Kaya Holdings, Inc. - Annual Report: 2016 (Form 10-K)

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

Commission File No. 333-177532

KAYA HOLDINGS, INC.  

(Exact name of registrant as specified in its charter)

305 South Andrews Avenue, Suite 209, Fort Lauderdale, Florida, 33301

(Address of principal executive offices) (Zip Code)

561-210-5784

(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: None

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No

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

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

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 definition of “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

[ ] Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Smaller reporting company

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $5,447,215 as of June 30, 2016, based on the closing price on such date of $0.07 of the Company’s common stock on the OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc. For purposes of the foregoing computation, all executive officers, directors and 10% beneficial owners of the Registrant are deemed to be affiliates.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 128,310,773 shares of common stock outstanding as of April 14, 2017.

DOCUMENTS INCORPORATED BY REFERENCE: No documents are incorporated by reference into this Annual Report on Form 10-K except those Exhibits so incorporated as set forth in the list of Exhibits set forth in Item 15 of this Annual Report on Form 10-K.

KAYA HOLDINGS, INC.

FORM 10-K INDEX

As used in this Annual Report on Form 10-K (the “Annual Report”) and unless otherwise indicated, the terms “KAYS,” “the Company,” “we,” “us” and “our” refer to Kaya Holdings, Inc. and its subsidiaries.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information contained in this Annual Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the ‘Exchange Act”). These forward-looking statements are contained principally in the sections titled “Item 1. Business,” “Item 1A. Risk Factors,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

The forward-looking statements herein represent our expectations, beliefs, plans, intentions or strategies concerning future events. Our forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Moreover, our forward-looking statements are subject to various known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.

Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

  PART I

Background

Kaya Holdings, Inc., was incorporated in Delaware in 1993 under the name Gourmet Market, Inc. and has engaged in a number of businesses. Its name was changed on May 11, 2007 to Netspace International Holdings, Inc. (“Netspace”). Netspace acquired 100% of the capital stock of Alternative Fuels Americas, Inc., a Florida corporation in January 2010 in a stock for stock transaction and issued 100,000 shares of Series C convertible preferred stock to existing shareholders of the Florida corporation. The Company’s name was changed in October 2010 from Netspace International Holdings, Inc. to Alternative Fuels Americas, Inc.

From 2010 through 2014 the Company was engaged in seeking to develop a biofuels business. In January 2015, the Company determined that it was in the best interests of its stockholders to discontinue its biofuel development activities, and to instead leverage its agricultural and business development experience and focus all its resources on the development of legal medical and recreational marijuana opportunities in the United States and in select international markets.

In January of 2014 KAYS incorporated a subsidiary, Marijuana Holdings Americas, Inc. a Florida corporation (“MJAI”). Through entities controlled by MJAI, KAYS has focused on the development of opportunities within the legal recreational and medical marijuana sectors in the United States. In March 2014, MJAI, subsidiary, applied for and was awarded its first license to operate a Medical Marijuana Dispensary (an “MMD”). The Company developed the Kaya Shack™ brand for its retail operations and on July 3, 2014 opened its first Kaya Shack™ Medical Marijuana Dispensary in Portland, Oregon, thereby becoming the first publicly traded U.S. company to own and operate an MMD. Initial customer acceptance and media coverage was very positive, including many references to KAYS as the “Starbucks of Medical Marijuana” by television news stations, news print publications and online news sources. In March 2015, the Company changed its name to Kaya Holdings, Inc. to better reflect its new plan of operations. 

In April 2015 KAYS commenced its own medical marijuana grow operations for the cultivation and harvesting of legal marijuana thereby becoming the first publicly traded U.S. company to own a majority interest in a vertically integrated legal marijuana enterprise in the United States. In October 2015, concurrent with Oregon commencing legal sales of recreational marijuana through MMDs, KAYS opened its second retail operation in Salem, Oregon, the Kaya Shack™ Marijuana Superstore. Oregon. During 2015, the Company also consolidated its grow operations and manufacturing operations into a single facility in Portland, Oregon.

Recent Developments

OLCC Licensing

In 2016, Oregon began the process to transition legal marijuana sales from Oregon Health Authority (“OHA”) licensed MMDs and grow operations to Oregon Liquor Control Commission (“OLCC”) licensed recreational marijuana retailers and producer and processing facilities. Effective January 1, 2017, all retailers of recreational marijuana were required to have a recreational marijuana sales license issued by the OLLC for each retail outlet operated. The Company applied for OLLC licenses for its two initial Kaya Shack™ retail outlets and received an OLCC recreational license for its existing South Salem Kaya Shack™ Marijuana Superstore prior to the January 1, 2017 deadline. However, issuance of the OLCC license for the Portland, Oregon outlet was delayed because of the need to resolve various local issues with the City of Portland. Accordingly, from January 1, 2017 until the present, sales at the Portland, Oregon location were limited to medical marijuana.

On January 20, 2017, we entered into an agreement whereby the City of Portland agreed to license our Portland Kaya Shack™ retail outlet. Since that time, we completed all OLCC Licensing requirements, on March 29, 2017 passed our retail license inspection and expect to receive our OLCC recreational license for the Portland Kaya Shack™ outlet by not later than April 30, 2017, at which time, we will be able to commence legal recreational marijuana sales at that location.

Additional Kaya Shack™ Marijuana Superstores

During 2016, the Company focused a significant portion of its efforts on developing two additional Kaya Shack^™ Marijuana Superstores, including identifying and leasing suitable locations, completing necessary build out and applying for the requisite OLCC recreational marijuana retailer licenses. On March 21, 2017, the Company announced that it had secured the OLCC recreational retailer marijuana license and had opened its third retail outlet, a 2,600 square foot Kaya Shack™ Marijuana Superstore in North Salem, Oregon. We are completing construction of and the OLCC licensing process for our fourth outlet, a third Kaya Shack™ Marijuana Superstore, which will be located in Central Salem, Oregon and which we anticipate will open during the second quarter of 2017. In addition to the four Kaya Shack™ retail marijuana stores described above, the Company plans to identify and lease locations for, license and seek to open up to four additional Kaya Shack™ Marijuana Superstores in other Oregon markets over the next eighteen to twenty-four months, as well as explore opportunities in other states to increase its retail footprint. Additionally, the Company is exploring opportunities to further its operation in Oregon and elsewhere through the acquisition of currently licensed and operating retail operations, which can be converted to the Kaya Shack™ model.

Expansion of Grow and Manufacturing Operations

On March 21, 2017, KAYS announced that it was in the process of expanding its grow and manufacturing operations and had retained a realtor to assist in identifying a suitable 30-60 acre tract of land in Oregon which would permit KAYS to expand its grow operations to the maximum space currently allowed by law utilizing a mix of indoor and greenhouse cultivation. KAYS believes that the acquisition of a property will position the Company for future development, including increased Marijuana Canopy production, development of marijuana processing facilities and other cannabis related endeavors (subject to local zoning restrictions or liberalization of restrictions). As part of this expansion, KAYS ceased operations of its Portland grow facility at the end of March 2017, arranged to maintain its genetics library of over 30 strains of cannabis at an OHA-licensed medical grow site and contracted with farmers to meet demand until the new facility is secured, built and fully operational.

$2.1 Million Financing

In March 2017, the Company completed a $2.1 million financing with an institutional investor (the “Investor”) who had previously furnished KAYS with $1.2 million in financing, pursuant to a financing agreement (the “Financing Agreement”) entered into between the Company and the Investor in December 2016. Pursuant to the Financing Agreement, the Investor purchased $2.1 million in principal amount of convertible notes (the “Notes”) from the Company as follows:

The purchase price for the Notes is equal to the principal amount thereof. The Notes have a term of two years from issuance and bear interest at the rate of eight percent (8%) annum, which accrues and is payable to together with interest at maturity. The Investor may convert the principal amount of the Notes (as well as other notes it currently holds as referenced above), together with accrued but unpaid interest thereon, into shares at the applicable conversion price, at any time or from time to time prior to maturity. The conversion price is subject to adjustment for stock splits, stock dividends, recapitalizations and similar transactions. The Notes also provide that at no time may they be convertible if the number of shares being issued upon conversion to and then held by the Investor would result in the Investor beneficially owning in excess of 4.99% of the Company’s then outstanding shares of common stock, after giving effect to the proposed conversion. As of the date of this Annual Report, the Investor has not converted any of the Notes into shares of the Company’s common stock.

The Notes were issued pursuant to the exemption from registration afforded by Section 4(a)(2) of the Securities Act and Regulation D thereunder. The proceeds from the offer and sale of Notes are and will be used to fund the Company’s 2017 growth plan, including expansion of our chain of Kaya Shack™ Marijuana Superstores in Oregon, expansion of our marijuana grow facility and manufacturing operations and introducing new Kaya Shack™ branded cannabis products.

Corporate Information

Our corporate office is located at 305 South Andrews Avenue, Suite 209, Fort Lauderdale, Florida, 33301. Our website is www.kayaholdings.com. Information contained on our website does not constitute part of this Annual Report.

Market Overview

Twenty-nine states and the District of Columbia have legalized marijuana in some capacity. Additionally, eight states (Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington State) and Washington, DC have approved the implementation of legal recreational marijuana use, with active legal cannabis economies flourishing in Colorado, Oregon and Washington. As Melia Robinson of Business Insider stated, “After a historic election cycle, which saw four states pass ballot initiatives legalizing nonmedical marijuana, one in five Americans now live in a state where it's legal to smoke weed without a doctor's letter.”

According to cannabis research firm Arcview, sales of legal marijuana in North America rose by 34% to $6.9 billion in 2016, and based on estimates from investment firm Cowen & Co., U.S. legal sales could reach $50 billion by 2026. For added context, ArcView estimates that North American black market sales totaled $46.4 billion last year.

Arcview projects sales will grow at a compound annual growth rate of 25% through 2021, when the North American market is expected to top $20.2 billion in sales. "The only consumer industry categories I've seen reach $5 billion in annual spending and then post anything like 25% compound annual growth in the next five years are cable television (19%) in the 1990s and the broadband internet (29%) in the 2000s," Tom Adams, editor in chief of Arcview Market Research, said in a statement.

Estimates from various sources for the size of the long term market range from up to an excess of $100 billion if Federal Prohibition is repealed and marijuana sales become legal in all 50 states and Washington D.C. (for perspective beer is approximately a $100 billion market, with wine just under $30 billion and coffee approximately $12 billion).

The Kaya Shack™ Brand

Kaya Holdings operates the Kaya Shack™ brand of medical marijuana dispensaries and recreational marijuana stores.

Kaya Holdings operates three recreational marijuana retail outlets and medical marijuana dispensaries in Oregon under the Kaya Shack™ and anticipates opening a fourth location during the second quarter of 2017. In addition to these four Kaya Shack™ retail marijuana stores, the Company plans to identify and lease locations for, license and seek to open up to four additional Kaya Shack™ Marijuana Superstores in other Oregon markets over the next eighteen to twenty-four months, as well as explore opportunities in other states to increase its retail footprint. Additionally, the Company is exploring opportunities to further its operation in Oregon and elsewhere through the acquisition of currently licensed and operating retail operations, which can be converted to the Kaya Shack™ model.

Dubbed by the mainstream press as the “Starbucks of Marijuana” after our first outlet opened in July, 2014, our operating concept is simple to deliver a consistent customer experience (quality products, fair prices and superior customer service) to a broad and diverse base of customers. Kaya Shack™ meets the quality needs of the “marijuana enthusiast”, the comfort and atmosphere of all including “soccer moms” and the price sensitivities of casual smokers.

The Kaya Shack™ brand communicates positive thinking and joy, with signs adorning the walls that read “It’s a Good Day to have a Good Day,” “Some of our Happiest Days Haven’t Even Happened Yet,” and our signature “Be Kind.”

Kaya Shack™ retail outlets are open 7 days a week from 8:00 am to 9:00 pm. Operations follow an operational manual that details procedures for 18 areas of operation including safety, compliance, store opening, store closing, merchandising, handling of cash, inventory control, product intake, store appearance and employee conduct.

In compliance with regulations, all marijuana and marijuana infused products sold through our stores are quality tested by independent labs to assure adherence to strict quality and purity standards.

Kaya Shack™ Retail Outlets

I. Kaya Shack™, 1719 SE Hawthorne Blvd., Portland, Oregon

Our flagship Hawthorne Boulevard Kaya Shack™ store opened July 3, 2014. The location is prime Portland real estate, located in an area that many term as “the Greenwich Village of Portland”.

The Portland facility rotates through approximately 100 different strains throughout the year and in any given month features over 35 popular strains of marijuana including our proprietary, high-grade “Kaya Kush” (independent testing performed on 3/10/2016 confirms a total THC/Cannabinoid content of approximately 28%). Our stores also feature various concentrates, including butane hash oil (B.H.O.) and CO2 oil extract (wax, shatter) which range in potency from approximately 40% to over 80% THC, as well as high grade Oils and Tinctures, high CBD – low THC strains and “Kaya Candies”, “Kaya Caramels” and an assortment of cookies and cakes for patients who do not smoke.

Our Portland store initially operated as an MMD. In connection with the transition of recreational marijuana retailer licenses from the OHA to the OLCC, we applied for an OLCC license for the facility. However, issuance of the OLCC license for the Portland, Oregon outlet was delayed because of the need to resolve various local issues with the City of Portland. Accordingly, from January 1, 2017 until the present, sales at the Portland, Oregon location were limited to medical marijuana.

On January 20, 2017, we entered into an agreement whereby the City of Portland agreed to license our Portland Kaya Shack™ retail outlet. Since that time, we completed all OLCC Licensing requirements, on March 29, 2017 passed our retail license inspection and expect to receive our OLCC recreational license for the Portland Kaya Shack™ outlet by not later than April 30, 2017, at which time, we will be able to commence legal recreational marijuana sales at that location.

II. Kaya Shack ™ Marijuana Superstore, South Salem, Oregon

Our second retail outlet (and our first Kaya Shack™ Marijuana Superstore) opened for business on October 17, 2015 in South Salem, Oregon in time to take advantage of early recreational sales by MMDs.

The store is located in first class strip mall space adjacent to “Little Caesars Pizza” and “Aaron Rents”, with a footprint roughly three times the size of our first Kaya Shack™ outlet in Portland. The location and floor plan was carefully chosen with an eye towards concept expansion to enhance revenues and broaden branding opportunities.

In addition to the recreational and medical marijuana products as offered at our Hawthorne location, the space allows for additional products and concept innovations to be introduced. These include the Kaya Café Juice Bar ™ (featuring THC and CBD enhanced juices and beverages), the Kaya Clone Room ™ (supplying marijuana plants and home cultivation accessories) and additional unique on-site concepts.

Our South Salem Kaya Shack™ Marijuana superstore received its OLCC recreational marijuana retailer license prior to the January 1, 2017 deadline to do so. 

III. Kaya Shack™ Marijuana Superstore, North Salem, Oregon  

On March 21, 2017, the Company announced that it had secured the OLCC recreational retailer marijuana license and had opened its third retail outlet, a 2,600 square foot Kaya Shack™ Marijuana Superstore in North Salem, Oregon.

As with the South Salem Store, the location is first class space, adjacent to Starbucks Coffee. This is our largest location to date and is intended to be the model for future Kaya Shack™ Marijuana Superstores. We selected this location with an eye towards completing market penetration of the Salem Metropolitan Area, which hosts a population of approximately 400,000 people. We also intend to expand our product offerings here as well as utilize the additional space to host community events we hope will help make the Kaya Shack™ a destination for cannabis consumers.

IV. Kaya Shack™ Marijuana Superstore, Central Salem, Oregon

We are completing construction of and the OLCC licensing process for our fourth outlet, a third Kaya Shack™ Marijuana Superstore, which will be located in Central Salem, Oregon and which we anticipate will open during the second quarter of 2017. As with the other Salem, Oregon outlet, the store is located in first class space, adjacent to fast food restaurants stores and near popular national retail chain stores. It also has a footprint of approximately 2,600 square feet and utilizes the Kaya Shack™ Marijuana Superstore model reflected in our third outlet and substantially completes our geographic penetration of the Salem, Oregon market.

Kaya Shack™ Home Delivery

In early February of 2017, the Company began the process of filing applications to add Home Delivery Service for three of its Kaya Shack™ retail marijuana stores at the advice of one of their OLCC examiners. As of the date of this Annual Report, the Company has received approvals from the OLCC to add Home Delivery to their two currently OLCC licensed locations, expects to receive approval for Home Delivery at its third location in conjunction with the anticipated issuance of its OLCC location license and is also applying for Home Delivery licensing at its fourth retail outlet, which is currently under construction.

In addition to providing added value and convenience for our customers, extending visibility and building brand recognition for the Kaya Shack™ brand, we believe that Home Delivery provides greater market penetration, by allowing sales throughout the geographic area that our stores are licensed in. There is no limit to the number of delivery vehicles that can service an individual area using just one store as a home base, so in effect we intend to use this service to construct additional “virtual” Kaya Shacks™ without the added costs of additional brick and mortar locations.

On April 11, 2017 the Company took delivery of its first four Fiat 500 cars to begin building their Kaya Car™ Home Delivery Service fleet. The cars are presently being customized with distinctive Kaya Shack™ vehicle wrapping featuring the Company’s branding logos and colors, and the Company is developing the Kaya Shack™ Delivery App for use by its customers to order “Fast, Free Delivery” of the complete line of both medical and recreational grade Kaya Shack™ cannabis products.

The Company intends to initiate its Kaya Car™ Home Delivery Service within the next 30-60 days, contemporaneously with a grand opening celebration for all four then OLCC-Licensed Kaya Shack™ retail marijuana stores and to commence the to move to the next stage of branding and retail development.

Kaya Farms™ Cannabis and Cannabis Products

General

Since April 2015, Kaya Holdings has developed, operated and expanded its Kaya Farms™ West Coast Base of Operations, housing marijuana grow operations and a manufacturing facility. These operations enabled us to develop over 30 strains of cannabis and to provide ours Kaya Shack™ retail outlets with top grade connoisseur quality marijuana products including flower, concentrates and extracts.

On March 21, 2017, KAYS announced that it was in the process of expanding its grow and manufacturing operations and had retained a realtor to assist in identifying a suitable 30-60 acre tract of land in Oregon which would permit KAYS to expand its grow operations to the maximum space currently allowed by law utilizing a mix of indoor and greenhouse cultivation. KAYS believes that the acquisition of a property will position the Company for future development, including increased Marijuana Canopy production, development of marijuana processing facilities and other cannabis related endeavors (subject to local zoning restrictions or liberalization of restrictions). As part of this expansion, KAYS ceased operations of its Portland grow facility at the end of March 2017, arranged to maintain its genetics library of over 30 strains of cannabis at an OHA licensed medical grow site and contracted with farmers to meet demand until the new facility is secured, built and fully operational.

Kaya Farms™ Cannabis Testing Results

The following pages contain testing results of Kaya Farms™ flower produced throughout the year which make up part of our strain library of mother plants which we will use to help populate our new and improved grow and marijuana manufacturing facility.

Kaya Buddie™ Strain Specific Cannabis Cigarettes

In 2016 the Company introduced a signature line of strain-specific connoisseur-grade, pre-rolled cannabis cigarettes branded as “Kaya Buddies™”. The brand, marketed under the tagline “Buds with Benefits”, features over 25 different strains of connoisseur-grade, high quality cannabis and proprietary specialty blends. The Kaya Buddies™ cannabis cigarettes, made from 100% cannabis bud only, was launched in mid-March in the Kaya Shack™ stores in Oregon and are targeted to service the exploding legal recreational marijuana market.

Kaya Buddies™ cannabis cigarettes have consistently been very well received by both older medical patients and recreational users new to cannabis. Although they are first being marketed through our internal retail network they are also being targeted for potential distribution lines to other dispensaries.

Other Potential Markets

We believe that revenues and profitability will be enhanced through our planned opening of additional retail outlets utilizing the Kaya Shack™ brand and model in our chain, as well as economies of scale achieved by being a multi-location retail chain and being vertically integrated with grow and manufacturing operations. Ultimately, we believe that we can successfully enter other markets as they open up by applying our “brand” retail chain and vertically integrated grow and manufacture model to other states that legalize recreational marijuana use. Where applicable, we will seek to leverage our public company status to finance organic growth and enable acquisitions of existing locations for the Kaya Shack brand, as well as look to acquire and grow additional brands.

On November 8, 2016, California, Maine, Massachusetts and Nevada voted to legalize recreational marijuana, while Arkansas, Florida and North Dakota approved medical cannabis initiatives. Montana, which legalized medical marijuana in 2004, also passed a measure to set up commercial cultivation operations and dispensaries.

The California recreational cannabis market is by far the largest potential market in the country, and our operations in Oregon allow for a natural progression and expansion down the I-5 corridor into California. Florida could be a potentially large market for us as well, because we believe that KAYS would have a distinct advantage in the state, as it is one of the few Florida-based entities whose management has significant experience in owning and operating MMDs and grow and manufacturing operations. These markets are substantial, and their development could lead to $7-$8 billion in additional annual retail cannabis sales, according to Marijuana Business Daily’s preliminary estimates.

Growth Strategy

The Company has established a well-defined strategy for entering and maintaining a strong presence in the legal marijuana sector. The cornerstones of this strategy include:

Marketing and Sales

The Company will only market its legal marijuana as in compliance with applicable state law.

The Company employs a marketing campaign consisting of four cornerstones:

Our core strategic marketing objectives include:

Government Regulation

We are subject to general business regulations and laws, as well as regulations and laws directly applicable to our operations. As we continue to expand the scope of our operations, the application of existing laws and regulations could include matters such as pricing, advertising, consumer protection, quality of products, and intellectual property ownership. In addition, we will also be subject to new laws and regulations directly applicable to our activities.

Any existing or new legislation applicable to us could expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations, which could hinder or prevent the growth of our business.

Federal, state and local laws and regulations governing legal recreational and medical marijuana use are broad in scope and are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance. In addition, violations of these laws or allegations of such violations could disrupt our planned business and adversely affect our financial condition and results of operations. In addition, it is possible that additional or revised federal, state and local laws and regulations may be enacted in the future governing the legal marijuana industry. There can be no assurance that we will be able to comply with any such laws and regulations and its failure to do so could significantly harm our business, financial condition and results of operations.  

Competition

The legal marijuana sector is rapidly growing and the Company faces significant competition in the operation of retail outlets, MMDs and grow facilities. Many of these competitors will have far greater experience, more extensive industry contacts and greater financial resources than the Company. There can be no assurance that we can adequately compete to succeed in our business plan.

Employees

As of the date of this Annual Report, our Oregon operations have a total of seventeen (17) part-time store employees including budtenders, trimmers, growers, and 4 full-time employees- a Store Manager, a Sales and Marketing Coordinator, the Director of Dispensary and Grow Operations and a Master Grower. Additionally, we engage several consultants to assist with daily duties and business plan implementation and execution. Additional employees will be hired and other consultants engaged in the future as our business expands. 

We have a limited operating history with our current business.

The Company was incorporated in 1993 and has engaged in a number of businesses as both a private and as a publicly held company, including the online sale of specialty foods, online marketing and website development.

KAYS’s legal marijuana business, which it has focused on since 2014, only commenced generating more than a limited level of revenues subsequent to the commencement of legal recreational marijuana sales in Oregon on October 1, 2015. Accordingly, our operations continue to be subject to all the problems, expenses, difficulties, complications and delays encountered in an early stage business. Their can be no assurance that the Company will generate significant revenues or operate at a profit.

The Company will require additional financing to become commercially viable.

The Company’s current legal marijuana operations can be capital intensive.

During the years ended December 31, 2016 and 2015, we raised approximately $1,185,000 and $940,000, respectively, through a series of private of debt and equity offerings to finance operations for its legal marijuana operations in Oregon.

The Company incurred net losses of $19,849,262 and $3,225,394 for the years ended December 31, 2016 and 2015, respectively. The majority of our net loss during the year ended December 31, 2016 was a result of the derivative liabilities from the conversion of debt in the year ended December 31, 2016 and from the stabilization of our stock prices the reduces the volatility factors used in the derivative calculations. At December 31, 2016, we had a total stockholders' deficit of $ 20,990,060 and a working capital deficiency of $9,417,677. Their can be no assurance that the Company will become commercially viable without additional financing, the availability and terms of which are uncertain. If the Company can not secure necessary capital when needed on commercially reasonable terms, its business, condition (financial and otherwise) and commercial viability may be harmed. Although management believes that it will be able to successfully execute its business plan, which includes third party financing and the raising of capital to meet the Company’s future liquidity needs, there can be no assurances in this regard. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

We currently rely on certain key individuals, and the loss of one of these key individuals could have an adverse effect on the Company.

Our success depends to a certain degree upon certain key members of our management. These individuals are a significant factor in our growth and success. The loss of the services of such members of management could have a material adverse effect on our Company.

The Company’s success will be dependent in part upon its ability to attract qualified personnel and consultants.

The Company’s success will be dependent in part upon its ability to attract qualified creative marketing, sales and development professionals. The inability to do so on favorable terms may harm the Company’s proposed business.

KAYS must effectively meet the challenges of managing expanding operations.

The Company’s business plan anticipates that operations will undergo significant expansion in 2017 and beyond. This expansion will require the Company manage a larger and more complex organization, which could place a significant strain on our managerial, operational and financial resources. Management may not succeed with these efforts. Failure to expand in an efficient manner could cause expenses to be greater than anticipated, revenues to grow more slowly than expected and could otherwise have an adverse effect on the business, financial condition and results of operations.

Marijuana remains illegal in the United States under federal law.

Notwithstanding its legalization for recreational and/or medical use by a growing number of states, the growing, transport, possession or selling of marijuana continues to be illegal under federal law. Although the Obama administration has made a policy decision to allow implementation of state laws legalizing recreational and/or medical marijuana use and not to federally prosecute anyone operating under state law, the continuance of that policy is not assured under the Trump administration and could change at any time, which might render our marijuana operations illegal and adversely affecting KAYS’s business, financial condition and results of operations.

The marketing and market acceptance of marijuana may not be as rapid as KAYS expects.

The market for legal marijuana is quickly evolving, and activity in the sector is expanding rapidly. Demand and market acceptance for legal marijuana are subject to uncertainty and risk, as changes in the price and possible adverse political efforts could influence and denigrate demand. KAYS cannot predict whether, or how fast, this market will grow or how long it can be sustained. If the market for legal marijuana develops more slowly than expected or becomes saturated with competitors, KAYS’s operating results could be adversely impacted.

KAYS’s marijuana activities are part of an emerging industry.

The Company intends to implement an aggressive plan of growth to enter the legal recreational and medical marijuana industry. The legal marijuana industry is new and emerging, and has yet to fully define competitive, operational, financial and other parameters for successful operations. By pursuing a growth strategy to enter a new and emerging industry, the Company’s operations may be adversely impacted as the industry’s competitive, operational, financial and other parameters take shape. Given the fluidity of the industry, the Company may make errors in implementing its business plan, thereby limiting some or all of its ability to perform in accordance with its expectations.

Our business could be affected by changes in governmental regulation.

Federal, state and local laws and regulations governing legal recreational and medical marijuana use are broad in scope and are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance. In addition, violations of these laws or allegations of such violations could disrupt KAYS’s planned business and adversely affect our financial condition and results of operations. In addition, it is possible that additional or revised federal, state and local laws and regulations may be enacted in the future governing the legal marijuana industry. There can be no assurance that KAYS will be able to comply with any such laws and regulations and its failure to do so could significantly harm our business, financial condition and results of operations.

Our business will be subject to other operating risks which may adversely affect the Company’s financial condition.

Our planned operations will be subject to risks normally incidental to manufacturing operations which may result in work stoppages and/or damage to property. This may be caused by:

We will likely face significant competition.

The legal marijuana industry is in its early stages and is attracting significant attention from both small and large entrants into the industry. KAYS expects to encounter significant competition as it implements its business strategy. The ability of KAYS to effectively compete could be hindered by a lack of funds, poor positioning, management error, and other factors. The inability to effectively compete could adversely affect our business, financial condition and results of operations.

Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act `Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial office and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

We do not have a sufficient number of employees to segregate responsibilities and may be unable to afford increasing our staff or engaging outside consultants or professionals to overcome our lack of employees. During the course of our testing, we may identity other deficiencies that we may not be able to timely remediate. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes Oxley”). Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock, if a market ever develops, could drop significantly

The Jumpstart our Business Startups Act of 2012 (the “Jobs Act”) has reduced the information that the Company is required to disclose.

Under the Jobs Act, the information that the Company will be required to disclose has been reduced in a number of ways.

As a company that had gross revenues of less than $1 billion during the Company’s last fiscal year, the Company is an “emerging growth company,” as defined in the Jobs Act (an “EGC”). The Company will retain that status until the earliest of (a) the last day of the fiscal year which the Company has total annual gross revenues of $1,000,000,000 (as indexed for inflation in the manner set forth in the Jobs Act) or more; (b) the last day of the fiscal year of following the fifth anniversary of the date of the first sale of the common stock pursuant to an effective registration statement under the Securities Act; (c) the date on which the Company has, during the previous three year period, issued more than $1,000,000,000 in non-convertible debt; or (d) the date on which the Company is deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act or any successor thereto. As an EGC, the Company is relieved from the following: 

The costs of being a public company could result in us being unable to continue as a going concern.

As a public company, we are required to comply with numerous financial reporting and legal requirements, including those pertaining to audits and internal control. The costs of this compliance could be significant. If our revenues do not increase and/or we cannot satisfy many of these costs through the issuance of our shares, we may be unable to satisfy these costs in the normal course of business that would result in our being unable to continue as a going concern.

Management and the Board of Directors may be Indemnified.

The Certificate of Incorporation and Bylaws of KAYS provide for indemnification of directors and officers at the expense of the respective corporation and limit their liability. This may result in a major cost to the corporation and hurt the interests of stockholders because corporate resources may be expended for the benefit of directors and officers. The Company has been advised that, in the opinion of the Securities and Exchange Commission, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

The market for the KAYS Shares is extremely limited and sporadic

KAYS’s common stock is quoted on the OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc. The market KAYS’s for common stock is limited and sporadic. Trading in stock quoted on the OTCQB is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of KAYS’s common stock for reasons unrelated to operating performance. Moreover, the trading of securities in the OTCQB is often more sporadic than the trading of securities listed on a quotation system like NASDAQ, or a stock exchange like the New York Stock Exchange.

KAYS’s common stock is a penny stock. Trading of KAYS’s common stock may be restricted by the penny stock regulations adopted by the Securities and Exchange Commission (the “SEC”) and FINRA’s sales practice requirements, which may limit a stockholder’s ability to buy and sell our common stock.

KAYS’s common stock is a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. KAYS’s common stock is covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in, and limit the marketability of, KAYS’s common stock.

In addition to the penny stock rules promulgated by the SEC, FINRA (the Financial Industry Regulatory Authority) has adopted rules that require when recommending an investment to a customer, a broker- dealer must have reasonable grounds for believing that the investment is suitable for that customer. 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, the FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA’s requirements make it more difficult for broker-dealers to recommend that their customers buy KAYS’s common stock, which may limit investor ability to buy and sell KAYS’s common stock.

The market for penny stocks has experienced numerous frauds and abuses that could adversely impact KAYS’s common stock.  

Company management believes that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:

The board of directors of KAYS has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stockholders and with the ability to adversely affect common stockholder voting power and rights upon liquidation.

KAYS’s Certificate of Incorporation allows us to issue shares of preferred stock without any vote or further action by our stockholders. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders of preferred stock the rights to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.

The ability of our principal stockholders, including our CEO, to control our business may limit or eliminate minority stockholders’ ability to influence corporate affairs.

The principal stockholder of KAYS holds 22,996,833 shares of common stock and $500K in principal amount of convertible promissory notes which are convertible into 50,000 shares of Series C Convertible Stock. Additionally, our CEO owns 5,280,144 shares of common stock and 50,000 shares of Series C Convertible Preferred Stock. These preferred shares notes can be converted into a total of 43,329,970 shares of KAYS common stock which, added to the common shares of KAYS held by both parties gives them approximately 41% of votes on matters presented to stockholders. Accordingly, they are in a position to significantly influence membership of our board of directors as well as all other matters requiring stockholder approval. The interests of our principal stockholders may differ from the interests of other stockholders with respect to the issuance of shares, business transactions with or sales to other companies, selection of other officers and directors and other business decisions. The minority stockholders have no way of overriding decisions made by our principal stockholders. This level of control may also have an adverse impact on the market value of our shares because our principal stockholders may institute or undertake transactions, policies or programs that result in losses and/or may not take any steps to increase our visibility in the financial community and/or may sell sufficient numbers of shares to significantly decrease our price per share.

We do not expect to pay cash dividends in the foreseeable future.

KAYS has not paid cash dividends on its shares of common stock and does not intend to do so at any time in the foreseeable future. The future payment of dividends depends upon future earnings, capital requirements, financial requirements and other factors that the companies’ boards of directors will consider. Since they do not anticipate paying cash dividends on the common stock, return on investment, if any, will depend solely on an increase, if any, in the market value of the common stock.

The conversion of KAYS’ outstanding preferred stock by the CEO and convertible debt held by our principal stockholder would result in the issuance of 43,329,970 shares of KAYS’ common stock. Additionally, conversion of other convertible debt described in this Annual Report would result in further dilution to KAYS’ stockholders. Accordingly, such market overhang could adversely impact the market price of the common stock.

KAYS has 50,000 shares of Series C Convertible Preferred Stock outstanding, all of which are held by our CEO. Additionally, KAYS has $500K in principal amount of convertible promissory notes outstanding held by our principal stockholder, which are convertible into 50,000 shares of Series C Convertible Stock. These preferred shares and convertible promissory notes can be converted into a total of 43,329,970 shares of KAYS common stock. Additionally, the company has other convertible debt described in this Annual Report, which would result in further dilution if converted Such market overhang could adversely impact the market price of KAYS’s common stock as a result of the dilution which would result if such securities were converted into shares of KAYS common stock.

Future sales of shares of KAYS common stock pursuant to Rule 144 under the Securities Act could adversely affect the market price of KAYS’s common stock.

KAYS has a substantial number of shares of common stock which were issued in transactions exempt from the registration requirements of the Securities Act and are now available for public sale pursuant to the Rule 144 under the Securities Act. Such sales could adversely affect the market price of KAYS’s common stock.

Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested-director transactions, conflicts of interest and similar matters.

Sarbanes-Oxley as well as rule changes proposed and enacted by the SEC, the NYSE/AMEX and the NASDAQ Stock Market as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the NASDAQ Stock Market. Because we are not currently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with voluntary compliance, we have not yet adopted these measures.

We do not currently have independent audit or compensation committees. As a result, directors have the ability, among other things, to determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested- director transactions, conflicts of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations as a result thereof.

We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of Sarbanes-Oxley. The enactment of Sarbanes-Oxley has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.

Not applicable.

We do not own any real property.

The Company maintains office space at 305 South Andrews Avenue, Suite 209, Fort Lauderdale, Florida 33301, pursuant to the terms of a commercial office lease providing for rental payments of $2,544 per month. The lease was extended on March 18, 2017, for an additional 1 year.

Our Kaya Shack™ retail outlet located at 1719 SE Hawthorne Boulevard, Portland, Oregon 97214, is occupied pursuant to a lease expiring in April 2019, at a current monthly rental of $ 2,433.60. The lease provides for an annual rental rate increase of 4% effective May of each year, and two (2) five-year extension options at market rate.

Our Kaya Shack™ Marijuana Superstore located at 5757 Commercial Street SE, Salem, Oregon 97306 is occupied pursuant to a lease expiring in May 2020, at a current monthly rental of $ 4,195.84. The lease provides for an annual rental rate increase of 3% effective May of each year, and two (2) five-year extension options at market rate.

Our Kaya Shack™ Marijuana Superstore opened in March 2017 at 2505 Liberty Road NE #120, Salem, Oregon 97301. Is occupied pursuant to a lease expiring in August, 2022, at a current monthly rental of $ 6,182.23. The lease provides for an annual rental rate increase of 3 % effective August of each year, and two (2) five-year extension options at market rate.

Our Kaya Shack™ Marijuana Superstore located dispensary at 1252 23^rd St. SE #150, Salem, Oregon 97306, which we anticipate will open during the second quarter of 2017, is occupied pursuant to a lease expiring in August, 2022 at a current monthly rental of $ 6,720.02 The lease provides for an annual rental rate increase of 3% effective May of each year, and two (2) five-year extension options at market rate.

Until March 31, 2017, we operated our Kaya Shack™ West Coast Base of Operation in Portland, Oregon pursuant to a lease which was originally scheduled to expire in 2019. The current rental for that facility was $6,240.00. As disclosed in “Item 1. Business” we terminated that lease by agreement with the landlord as part of our plan to relocate our grow and manufacturing operations to and expand them in a larger facility.

Swartz Litigation

On August 22, 2014, a complaint was filed in the Circuit Court of the 17 ^th Judicial Circuit in and for Broward County, Florida (CACE 14-016324) entitled Neil Swartz vs. Alternative Fuels Americas, Inc.

The complaint by Mr. Swartz (a former executive officer and director of the Company) alleges that 44,880 shares of our Series A Preferred Stock (which our SEC filings reflect were contributed back to the Company for cancellation) were, in fact, not returned, and are still the property of Neil Swartz. Additionally, the complaint alleges that 5,120 shares of our Series A Preferred Stock held by us in book-entry form for Mr. Swartz should be released to Mr. Swartz.

On April 15, 2016, we entered into a Settlement Agreement with Mr. Swartz pursuant to which, among other matters, Mr. Swartz:

In addition to the foregoing, the parties also exchanged mutual releases.

Goldin Litigation

On June 22, 2016, Daniel A. Goldin and Wally Goldin commenced an action in Oregon Circuit Court, Multnomah County, against the Company, Marijuana Holdings Americas, Inc., its direct majority-owned subsidiary, Craig Frank, the Company’s Chairman, President and Chief Executive Officer, William David Jones, a consultant to the Company and BMN Capital Group, LLC, a limited liability company owned by Mr. Jones (the “Action”). The plaintiffs allege, in a complaint which has been amended three times, breach of contract, state securities fraud and state racketeering claims against the defendants arising from alleged misrepresentations made in subscription agreements with the Company entered into in October 2015 and January 2016 by Daniel A. Goldin and Wally Goldin, respectively, pursuant to which they each purchased 2,222,222 “restricted” shares of the Company’s our common stock for $100,000 in a private transaction. In addition, Daniel A. Goldin alleged that the Company breached a purported employment agreement with him pursuant to which he was purportedly to be compensated for working in our Oregon operations through a combination of cash and stock. The Plaintiffs are seeking monetary damages.

The Company believes that the claims and allegations set forth in the complaint filed in the Action are without merit and contain factual misstatements, and that the Company possesses documentation to establish that the plaintiffs’ investments were not solicited by the Company but that plaintiff Daniel A. Goldin unilaterally contacted the Company and represented himself as an “accredited investor” with expertise in the marijuana industry and proposed an investment in the Company. The Company is vigorously defending against the claims, has answered the complaint denying all of the plaintiff’s allegations and has brought various counterclaims against them arising from the plaintiffs’ misrepresentations. The action is currently in the discovery phase. Moreover, the Company believes that plaintiff Daniel Goldin has publicly sold the shares that he purchased from the Company for an amount significantly in excess of the purchase price, which adversely impacts his claim for damages.

Not applicable.

PART II

Market for Common Stock

Our common stock is currently traded on the OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc. under the symbol “KAYS”. Such market is extremely limited. We can provide no assurance that our shares will be continued to be traded on the OTCQB or another exchange, or if traded, that the current public market will be sustainable.

The following table sets forth the range of high and low bid quotations, obtained from Yahoo Finance, for our common stock as reported each of the periods indicated. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type, size and format, as the SEC shall require by rule or regulation.

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) monthly account statements showing the market value of each penny stock held in the customer’s account. 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock if it becomes subject to these penny stock rules. Therefore, because our common stock is subject to the penny stock rules, stockholders may have difficulty selling those securities.

Holders of Our Common Stock

As of April 14, 2017 we had 618 holders of record of our common stock. One of these holders is CEDE and Company which is the mechanism used for brokerage firms to hold securities in book entry form on behalf of their clients and as of April 7, 2017, they held 54,744,770 shares of common stock for these shareholders. Accordingly, we believe that KAYS has in excess of 2,000 beneficial stockholders as of such date.

Securities Authorized for Issuance under Equity Compensation Plans 

⁽¹⁾ Represents shares of common stock issued or reserved for issuance under our 2011 Incentive Stock Plan.

Recent Sales of Unregistered Securities

In January 2016 the Company received $100,000 from the sale of 2,222,222 “restricted” shares of the Company’s common stock to an “accredited investor” that is a current stockholder of the Company.

In February 2016 the Company issued 4,200,000 “restricted” shares of the Company’s common stock to an accredited investor that is a current shareholder of the Company upon conversion of a $126,000 note payable due January 1, 2017.

In February 2016 the Company issued:

In April 2016 the Company issued 150,000 “restricted” shares of the Company’s common stock to an accredited investor that is a current shareholder of the Company as a payment of interest on a note payable due January 1, 2017.

In April of 2016 the Company issued 1,200,249 shares of the Company’s common stock to an accredited investor that is a current stockholder of the Company upon conversion of 2,766 shares of preferred stock. On the same date the stockholder returned 2,454 preferred shares to be cancelled.

On May 9, 2016, the Company received a total of $75,000 from an “accredited investor” in exchange for a two year note in the aggregate amount of $75,000 with interest accruing at 10% per annum. The note holder is entitled to subscribe for and purchase from the Company 2,371,187 paid and non-assessable shares of the Company’s common stock at the price of $0.0316297 per share for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9, 2018 has been fully repaid or the start of the Acceleration Period as defined in the note or May 9, 2018.

On May 17, 2016, the Company received a total of $75,000 from an “accredited investor” in exchange for a two year note in the aggregate amount of $75,000 with interest accruing at 10% per annum. The note holder is entitled to subscribe for and purchase from the Company 2,371,187 paid and non-assessable shares of the Company’s common stock at the price of $0.0316297 per share for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 17 2018 has been fully repaid or the start of the Acceleration Period as defined in the note or May 17, 2018.

In June 2016 the Company authorized the issuance of 100,000 “restricted” shares of the Company’s common stock as payment for consulting fees. The shares were valued at $7,610.

In September 2016, the Company issued 2,300,000 shares of the Company’s common stock consisting of 2,000,000 shares to its President and Chief Executive Officer, 200,000 shares for director fees and 100,000 shares to a consultant. The shares were valued at $161,000.

In September 2016, the Company authorized the issuance of 6,825,000 shares of the Company’s common stock for employee compensation, legal and consulting fees. The shares were valued at $477,750.

In September 2016, the Company issued 4,380,000 “restricted” shares of the Company’s common stock to an accredited investor that is a current shareholder of the Company as a conversion of a $131,400 note payable due January 1, 2017.

In September 2016, the Company issued 1,486,111 “restricted” shares of the Company’s common stock to an accredited investor that is a current stockholder of the Company as a conversion of a $50,000 note payable due January 1, 2017.

In October 2016, the Company received $10,000 from the issuance of 200,000 shares of common stock.

On October 16, 2016, the Company received $15,000 from the issuance of a convertible note bearing interest at the rate of 12% per annum. The principal amount of the note together with accrued but unpaid interest thereon is convertible into common stock at $0.03 per share. The maturity date of the note is in January 2019.

On November 3, 2016, the Company received $200,000 from the issuance of a convertible note bearing interest at the rate of 12% per annum. The principal amount of the note together with accrued but unpaid interest thereon is convertible into common stock at $0.03 per share. The maturity date of the note is in January of 2019.

On November 18, 2016, the Company received $60,000 from the issuance of a convertible note bearing interest at the rate of 12% per annum. The principal amount of the note together with accrued but unpaid interest thereon is convertible into common stock at $0.03 per share. The maturity date of the note is in January of 2019.

On December 1, 2016, the Company received $50,000 from the issuance of a convertible note bearing interest at the rate of 10% per annum. The principal amount of the note together with accrued but unpaid interest thereon is convertible into common stock at $0.03 per share. The maturity date of the note is in January of 2019.

On December 7, 2016, the Company received $50,000 from the issuance of a convertible note bearing interest at the rate of 12% per annum. The principal amount of the note together with accrued but unpaid interest thereon is convertible into common stock at $0.03 per share. The maturity date of the note is in January of 2019.

On December 30, 2016, the Company received $250,000 from the issuance of a convertible note bearing interest at the rate of 10% per annum. The principal amount of the note together with accrued but unpaid interest thereon is convertible into common stock at $0.03 per share. The maturity date of the note is in January of 2019.

These securities were issued without registration under the Securities Act of 1933, as amended pursuant to the exemption from registration afforded by Section 4 (a) (2) thereof and Regulation D thereunder.

Not applicable.

Results of Operations

Year ended December 31, 2016 compared to year ended December 31, 2015

Revenues

We had revenues of $952,852 for the year ended December 31, 2016, as compared to $323,918 for the year ended December 31, 2015, an increase of approximately 200%. The increase in revenues from 2015 to 2016, reflects an entire year of legal recreational marijuana sales at our two Kaya Shack™ retail outlets in 2016, whereas legal recreational marijuana sales only commenced effective October 1 in 2015.

General and Administrative Expenses

General and administrative expenses were $504,617 for the year ended December 31, 2016, as compared to $1,553,654 for the year ended December 31, 2015.

Salaries and Wages

As a result of our increased retail operations, salaries and wages increased to $297,760 for the year ended December 31, 2016 from $135,786 for the year ended December 31, 2015.

Professional

Professional fees were $1,352,543 for the year ended December 31, 2016, as compared to $1,154,739 for the year ended December 31, 2015, reflecting additional licensing and regulatory compliance costs arising from our increased level of retail operations, as well as the need to apply for OLCC licenses for our existing retail outlets and those under development, as well as our grow and manufacturing operations. A portion of those fees were paid through the issuance of shares of our common stock.

Interest expense

Interest expense increased to $286,383 in 2016 from $163,919 in 2015, reflecting increased debt incurred to fund expansion of our operations.

Net Loss

We incurred a net loss of $19,849,262 for the year ended December 31, 2016, as compared to a net loss of $3,225,394 for the year ended December 31, 2015. The majority of our net loss during the year ended December 31, 2016 was a result of the derivative liabilities from the conversion of debt in the year ended December 31, 2016 and from the stabilization of our stock prices that reduces the volatility factors used in the derivative calculations. 

Liquidity and Capital Resources

During 2016, the Company has raised a total of $1,185,000 in a series of private placements of debt and equity securities, including $250,000 in the $2.1 million financing described below.

In March 2017, the Company completed a $2.1 million financing with an institutional investor (the “Investor”) who had previously furnished KAYS with $1.2 million in financing, pursuant to a financing agreement (the “Financing Agreement”) entered into between the Company and the Investor in December 2016. Pursuant to the Financing Agreement, the Investor purchased $2.1 million in principal amount of convertible notes (the “Notes”), $250,000 of which were purchased prior to December 31, 2016, from the Company as follows:

The purchase price for the Notes is equal to the principal amount thereof. The Notes have a term of two years from issuance and bear interest at the rate of eight percent (8%) annum, which accrues and is payable to together with interest at maturity. The Investor may convert the principal amount of the Notes (as well as other notes it currently holds as referenced above), together with accrued but unpaid interest thereon, into shares at the applicable conversion price, at any time or from time to time prior to maturity. The conversion price is subject to adjustment for stock splits, stock dividends, recapitalizations and similar transactions. The Notes also provide that at no time may they be convertible if the number of shares being issued upon conversion to and then held by the Investor would result in the Investor beneficially owning in excess of 4.99% of the Company’s then outstanding shares of common stock, after giving effect to the proposed conversion. As of the date of this Annual Report, the Investor has not converted any of the Notes into shares of the Company’s common stock.

The proceeds from the offer and sale of Notes are and will be used to fund the Company’s 2017 growth plan, including expansion of our chain of Kaya Shack™ Marijuana Superstores in Oregon, expansion of our marijuana grow facility and manufacturing operations and introducing new Kaya Shack™ branded cannabis products.

Management believes that consummation of the $2.1 million financing, combined with existing and anticipated revenues from operations has alleviated the Company’s financial difficulties to a significant extent and will allow the Company to meet its anticipated working capital needs for a period of between three and nine months from the date of this Annual Report. However, there can be no assurance that management’s belief will be correct and that the Company will not sooner require additional financing to meet its working capital needs prior to achieving profitability or positive cash flow, subject to, among other factors, the amount of capital reserves the Company utilizes for the purchase of property and buildout for the relocation of the Kaya Farms Grow and Manufacturing Facility and also for vehicle and infrastructure purchases to launch Kaya Home Delivery. Moreover, we may not be successful in raising additional capital on commercially reasonable terms, if and when needed, in which case our business, financial condition, cash flows and results of operations may be materially and adversely affected.

Critical Accounting Estimates

The following are deemed to be the most significant accounting estimates affecting us and our results of operations:

Fair value of financial instruments

The Company follows the provisions of ASC 820. This Topic defines fair value, establishes a measurement framework and expands disclosures about fair value measurements. We apply these provisions to estimate the fair value of our financial instruments including cash, accounts payable and accrued expenses, and notes payable.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes. Our deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.

ASC 740-10 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Recently Issued Accounting Pronouncements

There are no recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants (“AICPA”), and the SEC believed by management to have a material impact on the Company’s present or future financial statements.

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.

Not applicable.

See the Index of Consolidated Financial Statements on page F-1 below

None.

Disclosure controls and procedures

Under the direction of our Principal Executive Officer and Principal Financial Officer, we evaluated our disclosure controls and procedures as of December 31, 2016. Our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2016.

We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of our fourth fiscal quarter covered by this report. Based on the foregoing, our Principal Executive Officer and Principal Financial Officer President concluded that our disclosure controls and procedures were not effective.  It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Management’s Report on Internal Control Over Financial Reporting

Our management of is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s Principal Executive Officer and Principal Financial Officer and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.

The Company’s Principal Executive Officer and Principal Financial Officer assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.  In making this assessment, the Company’s Principal Executive Officer and Principal Financial Officer used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.  The COSO framework is based upon five integrated components of control: control environment, risk assessment, control activities, information and communications and ongoing monitoring.

Based on the assessment performed, the company’s Principal Executive Officer and Principal Financial Officer has concluded that the Company’s internal control over financial reporting, as of December 31, 2016, is not effective to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of its financial statements in accordance with generally accepted accounting principles.  Further, the Company’s Principal Executive Officer and Principal Financial Officer has identified material weaknesses in internal control over financial reporting as of December 31, 2016.

Based on an evaluation, the Company’s Principal Executive Officer and Principal Financial Officer has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of December 31, 2016 (the “Evaluation Date”), to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  Each of the following is deemed a material weakness in our internal control over financial reporting:

The Company’s Principal Executive Officer and Principal Financial Officer believes that the material weaknesses set forth in the two items above did not have an effect on our financial results. However, the Company’s Principal Executive Officer and Principal Financial Officer believes that the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and financial procedures, which could result in a material misstatement in our consolidated financial statements in future periods.

Changes in Internal Control over Financial Reporting

There was no change in our internal controls or in other factors that could affect these controls during the fourth quarter of the year ended December 31, 2016 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.

None.

PART III

Directors and Executive Officers

Our directors and executive officers and their respective ages and titles are as follows:

Set forth below is a brief description of the background and business experience of our directors and executive officers.

Craig Frank became Chairman of the Board, President, Chief Executive Officer and a Director of the Company in January 2010. He assumed the appointed position of acting Chief Financial Officer in 2012. For the past 15 years, Mr. Frank has served as Chairman and CEO of Tudog International Consulting, a Florida-based company with business advisory, business development, market research, training, and merchant banking divisions. During his tenure at Tudog, Mr. Frank has worked with more than 200 companies from 19 countries. In addition, in such capacity, he developed the business plan for a biofuels company based in Central America, and is the co-founder of the Company’s predecessor, which we acquired in January 2010. He remains Tudog’s Chairman. Mr. Frank is a widely published author with articles on business matters featured in magazines and newsletters internationally, including publications of the Guatemala America Chamber of Commerce, the Israel Export Institute, the Romania Chamber of Commerce, and the World Association of Small and Medium Sized Enterprises. He is also an in-demand speaker at international conferences, including the Florida Sterling Council, the International Project Management Association, The Central American Center for Entrepreneurship, the Israel Center for Entrepreneurial Studies, and the Pino Center for Entrepreneurship at Florida International University. The Company believes that Mr. Frank’s consulting and entrepreneurial experience brings significant value to our management team.

Carrie Schwarz, who became a director in January 2010, has served as the Managing Partner of Athena Assets Management, a New York based hedge fund specializing in investments of special situation publicly traded securities since 2002. Ms. Schwarz has also been a Portfolio Manager at Metropolitan Capital, a New York based hedge fund. From 1999 to 2001 Ms. Schwarz was an executive at Bank of America Securities, where she built and managed a proprietary Risk Arbitrage Department. From 1991 to 1999 she founded and managed Athena Investment Partners, L.P., a hedge fund that focused on special situations. Prior thereto, she was with American Porters, L.P., a hedge fund that focused on risk arbitrage, which she joined as a junior analyst in 1995 and ultimately rose to become Head of Research and a partner. Ms. Schwarz serves on the board of directors of the American Friends of the Weizmann Institute of Science. We believe that her financial industry experience makes her a valuable member of the board of directors.

Jordi Arimany, who became a director in January 2010, has served as Vice President of Business Development of First Diversity Management Group, a Cleveland, Ohio-based human capital services company since 2008. From 2007 to 2008 he served as Associate to the Executive Vice President of Bunco Industrial, in Guatemala City, one of the largest private banks in Central America. From 2000 to 2007 he was National Business Development Manager to LAFISE (Latin American Financial Services), a Miami, Florida-based financial services firm operating throughout Latin America. Mr. Arimany has a Bachelor’s degree in Business Administration from John Brown University and a Master’s degree in Business Administration from Regent University. We believe that his Latin American financial and business experience makes him a valuable member of the board of directors.

Terms of Office

Our directors are appointed for a one-year term to hold office until the next annual meeting of our stockholders and until a successor is appointed and qualified, or until their removal, resignation, or death. Executive officers serve at the pleasure of the board of directors.

Board Committees

Two of our three directors are “independent” within the scope of the rules adopted by the NASDAQ Stock Market and the SEC: Ms. Schwarz and Mr. Arimany. However, our board of directors does not currently have an audit committee, a compensation committee, or a corporate governance committee. We plan to establish such committees in the near future.

Board of Directors Role in Risk Oversight

Members of the board of directors have periodic meetings with management and the Company’s independent auditors to perform risk oversight with respect to the Company’s internal control processes. Our board is currently comprised of a majority of independent directors. The Company believes that the board’s role in risk oversight does not materially affect the leadership structure of the Company.

Code of Ethics

We adopted a Code of Business Conduct and Ethics (“Ethics Code”) on February 28, 2013 that includes provisions ranging from conflicts of interest to compliance with all applicable laws and regulations. All officers, directors and employees are bound by this Ethics Code, violations of which may be reported to any independent member of the board of directors.

Summary Compensation Table

The table below summarizes all compensation awarded to, earned by, or paid to our CEO and acting CFO, who is our sole executive officer, for 2016 and 2015, including amounts accrued but not paid.

SUMMARY COMPENSATION TABLE

Mr. Frank's compensation was paid to Tudog International Consulting, Inc., of which Mr. Frank is the Chairman and a principal.

Employment and Consulting Agreements

The Company is currently not a party to any employment agreement with its executive officers. The Company has consulting agreements with Tudog International Consulting, of which firm Mr. Frank is Chairman and a Principal, for the services of Mr. Frank as CEO and acting CFO.

Outstanding Equity Awards at Fiscal Year-End

None.

Compensation of Directors Table

The table below summarizes all compensation paid to our nonemployee directors for 2016.

 ⁽¹⁾ Represents shares granted. 

Narrative Disclosure to the Director Compensation Table

Our nonemployee directors are compensated with common stock. All such directors receive 100,000 “restricted” shares of common stock annually for their service.

2011 Incentive Stock Plan

Our 2011 Incentive Stock Plan, as amended (the “Plan”) provides for equity incentives to be granted to our employees, executive officers or directors or to key advisers or consultants. Equity incentives may be in the form of stock options with an exercise price not less than the fair market value of the underlying shares as determined pursuant to the Plan, restricted stock awards, other stock based awards, or any combination of the foregoing. The Plan is administered by the board of directors.

A total of 10,000,000 shares of KAYS common stock has been reserved for issuance under the Plan. As of December 31, 2016. awards covering 8,600,000 shares have been issued under the Plan and 1,400,000 shares of common stock were available for issuance under the Plan.

The following table sets forth the beneficial ownership of our common stock by each director and executive officer, by all directors and executives officers as a group and by each other person known by us to beneficially own 5% or more of our common stock as of the date of this Annual Report. The address of each such person is c/o the Company 305 S. Andrews Ave, Suite 209, Fort Lauderdale, FL, 33301.

* Less than 1%

The persons named above have full voting and investment power with respect to the shares indicated. Under the rules of the SEC, a person (or group of persons) is deemed to be a “beneficial owner” of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security, which that person has the right to acquire within 60 days, such as options or warrants to purchase our common stock.

Securities Authorized for Issuance under Equity Compensation Plans 

⁽¹⁾ Represents shares of common stock issued or reserved for issuance under our 2011 Incentive Stock Plan.

Related Party Transactions

At December 31, 2014, the Company was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100 principal and $103, 895 accrued interest, with interest accruing at 10%. On January 2, 2014, the Company entered into a Debt Modification Agreement whereby the total amount of the debt was reduced to $750,000 and no interest accrued until December 31, 2015. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares of KAYS. The remaining $250,000 is not convertible. On December 31, 2015, the Company entered into an agreement to extend the debt until December 31, 2017 with no additional interest for the extension period.

Review, Approval and Ratification of Related Party Transactions

Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of transactions with our executive officers, directors and significant shareholders. However, all matters relating to the compensation and stock awards for such persons were approved by the board of directors prior to implementation.

Audit Fees

The following is a summary of the fees billed to us by L+L CPAS, P.A. for professional services rendered for the years ended December 31, 2016 and 2015, respectively.

Audit fees consist of billings for the audit of the Company’s consolidated financial statements included in our Annual Reports on Form 10-K and reviews of the consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q.

Audit-related fees include billing related to a Registration Statement on Form S-8 during each of 2016 and 2015.

The Company does not have an Audit Committee. It is the Company’s policy to have its CEO and CFO preapprove all audit and permissible non-audit services provided by the independent public accountants, subject to approval by the Board of Directors. These services may include audit, audit-related, tax and other services. Pre-approval is generally for up to one year, is detailed as to the particular service or category of services, and is generally subject to a specific budget. Unless there are significant variations from the pre-approved services and fees, the independent public accountants and management generally are not required to formally report to the Board of Directors regarding actual services and related fees.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

Exhibit No. Description of Exhibit  

+ Management compensation arrangement.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: April 17, 2017

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, this Annual Report on Form 10K has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

1920 Jetton Road, 3rd Floor Cornelius, NC 28031 Tel: 704-897-8336 Fax: 704-919-5089

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Kaya Holdings, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Kaya Holdings, Inc. and Subsidiaries (“the Company”) as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ deficit, and consolidated cash flows for the two years ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit 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 the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2016 and 2015, and the results of its operations, changes in stockholders’ deficit and cash flows for the two years 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 2. 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

April 17, 2017

Kaya Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheet

(Audited)

ASSETS  

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

Kaya Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

      (Audited)