial statements. | ||||||||||||||||
| F-6 |
AGRITEK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization
Business
Agritek Holdings, Inc. (the “Company” or “Agritek”) and its wholly owned subsidiary, Agritek Venture Holdings, Inc. (“AVHI”), acquires and leases real estate to licensed marijuana operators, including providing complete turnkey growing space and related facilities to licensed marijuana growers and dispensary owners. Additionally, the Company offers a variety of services and product lines to the medicinal marijuana sector including the distribution of hemp based nutritional products and a line of innovative solutions for electronically processing merchant transactions.
The Company does not grow, harvest, distribute or sell marijuana or any substances that violate the laws of the United States of America.
Note 2 – Summary of Significant Account Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America ("US GAAP"). The consolidated financial statements of the Company include the consolidated accounts of Agritek and its’ wholly owned subsidiaries AVHI and Prohibition Products, Inc. (“PPI”). PPI, a Florida corporation, was originally formed on July 1, 2013 as The American Hemp Trading Company, Inc. (“AHTC”) and on August 27, 2014, AHTC changed its’ name to PPI. All intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.
Accounts Receivable
The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectability is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term. As of December 31, 2015, based on the above criteria, the Company has an allowance for doubtful accounts of $43,408.
Inventory
Inventory consists of finished goods and is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving inventory is made based on management analysis or inventory levels and future sales forecasts.
Deferred Financing Costs
The costs related to the issuance of debt would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
| F-7 |
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income.
For option-based simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Debt Issue Costs and Debt Discount
The Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The original issue discount would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
Marketable Securities
The Company classifies its marketable securities as available-for-sale securities, which are carried at their fair value based on the quoted market prices of the securities with unrealized gains and losses, net of deferred income taxes, reported as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Realized gains and losses on available-for-sale securities are included in net earnings in the period earned or incurred.
Investment of Non-Marketable Securities
The Company’s investment in non-marketable securities consist of cash investments in a less than 10% interest in two privately held companies that provide merchant processing services. Petrogress, Inc. (formerly 800 Commerce, Inc. and a subsidiary of the Company through its’ deconsolidation in May 2012) derived substantially all of its’ revenues, through April 2015, form these privately held companies.
Property and Equipment
Property and equipment are stated at cost, and except for land, depreciation is provided by use of a straight-line method over the estimated useful lives of the assets. The Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable. In November 2015, the Company was made aware that the land transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company was a party to the land purchase, however, the second party to the land contract never filed the original quit claim deed on behalf of the Company, even though a copy of the notarized quit claim deed was sent to the Company. To date, the Company has paid a total of $47,438.00 ($36,000 at closing) and is on the deed of trust of the property with a remaining note balance of approximately $75,000 held by the original owner. Accordingly, in December 2015, the Company reduced the remaining balance of the note payable for the acquisition of the land of $74,313 and recorded a reserve allowance for the remaining balance of the asset of $54,490. In February, 2017, the original owner of the 80 acres foreclosed on the property from the second party and the Company entered into a new land purchase contract directly with the landowner on February 7, 2017. The estimated useful lives of property and equipment are as follows:
| F-8 |
| Furniture and fixtures | 5 years |
| Computer equipment | 3 years |
The Company's property and equipment consisted of the following at December 31, 2016 and December 31, 2015:
2016 | 2015 | |||||||
| Furniture and fixtures | $ | 34,588 | $ | 13,829 | ||||
| Accumulated depreciation | (8,308 | ) | (4,742 | ) | ||||
| Balance | $ | 26,280 | $ | 9,087 | ||||
Depreciation expense of $3,566 and $2,766 was recorded for the year ended December 31, 2016 and 2015, respectively. The Company will record the land purchase in the first quarter of 2017.
Long-Lived Assets
Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on events and changes in circumstances on June 30, 2015, the Company reviewed the carrying amount of goodwill initially recorded from an acquisition in September 2014, and determined that the carrying amount may not be recoverable and accordingly recognized an impairment loss of $192,849 for the year ended December 31, 2015.
Revenue Recognition
The Company recognizes revenue in accordance with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured. The Company recognizes revenue during the month in which products are shipped or commissions are earned. No revenue has been recognized from leasing arrangements to date.
Fair Value of Financial Instruments
Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
Level 1 – Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
| F-9 |
Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.
The Company's financial instruments consist primarily of cash, accounts receivable, notes receivable, accounts payable and accrued expenses, note payable and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid, any interest or penalties.
Uncertain tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized. The Company’s tax years subsequent to 2005 remain subject to examination by federal and state tax jurisdictions.
Earnings (Loss) Per Share
Earnings (loss) per share are computed in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. As of December 31, 2016 there were warrants to purchase 6,059,524 shares of common stock and the Company’s outstanding convertible debt is convertible into 55,052,718 shares of common stock. These amounts are not included in the computation of dilutive loss per share because their impact is antidilutive.
Accounting for Stock-based Compensation
The Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. Stock awards granted to non-employees are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in which services are provided.
For the years ended December 31, 2016 and December 31, 2015, the Company recorded stock and warrant based compensation of $2,371 and $163,436, respectively. (See Notes 7 and 8).
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.
| F-10 |
Advertising
The Company records advertising costs as incurred. For the years ended December 31, 2016 and 2015, advertising expense was $8,321 and $37,685, respectively.
Note 3 – Recent Accounting Pronouncements
Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
Note 4 – Impairment of Goodwill
On September 12, 2014, the Company completed the asset acquisition of the entire line of products, technology and customers of Dry Vapes Holdings, Inc.
The Company recorded the acquisition using the acquisition method, which requires the Company to record the acquired assets and assumed liabilities (if any) at their acquisition date fair values and record any excess of the consideration given, including liabilities assumed (if any) over the fair value of the assets acquired as goodwill. The acquired assets consisted solely of inventory. The transaction resulted in the Company recording goodwill of $192,849. Based on events and changes in circumstances on June 30, 2015, the Company reviewed the carrying amount of the goodwill, and determined that the carrying amount may not be recoverable and accordingly recognized an impairment loss of $192,849 for the year ended December 31, 2015.
Note 5 – Sales Concentration and Concentration of Credit Risk
Cash
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company maintains cash balances at one financial institution, which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insured institution insures up to $250,000 on account balances. The company maintains its’ cash balance at a large financial institution and has not experienced any losses in such accounts.
Sales and Accounts Receivable
Following is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the years ended December 31, 2016 and 2015 and the accounts receivable balance as of December 31, 2016:
| Customer | Sales % Year Ended December 31, 2016 | Sales % Year Ended December 31, 2015 | Accounts Receivable Balance as of December 31, 2016 | |||||||||||
| A | — | 24.7 | % | $ | — | |||||||||
| B | — | 21.5 | % | $ | — | |||||||||
| C | — | 18.2 | % | $ | — | |||||||||
| F-11 |
Note 6 – Convertible Debt and Note Payable
2014 Convertible Note
In January 2014, the Company entered into a Secured Promissory Note for $1,660,000 (the “2014 Company Note”) to Tonaquint, Inc. (“Tonaquint”) which includes a purchase price of $1,500,000 and transaction costs of $160,000. On January 31, 2014, the Company received $300,000 of the purchase price. Tonaquint also issued to the Company 6 secured promissory notes, each in the amount of $200,000 (the 2014 “Investor Notes”). All or any portion of the outstanding balance of the 2014 Investor Notes may be prepaid, without penalty, along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay Tonaquint any amounts on the unfunded portion of the 2014 Company Note. The 2014 Company Note bears interest at 8% per annum (increases to 22% per annum upon an event of default) and is convertible into shares of the Company’s common stock at Tonaquint’s option at a price of $0.55 per share, exercisable in seven tranches, consisting of a first tranche of $340,000 of principal and any interest, fees costs or charges, and six additional tranches of $220,000 each, plus any interest, costs, fees or charges.
Beginning on the date that is six (6) months after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid to the Company (the “Initial Installment Date”), and on each applicable Installment Date thereafter, the Company is to pay the Holder, the applicable Installment Amount due on such date. Ten Installment Amounts of $166,000 plus the sum of any accrued and unpaid interest, fees, costs or charges may be made (a) in cash (a “Company Redemption”), (b) by converting such Installment Amount into shares of Common Stock (a “Company Conversion”), or (c) by any combination of a Company Conversion and a Company Redemption so long as the entire amount of such Installment Amount due shall be converted and/or redeemed by the Company on the applicable Installment Date. The 2014 Company Note matured fifteen months after the Issuance Date.
During the year ended December 31, 2014, the Company received an additional $800,000 of the purchase price and an additional $200,000 (including $21,188 of interest) during the year ended December 31, 2015. On December 16, 2015, the Company and AVHI, the Company’s wholly owned subsidiary entered into a Deed in Lieu of Foreclosure Agreement (the “DLF Agreement”) with Tonaquint, pursuant to which in exchange for the Company conveying its’ interest in the Company’s Nevada owned real estate (the “Property”), Tonaquint agreed to refrain and forbear from exercising and enforcing its remedies under their 2014 Convertible Note. Additionally, the Company received $25,000 and a reduction of the Note balance of $500,000. AVHI had a cost of approximately $224,466 for the Property.
During the year ended December 31, 2015, the Company recorded interest expense of $281,607, and increased accrued interest expense by $281,607 for amounts due Tonaquint, pursuant to the 2014 Company Note. Additionally, as of the date of the DLF Agreement, the Company and Tonaquint agreed to offset the remaining unpaid principal balance of the Investor Notes of $176,642 to the Note. The parties further agreed that accrued and unpaid interest of $316,723 would be added to the Note and further agree that the Note balance as the DLF Agreement the Note balance was $311,815, resulting in a net gain of debt forgiveness of $292,372. As of December 31, 2015, $311,815 of principal and accrued interest of $1,041 is outstanding on the 2014 Company Note.
On January 19, 2016, the Company accepted and agreed to a Debt Purchase Agreement (the “DPA”), whereby LG Capital Funding, LLC (“LG”) acquired $157,500 of the Tonaquint 2014 Convertible Note in exchange for $75,000. The Company issued an 8% Replacement Note to LG for $157,500 (the “Second Replacement Note”). The Second Replacement Note is due January 19, 2017 and is convertible into shares of the Company’s common stock at any time at the discretion of LG at a variable conversion price (“VCP”). The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. The principal balance of the Second Replacement Note as of December 31, 2016 is $157,500.
On January 19, 2016, the Company accepted and agreed to a DPA, whereby Cerberus Finance Group, LTD (“Cerberus”) acquired $154,315 of principal and $2,434 of accrued and unpaid interest of the Tonaquint 2014 Convertible Note in exchange for $75,000. The Company issued an 8% Replacement Note to Cerberus for $156,749 (the “Third Replacement Note”). The Third Replacement Note is due January 19, 2017 and is convertible into shares of the Company’s common stock at any time at the discretion of LG at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. For the year ended December 31, 2016, the Company issued 13,129,683 shares of common stock upon the conversion of $9,500 of principal and $400 accrued and unpaid interest on the Third Replacement Note. The shares were issued at approximately $0.000754 per share. As of December 31, 2016, the principal balance of the Third Replacement Note is $147,249.
| F-12 |
2015 Convertible Notes
On March 2, 2015, the Company issued a Convertible Promissory Note for $79,000 to Vis Vires Group (“Vis Vires”). The Company received net proceeds of $75,000 after debt issuance costs of $4,000 paid for lender legal fees. The Note matured on November 25, 2015 and can be converted at a 39% discount to the market price as defined in the Note. As of December 31, 2015, the principal balance of the Vis Vires note was $49,200. On January 6, 2016, the Company accepted and agreed to a DPA, whereby LG acquired the 2015 convertible promissory note from Vis Vires. The Company issued an 8% Replacement Note to LG for $53,613 (the “First Replacement Note”). The First Replacement Note is due January 5, 2017 and is convertible into shares of the Company’s common stock at any time at the discretion of LG at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. For the year ended December 31, 2016, the Company issued 10,804,749 shares of common stock upon the conversion of $53,613 of principal and $4,139 accrued and unpaid interest on the Vis Vires Note (assigned to LG). The shares were issued at approximately $0.0053 per share. As of December 31, 2016 and December 31, 2015, the principal balance of the LG Note was $0 and $53,613, respectively.
On March 27, 2015, the Company issued a Convertible Promissory Note for $27,000 to GW Holding Group, LLC (“GW”). On March 31, 2015, the Company received net proceeds of $25,000 after debt issuance costs of $2,000 paid for lender legal fees. The Note matured on March 27, 2016 and converted at a 42% discount to the market price as defined in the Note. For the year ended December 31, 2016, the Company issued 17,844,348 shares of common stock upon the conversion of $23,500 of principal and $4,002 accrued and unpaid interest on the 2015 GW Note. The shares were issued at approximately $0.00161 per share. As of December 31, 2016 and December 31, 2015, the principal balance of the GW note is $0 and $23,500, respectively.
March 27, 2015, the Company issued a Convertible Promissory Note for $78,750 to LG. The Company received net proceeds of $75,000 after debt issuance costs of $3,750 paid for lender legal fees. The Note matured on March 27, 2016 and converted at a 42% discount to the market price as defined in the Note. For the year ended December 31, 2016, the Company issued 56,354,949 shares of common stock upon the conversion of $65,500 of principal and $6,241 accrued and unpaid interest on the 2015 LG Note. The shares were issued at approximately $0.0013 per share. As of December 31, 2016 and December 31, 2015, the principal balance of the LG Note was $0 and $65,500, respectively.
On March 30, 2015, the Company issued a Convertible Promissory Note for $27,000 to Service Trading Company, LLC (“Service”). On April 6, 2015, the Company received net proceeds of $25,000 after debt issuance costs of $2,000 paid for lender legal fees. The Note matured on March 30, 2016 and converted at a 42% discount to the market price as defined in the Note. For the year ended December 31, 2016, the Company issued 16,993,388 shares of common stock upon the conversion of $22,500 of principal and $1,990 accrued and unpaid interest on the 2015 Service Note. The shares were issued at approximately $0.001441 per share. As of December 31, 2016 and December 31, 2015, the principal balance of the Service Note was $0 and $22,500, respectively.
The debt issuance costs included in the 2015 Convertible Notes were amortized over the earlier of the terms of the Note or any redemptions and have been expensed as debt issuance costs (included in interest expense).
Among other terms the 2015 Notes are due nine to twelve months from their issuance date, bearing interest at 8% per annum, payable in cash or shares at a conversion price (the “Conversion Price”) for each share of common stock equal to 39% - 42% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s common stock for the ten to eighteen trading days immediately preceding the date of conversion. Upon the occurrence of an event of default, as defined in the 2015 Convertible Notes, the Company was required to pay interest at 22% per annum and the holders could at their option declare a Note, together with accrued and unpaid interest, to be immediately due and payable. In addition, the 2015 Convertible Notes provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.
| F-13 |
The Company determined that the conversion feature of the 2015 Convertible Notes represent an embedded derivative since the Notes conventional debt are convertible into a variable number of shares upon conversion. Accordingly, the 2015 Convertible Notes were not considered to be under ASC 815-40 (formerly EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock) and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The embedded feature included in the 2015 Convertible Notes resulted in an initial debt discount of $211,750, an initial derivative liability expense of $71,761 and an initial derivative liability of $283,511.
2016 Convertible Notes
On January 19, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $76,080, and delivered on January 31, 2016, gross proceeds of $62,500 excluding transaction costs, fees, and expenses.
On January 19, 2016, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $34,775, and delivered on January 25, 2016, gross proceeds of $25,000 excluding transaction costs, fees, and expenses.
On March 23, 2016, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $22,000, and delivered on March 31, 2016, gross proceeds of $20,000 excluding transaction costs, fees, and expenses.
On April 15, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $65,625, and delivered on April 15, 2016, gross proceeds of $62,500 excluding transaction costs, fees, and expenses.
On July 14, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $65,625, and delivered on April 15, 2016, gross proceeds of $62,500 excluding transaction costs, fees, and expenses.
On August 1, 2016, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $22,000, and delivered on August 1, 2016, gross proceeds of $20,000 excluding transaction costs, fees, and expenses.
On October 14, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $30,812.50, and delivered on October 14, 2016, gross proceeds of $20,000 excluding transaction costs, fees, and expenses.
| F-14 |
On October 31, 2016, the Company entered into a Convertible Promissory Note ("St. George 2016 Notes") for $555,000 to St. George Investments, LLC. (“St. George”) which includes a purchase price of $500,000 and transaction costs of $5,000 and OID interest of $50,000. On October 31, 2016, the Company received $100,000 and recorded $115,000 as convertible note payable, including $5,000 of transaction costs and $10,000 OID interest. St. George also issued to the Company eight secured promissory notes, each in the amount of $50,000. All or any portion of the outstanding balance of the St. George 2016 Notes may be prepaid, without penalty, along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay St. George any amounts on the unfunded portion of the St. George 2016 Notes. The St. George 2016 Note bears interest at 10% per annum (increases to 22% per annum upon an event of default) and is convertible into shares of the Company’s common stock at St. George’s option at a price of $0.05 per share. On December 14, 2016, St. George funded one of the secured promissory notes issued to the Company.
Beginning on the date that is six (6) months after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid to the Company (the “Initial Installment Date”), and on each applicable Installment Date thereafter, the Company is to pay the Holder, the applicable Installment Amount due on such date. Five Installment Amounts of $111,000 plus the sum of any accrued and unpaid interest, fees, costs or charges may be made (a) in cash (a “Company Redemption”), (b) by converting such Installment Amount into shares of Common Stock (a “Company Conversion”), or (c) by any combination of a Company Conversion and a Company Redemption so long as the entire amount of such Installment Amount due shall be converted and/or redeemed by the Company on the applicable Installment Date. The St. George 2016 Note matures fifteen months after the Issuance Date.
On December 15, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $32,812.50, and delivered on December 15, 2016, gross proceeds of $30,812.5 excluding transaction costs, fees, and expenses.
Principal and interest on the above LG and Cerberus convertible debentures is due and payable one year from their respective funding date, and the LG and Cerberus Debentures are convertible into shares of the Company’s common stock at any time at the discretion of LG and Cerberus, respectively, at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.
The Company may prepay the LG and/or the Cerberus Debentures, subject to prior notice to the holder within an initial 30 day period after issuance, by paying an amount equal to 118% multiplied by the amount that the Company is prepaying. For each additional 30 day period the amount being prepaid is multiplied by an additional 6%, up to a maximum of 148% on the 180th day from issuance. Beginning on the 180th day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing.
The Company determined that the conversion feature of the 2016 Convertible Notes represent an embedded derivative since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the 2016 Convertible Notes were not considered to be conventional debt under ASC 815-40 (formerly EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock) and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The embedded feature included in the 2016 Convertible Notes resulted in an initial debt discount of $865,593, an initial derivative liability expense of $2,317,830 and an initial derivative liability of $3,183,423.
As of December 31, 2016, the Company revalued the embedded conversion feature of the 2015 and 2016 Convertible Notes. The fair value of the 2015 and 2016 Convertible Notes was calculated at December 31, 2016 based on the Black Scholes method consistent with the terms of the related debt.
| F-15 |
A summary of the derivative liability balance as of December 31, 2016 is as follows:
| Beginning Balance | $ | 167,014 | ||
| Initial Derivative Liability | 4,114,649 | |||
| Fair Value Change | (1,791,988 | ) | ||
| Debt extinguishment | (84,057 | ) | ||
| Reduction for conversions | (791,851 | ) | ||
| Ending Balance | $ | 1,613,767 |
The fair value at the commitment date for the 2016 Convertible Notes and the re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of December 31, 2016:
| Commitment date | Remeasurement date | |||||||
| Expected dividends | -0- | -0- | ||||||
| Expected volatility | 243%-268 | % | 246 | % | ||||
| Expected term | 0.85 - 5 years | 0.25 - 4.84 years | ||||||
| Risk free interest | .44%-.68 | % | .48%-.85% | |||||
A summary of the convertible notes payable balance as of December 31, 2016 is as follows:
| 2016 | ||||
| Beginning Principal Balance | $ | 472,515 | ||
| Convertible notes-newly issued | 521,731 | |||
| Accrued interest added to Note | 6,848 | |||
| Conversion of convertible notes (principal) | (174,613 | ) | ||
| Unamortized discount | (257,033 | ) | ||
| Ending Principal Balance | $ | 569,448 | ||
Activity of discount on convertible notes payable as of December 31, 2016 is as follows:
| Debt discount, December 31, 2015 | $ | 27,220 | ||
| Debt discount generated during 2016 | 890,949 | |||
Amortization of debt discount | (661,136 | ) | ||
| Debt discount, December 31, 2016 | $ | 257,033 |
| F-16 |
During the year ended December 31, 2016, the Company issued the following shares of common stock upon the conversion of portions of the 2015 Convertible Notes and accrued interest thereon:
| Date | Principal Conversion | Interest Conversion | Total Conversion |
Conversion Price |
Shares Issued |
Issued to | ||||||||||||||||||
| 12/28/16 | $ | 45,000 | $ | 3,511 | $ | 48,511 | $ | 0.015080 | 3,216,925 | LG | ||||||||||||||
| 12//13/16 | $ | 9,500 | $ | 400 | $ | 9,900 | $ | 0.000754 | 13,129,683 | Cerberus | ||||||||||||||
| 9/26/16 | $ | 8,613 | $ | 629 | $ | 9,242 | $ | 0.001218 | 7,587,824 | LG | ||||||||||||||
| 7/29/16 | $ | 7,500 | $ | 801 | $ | 8,301 | $ | 0.000081 | 10,222,352 | LG | ||||||||||||||
| 7/20/16 | $ | 9,500 | $ | 995 | $ | 10,495 | $ | 0.000098 | 10,644,310 | LG | ||||||||||||||
| 7/12/16 | $ | 9,000 | $ | 927 | $ | 9,927 | $ | 0.000986 | 10,068,073 | LG | ||||||||||||||
| 7/1/16 | $ | 8,000 | $ | 805 | $ | 8,805 | $ | 0.001160 | 7,590,362 | LG | ||||||||||||||
| 6/22/16 | $ | 5,000 | $ | 973 | $ | 5,973 | $ | 0.001450 | 4,119,414 | GW | ||||||||||||||
| 6/20/16 | $ | 10,500 | $ | 1,003 | $ | 11,503 | $ | 0.001450 | 7,933,377 | Cerberus | ||||||||||||||
| 6/20/16 | $ | 5,000 | $ | 967 | $ | 5,967 | $ | 0.001450 | 4,114,879 | GW | ||||||||||||||
| 6/20/16 | $ | 6,000 | $ | 589 | $ | 6,589 | $ | 0.001450 | 4,544,241 | LG | ||||||||||||||
| 6/10/16 | $ | 6,075 | $ | 1,134 | $ | 7,209 | $ | 0.001798 | 4,009,701 | GW | ||||||||||||||
| 6/9/16 | $ | 5,000 | $ | 479 | $ | 5,479 | $ | 0.001798 | 3,047,219 | LG | ||||||||||||||
| 6/2/16 | $ | 9,000 | $ | 848 | $ | 9,848 | $ | 0.002378 | 4,141,387 | Cerberus | ||||||||||||||
| 5/23/16 | $ | 5,000 | $ | 460 | $ | 5,460 | $ | 0.002436 | 2,241,490 | LG | ||||||||||||||
| 3/17/16 | $ | 9,000 | $ | 696 | $ | 9,696 | $ | 0.002436 | 3,980,431 | LG | ||||||||||||||
| 3/17/16 | $ | 3,000 | $ | 138 | $ | 3,138 | $ | 0.000638 | 4,918,624 | Service | ||||||||||||||
| 3/8/16 | $ | 7,425 | $ | 928 | $ | 8,353 | $ | 0.00174 | 4,800,354 | GW | ||||||||||||||
| 3/7/16 | $ | 6,500 | $ | 489 | $ | 6,989 | $ | 0.00174 | 4,016,471 | LG | ||||||||||||||
| $ | 174,613 | $ | 16,772 | $ | 191,385 | 114,327,117 | ||||||||||||||||||
Note Payable Land
On March 18, 2014, in conjunction with the land purchase of 80 acres in Pueblo County, Colorado, the Company paid $36,000 cash and entered into a promissory note in the amount of $85,750. The promissory note is being amortized on the basis of five (5) years, with principal payments of $17,150 plus interest at 3.5% due annually on December 1 of each year. Payments begin December 1, 2014, and shall be due on the first day of each succeeding December, with any balance of principal and accrued interest due December 1, 2020. On March 4, 2015, and May 4, 2015, the Company paid $9,000 and $2,437, respectively, of the December 1, 2014 amount, resulting in the balance of note being $74,313. In November 2015, the Company was made aware that the land transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company was a party to the land purchase, however, the second party to the land contract never filed the original quit claim deed on behalf of the Company, even though a copy of the notarized quit claim deed was sent to the Company. To date, the Company has paid a total of $47,438 ($36,000 at closing) and is on the deed of trust of the property. Accordingly, in December 2015, the Company reduced the remaining balance of the note payable for the acquisition of the land of $74,313 and recorded a reserve allowance for the remaining balance of the asset of $54,490. In February, 2017, the original owner of the 80 acres foreclosed on the property from the second party and the Company entered into a new land purchase contract directly with the landowner on February 7, 2017.
Future principle payments due on the Company’s convertible debt as of December 31, 2016, are as follows
| Twelve months ending December 31, | Amount | |||||
| 2017 | $ | 826,480 | ||||
| F-17 |
Note 7 – Related Party Transactions
Effective January 1, 2013, the Company agreed to an annual compensation of $150,000 for its CEO, Mr. Michael Friedman (resigned March 20, 2015, re-appointed November 4, 2015), and $96,000 for the CFO, Mr. Barry Hollander (resigned September 15, 2015). Effective March 20, 2015, Mr. Justin Braune was named CEO and President. Mr. Braune also was appointed to the Board of Directors. The Company agreed to an annual compensation of $100,000 for Mr. Braune in his role of CEO and Director of the Company and to issue Mr. Braune 15,000,000 shares of restricted common stock. Mr. Braune resigned from the board of directors and as CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation. The Company also initially issued Mr. Braune 12,500,000 shares of common stock on October 13, 2015. On October 16, 2015, Mr. Braune advised the Company’s transfer agent at the time to cancel the shares.
For the years ended December 31, 2016 and 2015, the Company recorded expenses to its officers the following amounts included in Administrative and Management Fees in the consolidated statements of operations, included herein:
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Mr. Braune, former CEO | $ | — | $ | 62,821 | ||||
| Mr. Friedman, CEO | 150,000 | 62,500 | ||||||
| Mr. Hollander, former CFO | — | 68,000 | ||||||
| Total | $ | 150,000 | $ | 151,654 | ||||
As of December 31, 2016 and 2015, the Company owed the following amounts, included in due to related party on the Company’s consolidated balance sheet:
| December 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Mr. Friedman, CEO | $ | 54,246 | $ | 8,580 | ||||
| Mr. Braune, former CEO | 16,667 | 16,667 | ||||||
| Mr. Hollander, former CFO | — | 12,731 | ||||||
| Total | $ | 70,913 | $ | 37,798 | ||||
On April 14, 2015, the Company appointed Dr. Stephen Holt to the Advisory Board of the Board of Directors of the Company. The Company issued 5,000,000 shares of restricted common stock to Dr. Holt for his appointment. The Company valued the 5,000,000 shares of common stock at $100,000 ($0.02 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015. Additionally, the Company agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share. 400,000 Option Shares vested immediately and the remaining 600,000 Option Shares vested over 12 months. Accordingly, the Company has recorded $2,371 for the year ended December 31, 2016 in stock compensation expense and all of the options have vested.
Amounts Due from 800 Commerce, Inc.
800 Commerce, Inc. (now known as Petrogress, Inc.), a commonly controlled entity until February 29, 2016, owed Agritek $282,947 and $236,759 as of February 29, 2016 and December 31, 2015, respectively, as a result of advances received from or payments made by Agritek on behalf of 800 Commerce. In February 2016, the Company entered into a Debt Settlement Agreement (the “Settlement Agreement”) with Petrogress, Inc. whereby the Company accepted 1,101,642 shares of common stock of Petrogress in settlement of the amount due. Based on the market value of the Petrogress common stock on the date of the Settlement Agreement, the Company recognized a loss of $266,422 for the year ended December 31, 2015. Based on the market price of the Petrogress common stock as of December 31, 2016, the Company recorded an unrealized gain on marketable securities of $23,244 for the year ended December 31, 2016.
| F-18 |
Note 8 – Common and Preferred Stock
Common Stock
On May 23, 2016, the Company filed a certificate of amendment, increasing the authorized capital of the Company to 1,001,000,000 shares of capital stock; consisting of 1,000,000,000 shares of common stock, par value $0.0001 and 1,000,000 shares of preferred stock, par value $0.01.
2016 Issuances
During the year ended December 31, 2016, the Company issued the following shares of common stock upon the conversions of portions of the 2014 Company Note and portions of the 2015 Convertible Notes:
| Date | Principal Conversion | Interest Conversion | Total Conversion |
Conversion Price |
Shares Issued |
Issued to | ||||||||||||||||||
| 12/28/16 | $ | 45,000 | $ | 3,511 | $ | 48,511 | $ | 0.015080 | 3,216,925 | LG | ||||||||||||||
| 12//13/16 | $ | 9,500 | $ | 400 | $ | 9,900 | $ | 0.000754 | 13,129,683 | Cerberus | ||||||||||||||
| 9/26/16 | $ | 8,613 | $ | 629 | $ | 9,242 | $ | 0.001218 | 7,587,824 | LG | ||||||||||||||
| 7/29/16 | $ | 7,500 | $ | 801 | $ | 8,301 | $ | 0.000081 | 10,222,352 | LG | ||||||||||||||
| 7/20/16 | $ | 9,500 | $ | 995 | $ | 10,495 | $ | 0.000098 | 10,644,310 | LG | ||||||||||||||
| 7/12/16 | $ | 9,000 | $ | 927 | $ | 9,927 | $ | 0.000986 | 10,068,073 | LG | ||||||||||||||
| 7/1/16 | $ | 8,000 | $ | 805 | $ | 8,805 | $ | 0.001160 | 7,590,362 | LG | ||||||||||||||
| 6/22/16 | $ | 5,000 | $ | 973 | $ | 5,973 | $ | 0.001450 | 4,119,414 | GW | ||||||||||||||
| 6/20/16 | $ | 10,500 | $ | 1,003 | $ | 11,503 | $ | 0.001450 | 7,933,377 | Cerberus | ||||||||||||||
| 6/20/16 | $ | 5,000 | $ | 967 | $ | 5,967 | $ | 0.001450 | 4,114,879 | GW | ||||||||||||||
| 6/20/16 | $ | 6,000 | $ | 589 | $ | 6,589 | $ | 0.001450 | 4,544,241 | LG | ||||||||||||||
| 6/10/16 | $ | 6,075 | $ | 1,134 | $ | 7,209 | $ | 0.001798 | 4,009,701 | GW | ||||||||||||||
| 6/9/16 | $ | 5,000 | $ | 479 | $ | 5,479 | $ | 0.001798 | 3,047,219 | LG | ||||||||||||||
| 6/2/16 | $ | 9,000 | $ | 848 | $ | 9,848 | $ | 0.002378 | 4,141,387 | Cerberus | ||||||||||||||
| 5/23/16 | $ | 5,000 | $ | 460 | $ | 5,460 | $ | 0.002436 | 2,241,490 | LG | ||||||||||||||
| 3/17/16 | $ | 9,000 | $ | 696 | $ | 9,696 | $ | 0.002436 | 3,980,431 | LG | ||||||||||||||
| 3/17/16 | $ | 3,000 | $ | 138 | $ | 3,138 | $ | 0.000638 | 4,918,624 | Service | ||||||||||||||
| 3/8/16 | $ | 7,425 | $ | 928 | $ | 8,353 | $ | 0.00174 | 4,800,354 | GW | ||||||||||||||
| 3/7/16 | $ | 6,500 | $ | 489 | $ | 6,989 | $ | 0.00174 | 4,016,471 | LG | ||||||||||||||
| $ | 174,613 | $ | 16,772 | $ | 191,385 | 114,327,117 | ||||||||||||||||||
In addition to the above, on November 7, 2016, the Company issued 5,000,000 shares of common stock to acquire 100% of Sterling Classic Compassion, LLC.
| F-19 |
2015 Issuances
During the year ended December 31, 2015, the Company issued the following shares of common stock upon the conversions of portions of the 2014 Company Note and portions of the 2015 Convertible Notes:
| Date | Principal Conversion | Interest Conversion | Total Conversion | Conversion Price | Shares Issued |
Issued to | ||||||||||||||||||
| 1/3/15 | $ | 65,460 | $ | 9,540 | $ | 75,000 | $ | .045 | 1,665,445 | Tonaquint | ||||||||||||||
| 1/28/15 | $ | 54,123 | $ | 8,377 | $ | 62,500 | $ | .0334 | 1,869,187 | Tonaquint | ||||||||||||||
| 2/20/15 | $ | 55,901 | $ | 9,099 | $ | 65,000 | $ | .0244 | 2,668,309 | Tonaquint | ||||||||||||||
| 3/13/15 | $ | 60,000 | $ | — | $ | 60,000 | $ | .0244 | 2,463,045 | Tonaquint | ||||||||||||||
| 3/31/15 | $ | 66,555 | $ | 8,445 | $ | 75,000 | $ | .0125 | 5,985,634 | Tonaquint | ||||||||||||||
| 5/5/15 | $ | 66,731 | $ | 8,269 | $ | 75,000 | $ | .0125 | 6,008,171 | Tonaquint | ||||||||||||||
| 6/2/15 | $ | 67,277 | $ | 7,723 | $ | 75,000 | $ | .0095 | 7,917,238 | Tonaquint | ||||||||||||||
| 6/29/15 | $ | 67,483 | $ | 7,517 | $ | 75,000 | $ | .0055 | 13,678,643 | Tonaquint | ||||||||||||||
| 7/29/15 | $ | 29,368 | $ | 7,262 | $ | 36,630 | $ | .003663 | 10,000,000 | Tonaquint | ||||||||||||||
| 8/13/15 | $ | 27,473 | $ | — | $ | 27,473 | $ | .003663 | 7,500,000 | Tonaquint | ||||||||||||||
| 9/3/15 | $ | 10,000 | $ | — | $ | 10,000 | $ | .0019 | 5,263,158 | Vis Vires | ||||||||||||||
| 9/10/15 | $ | 19,800 | $ | — | $ | 19,800 | $ | .00083 | 16,500,000 | Vis Vires | ||||||||||||||
| 10/1/15 | $ | 2,750 | $ | 112 | $ | 2,862 | $ | .000812 | 3,524,027 | LG | ||||||||||||||
| 10/9/15 | $ | 4,500 | $ | 183 | $ | 4,683 | $ | .000638 | 7,340,834 | Service | ||||||||||||||
| 10/12/15 | $ | 3,500 | $ | 150 | $ | 3,650 | $ | .000812 | 4,494,567 | GW | ||||||||||||||
| 10/13/15 | $ | 5,000 | $ | 216 | $ | 5,216 | $ | .00087 | 5,995,275 | LG | ||||||||||||||
| 10/16/15 | $ | 10,549 | $ | 13,924 | $ | 24,473 | $ | .001003 | 24,400,000 | Tonaquint | ||||||||||||||
| 11/6/15 | $ | 5,500 | $ | 265 | $ | 5,765 | $ | .000638 | 9,036,379 | LG | ||||||||||||||
| 11/16/15 | $ | 14,005 | $ | 6,792 | $ | 20,797 | $ | .001 | 21,730,000 | Tonaquint | ||||||||||||||
| $ | 635,975 | $ | 87,873 | $ | 723,848 | 158,039,912 | ||||||||||||||||||
In addition to the above during the year ended December 31, 2015, the Company:
On October 13, 2015, the Company issued 12,500,000 shares of common stock to Mr. Friedman for services. The Company valued the shares of common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015.
On October 13, 2015, the Company issued 12,500,000 shares of common stock to Mr. Braune for services. The Company valued the shares of common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015. On October 16, 2015, Mr. Braune advised the Company and the transfer agent at the time to cancel the shares. Since then, Mr. Braune is claiming ownership of the shares, which the Company disputes.
On April 14, 2015, the Company appointed Dr. Stephen Holt to the Advisory Board of the Board of Directors of the Company. The Company issued 5,000,000 shares of restricted common stock to Dr. Holt for his appointment.
On March 20, 2015, the Company issued 15,000,000 shares of common stock to the Company’s CEO in connection with an employment and board of director’s agreement naming Mr. Braune as CEO, President and a member of our Board of Directors. The shares of common stock were to vest as follows: 5,000,000, shares on the six month anniversary of the Agreement and 10,000,000 shares on the one year anniversary of the Agreement. Mr. Braune resigned from the board of directors and as CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation.
Preferred Stock
On June 26, 2015, the Company filed with the Delaware Secretary of State the Amended and Restated Designation Preferences and Rights (the “Certificate of Designation”) of Class B Preferred Stock (the “Series B Preferred Stock”). Pursuant to the Certificate of Designation, 1,000 shares constitute the Series B Preferred Stock. The Series B Preferred Stock and any accrued and unpaid dividends thereon shall, with respect to rights on liquidation, winding up and dissolution, rank senior to the Company’s issued and outstanding common stock and Series A preferred stock.
| F-20 |
The Series B Preferred Stock has the right to vote in aggregate, on all shareholder matters equal to 51% of the total vote, no matter how many shares of common stock or other voting stock of the Company are issued or outstanding in the future. The Series B Preferred Stock has a right to vote on all matters presented or submitted to the Company’s stockholders for approval in pari passu with the common stockholders, and not as a separate class. The holders of Series B Preferred Stock have the right to cast votes for each share of Series B Preferred Stock held of record on all matters submitted to a vote of common stockholders, including the election of directors. There is no right to cumulative voting in the election of directors. The holders of Series B Preferred Stock vote together with all other classes and series of common stock of the Company as a single class on all actions to be taken by the common stockholders except to the extent that voting as a separate class or series is required by law.
On June 26, 2015, the Company issued 1,000 shares of Class B Preferred Stock. The Company estimated the fair value of the shares of the Series B Preferred Stock (super voting rights, non-convertible securities) at $276,300 for purposes of solely determining the proper accounting treatment and valuation in accordance with ASC 820, Fair Value in Financial Instruments. The Company recorded $40,000 as payment towards accrued and unpaid fees owed Mr. Friedman and $236,300 as a loss on settlement of debt extinguishment.
As of December 31, 2016 and 2015, there were 1,000 shares of Class B Preferred Stock outstanding, respectively.
Warrants
On April 14, 2015, in connection with the appointment of Dr. Stephen Holt to the advisory board, the Company agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share and expiring April 14, 2018. Option Shares of 400,000 vested immediately and 50,000 Option Shares vest each month from April 2015 through March 2016. Accordingly, as of December 31, 2016 and 2015, 1,000,000 and 850,000 Option Shares have vested, respectively, and the Company recorded $2,317 and $13,436 as stock compensation expense for the years ended December 31, 2016 and 2015, respectively, based on Black-Scholes.
On April 26, 2013 and in connection with the appointment of Mr. James Canton to the Company’s advisory board, the Company issued a warrant to Mr. Canton to purchase 300,000 shares of common stock. The warrants expired on April 26, 2016.
On October 31, 2016, the Company granted (Warrant #1) to St. George the right to purchase at any time on or after November 10, 2016 (the “Issue Date”) until the date which is the last calendar day of the month in which the fifth anniversary of the Issue Date occurs (the “Expiration Date”), a number of fully paid and non-assessable shares (the “Warrant Shares”) of Company’s common stock, equal to $57,500 divided by the Market Price (defined below) as of the Issue Date, as such number may be adjusted from time to time pursuant to the terms and conditions of Warrant #1 to Purchase Shares of Common Stock. The exercise price is $0.05 and is subject to price adjustments pursuant to the agreement and includes a cashless exercise provision. The Company also issued Warrant #’s 2-9, with each warrant only effective upon St. George funding of the secured notes they issued to the Company. Warrant #’s 2-9 give St. George the right to purchase Warrant Shares equal to $27,500 divided by the Market Price on the funded date. On December 14, 2016, the Company received a payment of $50,000, and accordingly, Warrant #2 is effective.
The Company evaluated all outstanding warrants to determine whether these instruments may be tainted. All warrants outstanding were considered tainted. The Company valued the embedded derivatives within the warrants using the Black-Scholes valuation model. As of December 31, 2016, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 1.25 to 4.8 years; (2) a computed volatility rate of 246%; (3) a discount rate of .85% to 1.33%; and (4) zero dividends. The valuation of this embedded derivative was recorded with an offsetting gain/loss on derivative liability.
Note 9 – Income Taxes
Deferred income taxes reflect the net tax effects of operating loss and tax credit carry forwards and temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of the Company’s ability to realize the benefit of the deferred tax assets, the deferred tax assets are fully offset by a valuation allowance at December 31, 2016 and 2015.
| F-21 |
Income tax expense for 2016 and 2015 is as follows:
| 2016 | 2015 | |||||||
| Current: | ||||||||
| Federal | $ | — | $ | — | ||||
| State | — | — | ||||||
| — | — | |||||||
| Deferred: | ||||||||
| Federal | $ | (924,670 | ) | $ | (657,937 | ) | ||
| State | (98,722 | ) | (70,244 | ) | ||||
| Change in Valuation allowance | 1,023,392 | 728,181 | ||||||
| $ | — | $ | — | |||||
The following is a summary of the Company’s deferred tax assets at December 31, 2016 and 2015:
| 2016 | 2015 | |||||||
| Deferred Tax Assets: | ||||||||
| Net operating losses | $ | 2,196,021 | $ | 1,414,628 | ||||
| Stock compensation | 1,633,840 | 1,632,947 | ||||||
| Debt discounts and derivatives | 518,183 | 277,597 | ||||||
| Other | 132,279 | 120,990 | ||||||
| Net deferred tax assets | 4,480,323 | 3,446,162 | ||||||
| Valuation allowance | (4,480,323 | ) | (3,446,162 | ) | ||||
| $ | — | $ | — | |||||
A reconciliation between the expected tax expense (benefit) and the effective tax rate for the years ended December 31, 2016 and 2015 are as follows:
| 2016 | 2015 | |||||||
| Statutory federal income tax rate | (34.00 | %) | (34.00 | %) | ||||
| State taxes, net of federal income tax | (3.63 | %) | (3.63 | %) | ||||
| Effect of change in valuation allowance | — | — | ||||||
| Non-deductible expenses | 37.63 | % | 37.63 | % | ||||
| 0 | % | 0 | % | |||||
As of December 31, 2016, the Company had a tax net operating loss carry forward of approximately $5,836,000. Any unused portion of this carry forward expires in 2031. Utilization of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.
Note 10 – Commitments and Contingencies
Office Space
Effective April 1, 2014, the Company entered into a rent sharing agreement for the use of 1,300 square feet with a company controlled by the Company’s CFO. The Company agreed to pay $1,350 per month for the space. The Company terminated the agreement in September 2015.
| F-22 |
In April 2014, the Company entered into a two year sublease agreement for the use of up to 7,500 square feet with a Colorado based oncology clinical trial and drug testing company and facility presently doing cancer research and testing for established pharmaceutical companies seeking FDA approval for new drugs. Pursuant to the lease, as amended, the Company agreed to pay $3,500 per month for the space. The lease expired in April 2016, and the Company owes the landlord $48,750.
Effective April 10, 2015, the Company entered into a four month lease agreement for the use of 170 square feet in California, for office space for our CEO. The Company agreed to pay $1,300 for the use of the space. The agreement expired in August 2015.
In December 2016, the Company signed a one year lease for office space in San Juan, Puerto Rico. The lease requires monthly base rent of $800 for the months of December 2016 through February 2017, and $900 per month for the months of March 2017 through November 2017.
In January 2017, the Company signed a five (5) year lease, beginning February 1, 2107, for approximately 6,000 square feet of office space, comprised of two floors, in San Juan, Puerto Rico. Pursuant to the lease, the Company will pay $3,000 per month for one floor for the first year of the lease. The rent will increase 3% per year on February beginning in 2018 and an additional 3% per year on each successive February 1, during the term of the lease. The landlord has agreed that for the month of February 2017, the rent will be $1,500. The rent for the other floor will be $2,000 per month during the term of the lease and the Company does not have any rent payments for the first three months of the lease (February 2017 through April 2017).
For the years ended December 31, 2016 and 2015, the Company recorded rent expense of $64,190 and $72,936, respectively.
Leased Properties
On April 28, 2014, the Company executed and closed a 10 year lease agreement for 20 acres of an agricultural farming facility located in South Florida following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing low grade marijuana specifically for the use of treating epilepsy and cancer patients. Pursuant to the lease agreement, the Company maintains a first right of refusal to purchase the property for three years. The Company prepaid the first year lease amount of $24,000 and based on the straight line expense over the term of the lease, the Company has recorded $38,244 of expense (included in leased property expenses) for each of the years ended December 31, 2016 and 2015. The Company is currently in default of the lease agreement, as rents have not been for the second year of the lease beginning May 2015.
On July 11, 2014, the Company signed a ten year lease agreement for an additional 40 acres in Pueblo, Colorado. The lease requires monthly rent payments of $10,000 during the first year and is subject to a 2% annual increase over the life of the lease. The lease also provides rights to 50 acres of certain tenant water rights for $50,000 annually plus cost of approximately $2,400 annually. The Company paid the $50,000 in July 2014. The Company has not used the land and effective July 31, 2016, stopped recording leased property expense for this property. Based on the straight line expense through July 31, 2016, the Company has recorded $76,650 and $158,485 of expense for the years ended December 31, 2016 and 2015, respectively, (included in leased property expenses) related to the land and water rights. The Company is currently in default of the lease agreement, as rents have not been paid since February 2015.
Future rent payments for the next five years and thereafter are as follows:
| Twelve months ending December 31, | Amount | |||||
| 2017 | $ | 88,244 | ||||
| 2018 | 96,128 | |||||
| 2019 | 100,752 | |||||
| 2020 | 105,761 | |||||
| 2021 | 114,565 | |||||
| Thereafter | 113,413 | |||||
| $ | 618,863 | |||||
| F-23 |
Legal & Other
On March 2, 2015, the Company, the Company’s CEO and the Company’s CFO at the time were named in a civil complaint filed by Erick Rodriguez in the District Court in Clark County, Nevada (the “DCCC”). The complaint alleges that Mr. Rodriguez never received 250,000 shares of Series B preferred stock that were initially approved by the Board of Directors in 2012, subject to the completion of a merger of a company controlled by Mr. Rodriguez. Since the merger was never completed, the shares were never certificated to Mr. Rodriguez. On March 21, 2017, the DCC agreed to Set Aside the Entry of Default against the Defendants. Mr. Rodriguez resigned in June 2013.
On May 6, 2016, the Company, B. Michael Freidman and Barry Hollander (former CFO) were named as defendants in a Summons/Complaint filed by Justin Braune (the “Plaintiff”) in Palm Beach County Civil Court, Florida (the “PBCCC”). The complaint alleges that Mr. Braune was entitled to shares of common stock of the Company. On December 5, 2016, the PBCCC set aside a court default that had been previously issued. The defendants have answered the complaint, including the defenses that Mr. Braune advised the Company’s transfer agent and the Company in his letter of resignation dated November 4, 2015, clearly stating that he has relinquished all shares of common stock. The Company has filed a counterclaim suit against the Plaintiff, as well as sanctions against the Plaintiff and their counsel.
Note 11 – Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of December 31, 2016 the Company had an accumulated deficit of $16,424,767 and working capital deficit of $2,679,929. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 12 – Segment Reporting
Description of Segments
During the years ended December 31, 2016 and 2015, the Company operated in one reportable segment, wholesale sales.
Note 13 – Subsequent Events
2017 Convertible Notes
On January 24, 2017, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $94,500, and delivered on January 25, 2017, gross proceeds of $90,000 excluding transaction costs, fees, and expenses.
On January 24, 2017, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $63,000, and delivered on January 25, 2017, gross proceeds of $60,000 excluding transaction costs, fees, and expenses.
| F-24 |
On February 1, 2017, the Company completed the closing of a private placement financing transaction with Power Up Lending Group, LTD, pursuant to a Securities Purchase Agreement (the “Power Up Purchase Agreement”). Pursuant to the Power Up Purchase Agreement, Power Up purchased an 12% Convertible Debenture (the “Power Up Debenture”) in the aggregate principal amount of $140,000, and delivered on February 3, 2017 (the “Funding Date”), gross proceeds of $136,500 excluding transaction costs, fees, and expenses. Principal and interest on the Power Up Debentures is due and payable on November 5, 2017, and the Power Up Debenture is convertible into shares of the Company’s common stock beginning six months from the Funding Date, at a VCP. The VCP is calculated as the average of the three (3) lowest closing bid price during the ten (10) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. The Company may prepay the Power Up Debenture, subject to prior notice to the holder within an initial 30 day period after issuance, by paying an amount equal to 120% multiplied by the amount that the Company is prepaying. For each additional 30 day period the amount being prepaid is multiplied by an additional 5%, up to a maximum of 140% on the 180th day from issuance. Beginning on the 180th day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing.
On February 24, 2017, the Company completed the closing of a private placement financing transaction with LG. Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture in the aggregate principal amount of $26,000, and delivered on February 24, 2017, gross proceeds of $24,000 excluding transaction costs, fees, and expenses.
On February 24, 2017, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $17,500, and delivered on February 27, 2017, gross proceeds of $16,000 excluding transaction costs, fees, and expenses.
On March 24, 2017, the Company completed the closing of a private placement financing transaction with LG. Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture in the aggregate principal amount of $52,000, and delivered on March 28, 2017, gross proceeds of $49,600 excluding transaction costs, fees, and expenses.
Principal and interest on the LG and Cerberus Debentures above is due and payable one year from their respective funding date, and the LG and Cerberus Debentures are convertible into shares of the Company’s common stock at any time at the discretion of LG and Cerberus, respectively, at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.
The Company may prepay the LG and/or the Cerberus Debentures, subject to prior notice to the holder within an initial 30 day period after issuance, by paying an amount equal to 118% multiplied by the amount that the Company is prepaying. For each additional 30 day period the amount being prepaid is multiplied by an additional 6%, up to a maximum of 148% on the 180th day from issuance. Beginning on the 180th day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing.
2017 Convertible Note Conversions
Since December 31, 2016 the Company issued the following shares of common stock upon the conversions of portions of the Convertible Notes (see Note 6):
| Date | Principal Conversion | Interest Conversion | Total Conversion | Conversion Price | Shares Issued | Issued to | ||||||||||||||||||
| 1/10/17 | $ | 73,000 | $ | 5,664 | $ | 78,664 | $ | 0.01595 | 4,931,912 | Cerberus | ||||||||||||||
| 1/17/17 | $ | 57,500 | $ | 4,562 | $ | 62,062 | $ | 0.01537 | 4,037,878 | LG | ||||||||||||||
| 1/27/17 | $ | 48,129 | $ | 3,914 | $ | 52,043 | $ | 0.01276 | 4,078,598 | Cerberus | ||||||||||||||
| 2/8/17 | $ | 60,000 | $ | 5,050 | $ | 65,050 | $ | 0.012934 | 5,029,369 | LG | ||||||||||||||
| 2/27/17 | $ | 26,120 | $ | 2,171 | $ | 28,291 | $ | 0.013804 | 2,049,467 | Cerberus | ||||||||||||||
| 3/10/17 | $ | 40,000 | $ | 3,630 | $ | 43,630 | $ | 0.01363 | 3,200,997 | LG | ||||||||||||||
| 3/27/17 | $ | 34,775 | $ | 3,255 | $ | 38,030 | $ | 0.012876 | 2,953,523 | Cerberus | ||||||||||||||
| 3/28/17 | $ | 65,625 | $ | 3,697 | $ | 69,322 | $ | 0.01276 | 5,432,725 | |||||||||||||||
| $ | 405,149 | $ | 31,941 | $ | 437,090 | 31,714,470 | ||||||||||||||||||
| F-25 |
Other
On January 16, 2017, the Company entered into a Business Consultant Agreement (the “BCA”). Pursuant to the BCA, the Company issued 5,000,000 shares of common stock for services to be provided to the Company related to business development, product marketing, helping identify mergers and acquisition candidates, and will consult with and advise the Company on matters pertaining to business modeling and strategic alliances.
On January 27, 2017, the Company issued 1,000,000 shares of restricted common stock to Kopelowitz Ostrow P.A. (“KO”) pursuant to a Debt Settlement and Release Agreement (the “Debt Settlement”) by and between the Company and KO. Among the terms of the Debt Settlement was the forgiveness of $24,614.49 of debt the Company owed KO for legal services provided.
On January 30, 2017, the Company issued 10,000,000 shares of common stock to B. Michael Friedman, the Company’s CEO. The shares were issued for services Mr. Friedman has performed as the sole Officer and director of the Company since November 2014.
Also on January 30, 2017, the Company issued 1,000,000 shares of common stock to Venture Equity as consideration for the cancellation of $12,000 of accrued and unpaid fees owed Venture Equity.
On February 7, 2017, the Company completed the purchase and closing of the eighty (80) acre approved cannabis farm for the medicinal and recreational sector located in Pueblo, Colorado. The Company now owns the parcel including water and mineral rights, a major land asset for the cultivation of cannabis. The Company plans to section the parcel by acres and lease to licensed cultivators, manufacturers and lab testing companies.
F-26