Kaya Holdings, Inc. - Quarter Report: 2017 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period September 30, 2017
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from
__________to __________
Commission File No.: 333-177532
KAYA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 90-0898007 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
888 S. Andrews Avenue
Suite 302
Ft. Lauderdale, Florida 33316
(Address of principal executive offices)
(954)-892-6911
(Issuer's telephone number)
305 S. Andrews Avenue, Suite 209, Ft. Lauderdale, Florida 33301
Former Name or Former Address (If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |
| Non-accelerated filer | [ ] | Smaller reporting company | [X] |
Emerging growth company [X]
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
As of November 17, 2017, the Issuer had 138,793,087 shares of its common stock outstanding.
KAYA HOLDINGS, INC.
INDEX TO QUARTERLY REPORT ON FORM 10 Q
| Part I – Financial Information | Page | |
| Item 1. | Condensed Consolidated Financial Statements | 1 |
| Condensed Consolidated Balance Sheet | 1 | |
| Condensed Consolidated Statements of Operation | 3 | |
| Condensed Consolidated Statements of Cash Flows | 4 | |
| Notes to Condensed Consolidated Financial Statements | 6 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 56 |
| Item 4. | Controls and Procedures | 56 |
| Part II Other Information | ||
| Item 1. | Legal Proceedings | 57 |
| Item 1A. | Risk Factors | 57 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 58 |
| Item 3. | Defaults Upon Senior Securities | 58 |
| Item 4. | Mine Safety Disclosures | 58 |
| Item 5. | Other Information | 59 |
| Item 6. | Exhibits | 59 |
| Signatures | 59 | |
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements.
Kaya Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
| ASSETS | ||||||||
| (Unaudited) | (Audited) | |||||||
| September 30, 2017 | December 31, 2016 | |||||||
| CURRENT ASSETS: | ||||||||
| Cash and equivalents | $ | 285,603 | 306,884 | |||||
| Inventory-Net of Allowance | 150,936 | 83,997 | ||||||
| Prepaid Expenses | 20,274 | 4,500 | ||||||
| Total Current Assets | 456,813 | 395,381 | ||||||
| OTHER ASSETS: | ||||||||
| Property and equipment, net | 893,385 | 192,964 | ||||||
| Land | 506,076 | — | ||||||
| Deposits | 81,597 | 122,024 | ||||||
| Total Other Assets | 1,481,058 | 314,988 | ||||||
| Total Assets | 1,937,871 | 710,369 | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expense | 543,537 | 506,601 | ||||||
| Accounts payable and accrued expense-related parties | 13,586 | 18,586 | ||||||
| Accrued interest | 234,023 | 142,853 | ||||||
| Notes Payable | 89,131 | |||||||
| Notes Payable-Related Party | 250,000 | — | ||||||
| Convertible Note Payable-related party-Net of Discount (50,455) | 449,545 | — | ||||||
| Convertible Notes Payable-net of discount (21,545) | 278,455 | 721,665 | ||||||
| Derivative liabilities | 3,923,015 | 8,423,354 | ||||||
| Total Current Liabilities | 5,781,291 | 9,813,059 | ||||||
| LONG TERM LIABILITIES: | ||||||||
| Convertible Note Payable-related party-Net of Discount | — | 298,908 | ||||||
| Derivative liabilities | 8,439,135 | 10,922,994 | ||||||
| Convertible Note Payable-Net of Discount (2,415,596) | 4,784,769 | 147,833 | ||||||
| Notes Payable | — | 267,635 | ||||||
| Notes Payable-Related Party | — | 250,000 | ||||||
| Total Long Term Liabilities | 13,223,904 | 11,887,370 | ||||||
| Total Liabilities | 19,005,195 | 21,700,429 | ||||||
| 1 |
| STOCKHOLDERS' EQUITY (DEFICIT): | ||||||||
| Convertible Preferred Stock, Series C, par value $.001; 10,000,000 shares authorized; | ||||||||
| 49,900 and 49,900 issued and outstanding at September 30, 2017 | 50 | 50 | ||||||
| and December 31, 2016 | ||||||||
| Common stock , par value $.001; 500,000,000 shares authorized; | ||||||||
| 131,058,988 shares issued as of September 30, 2017 and | ||||||||
| 117,076,795 shares issued as of December 31, 2016 | 131,058 | 117,076 | ||||||
| Additional paid in capital | 14,019,989 | 9,035,740 | ||||||
| Subscriptions payable | — | 272,400 | ||||||
| Accumulated Deficit | (30,429,005 | ) | (29,790,416 | ) | ||||
| Non-controlling Interest | (789,417 | ) | (624,910 | ) | ||||
| Net Stockholders' Equity/(Deficit) | (17,067,325 | ) | (20,990,060 | ) | ||||
| Total Liabilities and Stockholders' Equity/(Deficit) | $ | 1,937,871 | $ | 710,369 |
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
Kaya Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| For the three | For the three | For the Nine | For the Nine | |||||||||||||
| months ended | months ended | Months Ended | Months Ended | |||||||||||||
| September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
| Net Sales | $ | 320,950 | $ | 263,435 | $ | 667,601 | $ | 754,093 | ||||||||
| Cost of Sales | 122,788 | 126,320 | 272,665 | 421,002 | ||||||||||||
| Gross Profit | 198,162 | 137,115 | 394,936 | 333,091 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Professional Fees | 166,150 | 815,508 | 523,551 | 1,205,293 | ||||||||||||
| Salaries and Wages | 131,762 | 65,358 | 311,253 | 216,691 | ||||||||||||
| General and Administrative | 367,975 | 109,417 | 911,598 | 338,073 | ||||||||||||
| Total Operating Expenses | 665,887 | 990,283 | 1,746,402 | 1,760,057 | ||||||||||||
| Operating Loss | (467,724 | ) | (853,168 | ) | (1,351,465 | ) | (1,426,966 | ) | ||||||||
| Other Income(expense): | ||||||||||||||||
| Interest Expense | (115,552 | ) | (45,982 | ) | (260,295 | ) | (195,968 | ) | ||||||||
| Legal Settlement | (247,500 | ) | — | (247,500 | ) | — | ||||||||||
| Amortization of Debt discount | (569,497 | ) | (405,530 | ) | (1,678,899 | ) | (978,208 | ) | ||||||||
| Derivative Liabilities Expense | (375,950 | ) | — | (16,221,943 | ) | (129,340 | ) | |||||||||
| Gain(Loss) on Extinguishment of Debt | — | — | (67,442 | ) | (126,000 | ) | ||||||||||
| Change in Derivative Liabilities Expense | 1,260,200 | 181,986 | 22,114,526 | 1,895,657 | ||||||||||||
| Total Other Income(Expense) | (48,299 | ) | (269,526 | ) | 3,638,447 | 466,141 | ||||||||||
| Net income (loss) before Income Taxes | (516,023 | ) | (1,122,694 | ) | 2,286,982 | (960,825 | ) | |||||||||
| Provision for Income Taxes | — | — | ||||||||||||||
| Net income (loss) | (516,023 | ) | (1,122,694 | ) | 2,286,982 | (960,825 | ) | |||||||||
| Net (Loss) attributed to non-controlling interest | 62,878 | (3,975 | ) | (164,507 | ) | (61,259 | ) | |||||||||
| Net income (loss) attributed to Kaya Holdings, Inc. | (578,900 | ) | (1,118,719 | ) | 2,451,489 | (899,566 | ) | |||||||||
| Basic and diluted net loss per common share | $ | (0.00 | ) | $ | (0.01 | ) | $ | 0.02 | $ | (0.01 | ) | |||||
| Weighted average number of common shares outstanding | 130,749,488 | 102,076,923 | 127,585,695 | 84,497,017 | ||||||||||||
* The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
Kaya Holdings, Inc. and Subsidiaries
Consolidated Statement of Cash flows
(Unaudited)
| For the Nine | For the Nine | |||||||
| Months Ended | Months Ended | |||||||
| September 30, 2017 | September 30, 2016 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net Income/(Loss) | $ | 2,286,982 | (899,566 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Net loss attributable to non-controlling interest | (164,507 | ) | (61,259 | ) | ||||
| Depreciation | 54,403 | 59,964 | ||||||
| Imputed Interest | 30,000 | 90,000 | ||||||
| Loss (Gain) on Extinguishment of Debt | 67,442 | 126,000 | ||||||
| Derivative Expense | 16,221,943 | 129,340 | ||||||
| Change in derivative liabilities | (22,114,526 | ) | (1,895,656 | ) | ||||
| Amortization of debt discount | 1,678,899 | 978,208 | ||||||
| Stock issued for services | — | 659,650 | ||||||
| Stock issued as contribution | — | — | ||||||
| Stock issued for interest | 29,638 | 9,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid Expense | (15,774 | ) | (14,000 | ) | ||||
| Inventory | (66,939 | ) | 40,915 | |||||
| Rent Deposit | — | — | ||||||
| Security Deposit | — | — | ||||||
| Other assets | 58,046 | (45,943 | ) | |||||
| Accrued Interest | 188,683 | 104,005 | ||||||
| Accounts payable and accrued expenses | 40,582 | 142,382 | ||||||
| Net cash used in operating activities | (1,705,128 | ) | (576,960 | ) | ||||
| INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (679,824 | ) | (28,224 | ) | ||||
| Net cash used in investing activities | (679,824 | ) | (28,224 | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Proceeds from Convertible debt | 2,500,000 | 325,000 | ||||||
| Payment on Convertible debt | (23,500 | ) | — | |||||
| Proceeds from Notes Payable | — | 150,000 | ||||||
| Payments on Note Payable | (112,829 | ) | (52,578 | ) | ||||
| Proceeds from sales of common stock | — | 100,000 | ||||||
| Net cash provided by (used in) financing activities | 2,363,671 | 522,422 | ||||||
| 4 |
| NET INCREASE IN CASH | (21,282 | ) | (82,762 | ) | ||||
| CASH BEGINNING BALANCE | 306,884 | 123,907 | ||||||
| CASH ENDING BALANCE | $ | 285,803 | 41,145 | |||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Taxes paid | — | — | ||||||
| Interest paid | — | — | ||||||
| NON-CASH TRANSACTIONS AFFECTING OPERATING, INVESTING | ||||||||
| AND FINANCING ACTIVITIES: | ||||||||
| Value of common shares issued as payment of debt | 95,680 | 104,727 | ||||||
| Value of common shares issued as payment of debt | 190,575 | — | ||||||
| Value of common shares issued as payment of debt and interest | 238,739 | — | ||||||
| Value of common shares issues as payment of interest | 29,638 | 9,000 |
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
Kaya Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF THE BUSINESS
Organization
Kaya Holdings, Inc., a Delaware corporation (the “Company” or “KAYS”), is a holding company. The Company was incorporated in 1993 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 Alternative Fuels Americas, Inc, (a Florida corporation) in January 2010 in a stock-for-member interest transaction and issued 6,567,247 shares of common stock and 100,000 shares of Series C convertible preferred stock to existing shareholders. A Certificate of Amendment to the Certificate of Incorporation was filed in October 2010 changing the Company’s name from NetSpace International Holdings, Inc. to Alternative Fuels Americas, Inc. A Certificate of Amendment to the Certificate of Incorporation was filed in March 2015 changing the Company’s name from Alternative Fuels Americas, Inc. to Kaya Holdings, Inc.
The Company has three subsidiaries, Alternative Fuels Americas, Inc, a Florida corporation, which is wholly-owned, Marijuana Holdings Americas, Inc., a Florida corporation (“MJAI”), which is majority-owned and 34225 Kowitz Road, LLC, an Oregon limited liability company which holds the Company’s recently acquired 26 acre property in Lebanon, Oregon on which it plans to develop a legal cannabis cultivation and manufacturing facility. MJAI develops and operates the Company’s Kaya Shack™ legal cannabis retail operations in Oregon through controlling ownership interests in four Oregon limited liabilities companies: MJAI Oregon 1 LLC, MJAI Oregon 2 LLC, MJAI Oregon 3 LLC and MJAI Oregon 4 LLC.
Nature of the Business
In January 2014, KAYS incorporated MJAI, a wholly-owned subsidiary, to focus on opportunities in the legal recreational and medical marijuana in the United States. MJAI has concentrated its efforts in Oregon, where through controlled Oregon limited liability companies, it initially secured licenses to operate a medical marijuana dispensary (an “MMD”) and following legalization of recreational cannabis use in Oregon, has secured licenses to operate three retail outlets (with the license application for a fourth outlet pending) and purchased 26 acres for development as a legal cannabis cultivation and manufacturing facility. The Company has developed the Kaya Shack™ brand for its retail operations.
On July 3, 2014, the Company opened its first Kaya Shack™ MMD in Portland, Oregon. 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 outlet in Salem, Oregon, the Kaya Shack™ Marijuana Superstore. During 2015, the Company also consolidated its grow operations and manufacturing operations into a single facility in Portland, Oregon.
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.
Accordingly, in 2016 the Company applied for OLLC licenses for its two initial Kaya Shack™ retail outlets (Portland, Oregon and South Salem, Oregon), and also submitted license applications for its two new locations under construction and development at that time.
In late December 2016, we received our OLCC recreational license for the South Salem Kaya Shack™ Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #1) and recreational and medical sales continued without interruption from 2016 through the present at that location.
On March 21, 2017, we received our North Salem Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #2) a 2,600-square foot Kaya Shack™ Marijuana Superstore in North Salem, Oregon, whereupon the location opened for business with both recreational and medical sales.
| 6 |
On May 2, 2017, we received our OLCC recreational license for our Portland Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #3) after a delay of approximately four months. During that period, we were limited to solely medical sales at the Portland location. Upon receipt of Kaya Shack™ OLCC Marijuana Retailer License #3, recreational sales recommenced at that location. Our OLCC License for the Central Salem Kaya Shack™ Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #4) has been filed and is pending completion, inspection and final licensing.
During the third quarter of 2017, we purchased 26 acres in Lebanon, Oregon, for development as a legal cannabis cultivation and manufacturing facility.
NOTE 2 - LIQUIDITY AND GOING CONCERN
The Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2017 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net income of $2,436,271 for the nine months ended September 30, 2017 and a net loss of $899,566 for the nine months ended September 30, 2016. At September 30, 2017, the Company has a working capital deficiency of $5,147,348 and is totally dependent on its ability to raise capital. The Company has a plan of operations and acknowledges that its plan of operations may not result in generating positive working capital in the near future. Even though management believes that it will be able to successfully execute its business plan, which includes third-party financing and capital issuance, and meet the Company’s future liquidity needs, there can be no assurances in that regard. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this material uncertainty. Management recognizes that the Company must generate additional funds to successfully develop its operations and activities. Management plans include:
| • | the sale of additional equity and debt securities, | |
| • | alliances and/or partnerships with entities interested in and having the resources to support the further development of the Company’s business plan, | |
| • | business transactions to assure continuation of the Company’s development and operations, | |
| • | development of a unified brand and the pursuit of licenses to operate recreational and medical marijuana facilities under the branded name. |
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) under the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future non-conforming events. Accordingly, actual results could differ significantly from estimates.
Risks and Uncertainties
The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure.
| 7 |
The Company has experienced, and in the future expects to continue to experience, variability in its sales and earnings. The factors expected to contribute to this variability include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the product, (ii) competition inherent at other locations where product is expected to be sold (iii) general economic conditions and (iv) the related volatility of prices pertaining to the cost of sales.
Fiscal Year
The Company’s fiscal year-end is December 31.
Principles of Consolidation
The consolidated financial statements include the accounts of Kaya Holdings, Inc. and its subsidiary, Alternative Fuels Americas, Inc. (a Florida corporation) and Marijuana Holdings Americas, Inc. (a Florida corporation) which is a majority owned subsidiary including all wholly owned LLC’s (MJAI Oregon 1 LLC, MJAI Oregon 2 LLC, MJAI Oregon 3 LLC, MJAI Oregon 4 LLC). All inter-company accounts and transactions have been eliminated in consolidation.
Non-Controlling Interest
The company owns 55% of Marijuana Holdings Americas, Inc.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less. The Company had no cash equivalents
Inventory
Inventory consists of finished goods purchased, which are valued at the lower of cost or market value, with cost being determined on the first-in, first-out method. The Company periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. Total Value of Finished goods inventory as of September 30, 2017 is $150,936 and $83,997 as of December 31, 2016. No allowance was necessary as of September 30, 2017 and December 31, 2016.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 5-7 years of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred.
Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations.
Long-lived assets
The Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its intangible assets, management performs an analysis of the anticipated undiscounted future net cash flow of the individual assets over the remaining amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows.
Operating Leases
We lease our retail stores under non-cancellable operating leases. Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions. We recognize rent expense on a straight-line basis over the lease term, excluding contingent rent, and record the difference between the amount charged to expense and the rent paid as a deferred rent liability.
| 8 |
Deferred Rent and Tenant Allowances
Deferred rent is recognized when a lease contains fixed rent escalations. We recognize the related rent expense on a straight-line basis starting from the date of possession and record the difference between the recognized rental expense and cash rent payable as deferred rent. Deferred rent also includes tenant allowances received from landlords in accordance with negotiated lease terms. The tenant allowances are amortized as a reduction to rent expense on a straight-line basis over the term of the lease starting at the date of possession.
Earnings Per Share
In accordance with ASC 260, Earnings per Share, the Company calculates basic earnings per share by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed if the Company has net income; otherwise it would be antidilutive, and would result from the conversion of a convertible note.
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. Under this method, 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.
Fair Value of Financial Instruments
The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure fair value:
| • | Level 1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities. | |
| • | Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. | |
| • | Level 3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. |
| 9 |
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses, certain notes payable and notes payable – related party, approximate their fair values because of the short maturity of these instruments.
The Company accounts for its derivative liabilities, at fair value, on a recurring basis under level 3. See Note 7.
Embedded Conversion Features
The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.
For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Beneficial Conversion Feature
For conventional convertible debt where the rate of conversion is below market value, the Company records a "beneficial conversion feature" ("BCF") and related debt discount.
When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional paid in capital) and amortized to interest expense over the life of the debt.
Debt Issue Costs and Debt Discount
The Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The original issue discount would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
Extinguishments of Liabilities
The Company accounts for extinguishments of liabilities in accordance with ASC 860-10 (formerly SFAS 140) “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. When the conditions are met for extinguishment accounting, the liabilities are derecognized and the gain or loss on the sale is recognized.
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Stock-Based Compensation - Employees
The Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.
If the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement memorandum (based on sales to third parties) (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:
| • | Expected term of share options and similar instruments: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
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| • | Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
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| • | Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
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| • | Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.
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Generally, all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest.
The expense resulting from share-based payments is recorded in general and administrative expense in the statements of operations.
Stock-Based Compensation – Non Employees
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:
| • | Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
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| • | Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
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| • | Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
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| • | Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.
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Pursuant to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances.
Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.
Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share option and similar instrument that the counterparty has the right to exercise expires unexercised.
Pursuant to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.
Revenue Recognition
Revenue is recorded when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) asset is transferred to the customer without further obligation, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
Cost of Sales
Cost of sales represents costs directly related to the purchase of goods and third party testing of the Company’s products.
Related Parties
The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the related parties include a. affiliates of the Company; b. Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
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The consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements.
The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Contingencies
The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, consolidated financial position, and consolidated results of operations or consolidated cash flows.
Uncertain Tax Positions
The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the reporting periods ended December 31, 2016, 2015 and 2014.
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Subsequent Events
The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued.
Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Stock Compensation, which is intended to simplify the accounting for share based payment award transactions. The new standard will modify several aspects of the accounting and reporting for employee share based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that year, and will be adopted by the Company in the first quarter of fiscal 2017. The Company anticipates the new standard will result in an increase in the number of shares used in the calculation of diluted earnings per share and will add volatility to the Company’s effective tax rate and income tax expense. The magnitude of such impacts will depend in part on whether significant employee stock option exercises occur.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest—Imputation of Interest (Topic 83530): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by ASU 2015-03. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”), which applies guidance on the subsequent measurement of inventory. ASU 2015-11 states that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. The guidance excludes inventory measured using last in, first out or the retail inventory method. ASU 2015-11 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is not planning to early adopt ASU 2015-11 and is currently evaluating ASU 2015-11 to determine the potential impact to its condensed consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The ASU will increase transparency and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU will require lessees to recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The ASU is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those annual periods. We do not believe the adoption of this update will have a material impact on our financial statements.
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (”ASU”) No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU includes specific guidance to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The Company does not expect the adoption of this ASU to have a significant impact on the consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
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Re-Classifications
Certain amounts in 2016 were reclassified to conform to the 2017 presentation. These reclassifications had no effect on consolidated net loss for the periods presented.
The fair value of the warrants on the date of issuance and on each re-measurement date of those warrants classified as liabilities is estimated using the Black-Scholes option pricing model using the following assumptions: contractual life according to the remaining terms of the warrants, no dividend yield, weighted average risk-free interest rate of 1.09% at September 30, 2017 and weighted average volatility of 130%. For this liability, the Company developed its own assumptions that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of the Company's various classes of preferred stock, stock price volatility, the contractual term of the warrants, risk free interest rates and dividend yields.
NOTE 4 – CONVERTIBLE DEBT
These debts have a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation are initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts have been amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.08 per share to $0.49 per share and a conversion price ranging from $0.03 per share to $0.12 per share. The total derivative liabilities associated with these notes are $12,362,150 at September 30, 2017 and $19,346,348 as of December 31, 2016.
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See Summary Table – Page 17
| Convertible Debt Summary | |||||||
| Footnote Number | Debt Type | Debt Classification | Interest Rate | Due Date | Ending | ||
| Current | LT | 09.30.17 | 12.31.16 | ||||
| A | Convertible | X | 10.0% | 1-Jan-17 | $25,000 | $25,000 | |
| B | Convertible | X | 8.0% | 1-Jan-19 | 65,700 | 58,556 | |
| C | Convertible | X | 8.0% | 1-Jan-19 | 32,850 | 29,278 | |
| D | Convertible | X | 8.0% | 1-Jan-19 | 209,047 | 186,316 | |
| F | Convertible | X | 8.0% | Converted | - | 117,113 | |
| G | Convertible | X | 8.0% | Converted | - | 117,113 | |
| H | Convertible | X | 8.0% | Converted | - | 55,895 | |
| I | Convertible | X | 8.0% | Converted | - | 67,074 | |
| J | Convertible | X | 8.0% | Converted | - | 23,442 | |
| K | Convertible | X | 8.0% | Converted | - | 23,442 | |
| L | Convertible | X | 8.0% | 1-Jan-19 | 30,424 | 27,116 | |
| M | Convertible | X | 8.0% | 1-Jan-19 | 131,236 | 116,966 | |
| N | Convertible | X | 8.0% | 1-Jan-19 | 55,983 | ||
| O | Convertible | X | 8.0% | 1-Jan-19 | 109,167 | 100,000 | |
| P | Convertible | X | 8.0% | 1-Jan-19 | 52,767 | ||
| Q | Convertible | X | 8.0% | 1-Jan-19 | 52,050 | ||
| R | Convertible | X | 8.0% | 1-Jan-19 | 203,867 | ||
| S | Convertible | X | 8.0% | 1-Jan-19 | 50,400 | ||
| T | Convertible | X | 8.0% | 1-Jan-19 | 250,000 | ||
| V | Convertible | X | 8.0% | 1-Jan-18 | 25,000 | ||
| W | Convertible | X | 8.0% | 1-Jan-18 | 15,000 | ||
| X | Convertible | X | 8.0% | 1-Jan-18 | 60,000 | ||
| Y | Convertible | X | 8.0% | 1-Jan-18 | 50,000 | ||
| Z | Convertible | X | 8.0% | Converted | - | 25,000 | |
| AA | Convertible | X | 6.0% | Converted | - | 18,500 | |
| BB | Convertible | X | 10.0% | 1-Jan-19 | 50,000 | 50,000 | |
| CC | Convertible | X | 10.0% | 1-Jan-19 | 100,000 | 100,000 | |
| DD | Convertible | X | 10.0% | 30-Nov-19 | 50,000 | 50,000 | |
| EE | Convertible | X | 0.0% | 31-Dec-17 | 500,000 | 500,000 | |
| KK | Convertible | X | 8.0% | 1-Jan-19 | 150,000 | - | |
| LL | Convertible | X | 8.0% | 1-Jan-19 | 600,000 | - | |
| MM | Convertible | X | 8.0% | 1-Jan-19 | 100,000 | - | |
| NN | Convertible | X | 8.0% | 1-Jan-19 | 500,000 | - | |
| OO | Convertible | X | 8.0% | 1-Jan-19 | 500,000 | - | |
| PP | Convertible | X | 8.0% | 1-Jan-20 | 500,000 | - | |
| Convertible | X | 8.0% | 1-Jan-20 | 150,000 | - | ||
| Current Convertible Debt | 875,000 | 1,690,811 | |||||
| Long-Term Convertible Debt | 3,743,490 | - | |||||
| Total Convertible Debt | $4,618,490 | $1,690,811 | |||||
FOOTNOTES
FOR CONVERTIBLE DEBT SUMMARY TABLE (A) At
the option of the holder the convertible note may be converted into shares of the Company’s common stock at the
lesser of $0.40 or 20% discount to the market price, as defined, of the Company’s common stock. The Company is currently
in discussions with the lender on a payment schedule. The outstanding balance of this note is convertible into a variable
number of the Company’s common stock: therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” The derivative component of the obligation are initially valued and classified as a derivative
liability with an offset to discounts on convertible debt. Discounts have being amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used
the Black Scholes Option Model with a risk-free interest rate of ranging from 0.08% to .87%, volatility ranging from 130%
of 157%, trading prices ranging from $.08 per share to $0.49 per share and a conversion price ranging from $0.05 per share
to $0.12 per share. The balance of the convertible note at September 30, 2017 including accrued interest and net of the
discount amounted to $43,075. (B),
(C), (D), (H), (I), (J), (K), (L), (M) On
December 31, 2015 the Company renegotiated twelve (12) convertible and non-convertible notes payable. The Total face value
of the notes issued was $888,500. The six-month notes were due on December 31, 2015. The new notes are convertible after
January 1, 2016 and are convertible into the Company’s common stock at a conversion rate of $0.03 per share. The
market value of the stock at the date when the debt becomes convertible was $0.087. All these amended debts have a price
adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”
The derivative component of the obligation are initially valued and classified as a derivative liability with an
offset to discounts on convertible debt. Discounts were amortized to interest expense over the respective term of the
related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option
Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 155% of 221%, trading prices
ranging from $.078 per share to $0.1 per share and a conversion price ranging from $0.03 per share to $0.04 per share.
The total derivative liabilities associated with these notes (one note was converted during the quarter ended March 31,
2016 and two notes were converted during the quarter ended December 31, 2016).was $2,640,030 at December 31, 2015 and
$4,718,754 at December 31, 2016, respectively. On
January 1, 2017 the Company renegotiated the nine (9) remaining convertible notes payable The total face value of the
remaining notes issued was $588,085. The notes are due on January 1, 2019. The new notes were convertible after January
1, 2017 into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at
the date when the debt became convertible was $0.2675. As of September 30, 2017, the principal balance was $469,256. All
these amended debts have a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic
815-15 “Embedded Derivative.” The derivative component of the obligation are initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are being amortized to interest expense
over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging
from 130% of 221%, trading prices ranging from $.14 per share to $0.22 per share and a conversion price ranging from $0.03
per share per share. The total derivative liabilities associated with these five remaining notes are $1,927,297
at September 30, 2017.
NOTE
5 - NON-CONVERTIBLE DEBT A-Non-
Related Party At
December 31, 2013, 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 there is no accrued
interest or principal due until December 31, 2017. $500,000 of the debt is convertible into 50,000 Series C Convertible
Preferred Shares of AFAI, which if converted are subject to resale restrictions through December 31, 2017. The two-year
note in the aggregate amount of $500,000 is convertible into the Company’s preferred stock at a conversion rate
of $10.00 per share of preferred. At a conversion rate of 433.9297 common shares to 1 preferred share, this would result
in a total of 21,696,485 common shares issued if all debt was converted. The market value of the stock at the date of
issuance of the debt was $0.04. The remaining $250,000 is not convertible. The company has imputed interest on both the
convertible debt and the non-convertible debt. The company used an interest rate of 4% for calculation purposes. The net
balance of $250,000 of the non-convertible portion is reflected on the balance sheet. This note was modified and restated
as of June 20, 2015, see Footnote 9. As of September 30, 2017, the balance of the convertible portion of the debt was
$500,000. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic
815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging
from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share.The derivative liability associated with
this convertible portion of the note as of September 30, 2017 was $2,539,521. The
net balance reflected on the balance sheet is for the convertible portion net of remaing debt discount is $399,090. The
remaining $250,000 is not convertible. The net balance of $250,000 of the non-convertible portion is reflected on the
balance sheet.
NOTE
6 – STOCKHOLDERS’ EQUITY The
Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001, of which 100,000 shares have been designated
as Series C convertible preferred stock (“Series C” or “Series C preferred stock”). The Board has the
authority to issue the shares in one or more series and to fix the designations, preferences, powers and other rights, as it deems
appropriate. Each
share of Series C has 433.9297 votes on any matters submitted to a vote of the stockholders of the Company and is entitled to
dividends equal to the dividends of 433.9297 shares of common stock. Each share of Series C preferred stock is convertible at
any time at the option of the holder into 433.9297 shares of common stock. The
Company has 500,000,000 shares of common stock authorized with a par value of $0.001. Each share of common stock has one vote
per share for the election of directors and all other items submitted to a vote of stockholders. The common stock does not have
cumulative voting rights, preemptive, redemption or conversion rights. In
February of 2017, the Company issued 6,352,500 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor
that is a current shareholder of the company. This was a conversion of four (4) Notes Payable with a total value of $190,575 the
Notes Payable were due January 1, 2019. In
June of 2017, the Company issued 987,632 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that
is a current shareholder of the company. The restricted common shares were issued as payment of interest of $29,638. In
July of 2017, the Company issued 1,760,283 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that
is a current shareholder of the company. This was a conversion of a Notes Payable with a total value of $50,000 the Note Payable
was due January 1, 2019. NOTE
7- DERIVATIVE LIABILITIES The
Company identified conversion features embedded within convertible debt and issued in 2013 and subsequent periods. The Company
has determined that the features associated with the embedded conversion option, in the form a ratchet provision, should be accounted
for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available
to settle all potential future conversion transactions. Additionally,
due to a recognition of tainting (due to shares not being held in reserve in 2014), all convertible notes are considered to have
a derivative liability. Therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”
The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to
discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining
the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest
rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49
per share and a conversion price ranging from $0.03 per share to $0.12 per share. As
a result of the application of ASC No. 815, the fair value of the ratchet feature related to convertible debt and warrants is
summarized as follow: The
fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following
management assumptions as September 30, 2017: The
Company recorded a derivative expense of $375,950 and $-0 - for the three months ended September 30, 2017 and 2016,
respectively and $16,221,943 and $129,340 for the nine months ended September 30, 2017 and 2016. The
Company recorded a change in the value of embedded derivative liabilities income/(expense) of $ 1,260,200 and $181,986 for the
three months ended September 30, 2017 and 2016, respectively and $22,114,526 and $1,895,657 for the nine months ended September
30, 2017 and 2016 NOTE
8- DEBT DISCOUNT The
Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining fair value
of the derivative liability, as it exceeded the gross proceeds of the note. Debt
discount amounted to $2,217,596 as of September 30, 2017 and $863,860 as of December 31, 2016. The
Company recorded $569,497 and $405,530 for the three months and $1,678,899 and $978,208 for the nine months ended September 30,
2017 and September 30, 2016, respectively for amortization of debt discount expense. NOTE
9 – RELATED PARTY TRANSACTIONS The
Company has agreements covering certain of its management personnel. Such agreements provide for minimum compensation levels and
are subject to annual adjustment. The
Company’s Chief Executive Officer holds 50,000 shares of its Series C preferred stock. These shares can be converted into
21,696,485 shares of the Company’s common stock at his option. The
Company’s largest stockholder has from time to time provided unsecured loans to the Company, See Note 4 for the detail of
the convertible and non-convertible debt with a face value of $750,000 NOTE
10– DEBT EXTINGUISHMENT On
January 1, 2017, the Company renegotiated nine (9) convertible notes payable. The Total face value of the notes issued was
$876,468 the notes are due on January 1, 2019. The face value plus accrued interest due of $62,533 resulting in new face amount
due of $876,468. The new notes are convertible after January 1, 2017 and are convertible into the Company’s common stock
at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.225.
The Company recorded a loss from debt extinguishment of $67,442.
NOTE
11 – Warrants On
September 8, 2015, the Company received a total of $100,000 from an accredited investor in exchange for a two year note in
the aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase
from the Company 3,161,583 paid and non-assessable shares of common stock at the price of $0.0316297 per share (the
“Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain
$100K, 10% promissory note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in
“The Note” or September 9, 2017. The Note and interest has been paid in full as of September 30, 2017. On
September 9, 2015, the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the
aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the
Company 3,161,583 paid and non-assessable shares of common stock at the price of $0.0316297 per share (the “Warrant Exercise
Price”) for a period of five (5) years commencing from the earlier of such time as that certain $100K, 10% promissory note
due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or September
9, 2017. The Note and interest has been paid in full as of September 30, 2017. 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%. The note holder is entitled to subscribe for and purchase from the company 2,371,187
paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
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%. The note holder is entitled to subscribe for and purchase from the company 2,371,187
paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
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. Warrants
issued to Non-Employees
NOTE
12 – COMMITMENTS AND CONTINGENCIES The
Company is, from time to time involved in litigation in the normal course of business. While it is not possible at this time to
establish the ultimate amount of liability with respect to contingent liabilities, including those related to legal proceedings,
management is of the opinion that the aggregate amount of any such liabilities, for which provision has not been made, will not
have a material adverse effect on the Company’s financial position. On
June 22, 2016, Daniel A. Goldin and Wally Goldin commenced an action in Oregon Circuit Court, Multnomah County, against the Company,
MJAI, its direct majority-owned subsidiary, Craig Frank, our Chairman, President and Chief Executive Officer, William David Jones,
a consultant to our Company and BMN Capital Group, LLC (the “Action”). The plaintiffs alleged 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 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 sought in excess of $1.7 million in damages. The Company believed that not only was the Action without merit, but
that it had various counterclaims against the plaintiffs, particularly Daniel L. Goldin. The Company defended against the Action
and pursued its counterclaims both in the Action and in a separate lawsuit commenced against the plaintiffs in the U.S. District
Court for the Southern District of Florida in which the Company alleged fraud by the plaintiffs and sought damages and the return
of the common stock issued to the Company’s treasury In September 2017, the parties entered in a settlement agreement, pursuant
to which Mr. Goldin waived any rights to a total of 1.2 million shares of common stock (200,000 shares of our common stock which
were already issued in his name and an additional 1,000,000 shares which were to be issued) and $40,000 in cash compensation payable
to him under the employment agreement. The Company paid the plaintiffs the sum of $247,500, in exchange for the return of the
stock and the waiver of claims against any further stock or cash, all litigation was dismissed by the parties and the parties
exchanged mutual releases. NOTE
13– SUBSEQUENT EVENTS On
November 13, 2017 we paid into escrow $247,500 to settle the commitment discussed in Note 12 On
November 3, 2017 three convertible notes with the face value of $217,643 were converted into 7,734,099 shares of common stock. On
May 11, 2017, we entered into a financing agreement with an institutional investor (the “Investor”) to provide the
Company with up to $5.8 in convertible note funding through July 31, 2018 (the “May 2017 Financing Agreement”). The
May 2011 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding available to the Company thereunder
to $6.3 million and to extend the time period for such funding to May 31, 2019 and was additionally amended as of November 15,
2017 to further increase the amount of funding available to the Company thereunder to $7.0 million and to extend the time period
for such funding to November 30, 2019. Funding under the May 2017 Financing Agreement, as amended, takes the form of the offer
and sale of Convertible Notes (the “$7.0 Million Notes”). The $7.0 Million Notes are substantially similar in form
and substance to the $2.1 million Notes that were part of the $2.1 million Financing Agreement entered into between the Company
and the Investor in December 2016 and completed in March of 2017 (as well as the approximately $1.2 million in financing previously
received from the Investor in 2014 and 2015), except that the $7.0 million Notes are due and payable on January 1, 2020. The
$7.0 million Notes are substantially similar in form and substance to the $2.1 million Notes that were part of the $2.1 million
Financing Agreement entered into between the Company and the Investor in December 2016 and completed in March of 2017 (as well
as the approximately $1.2 million in financing previously received from the Investor in 2014 and 2015), except that the $7.0 million
Notes are due and payable on January 1, 2020. Pursuant
to the terms of the $7.0 million Financing Agreement, an additional $500,000 was delivered to the Company on November 3, 2017,
bringing the total amount received by the Company to $1,150,000 since its execution on May 11, 2017. The purpose for the increase
in the $7.0 million Financing Agreement was to allocate an additional $500,000 to be used for the targeted acquisition of property
in Oregon for the development of a Commercial and Medical Cannabis Grow Complex and related enterprises, and $500,000 has been
used against the purchase of an identified property which the Company closed on the property during the third Quarter of 2017. For
more information on the $7.0 million Financing Agreement, please refer to the narrative in Item 2 (above), Management’s
Discussion and Analysis of Financial Condition and Results of Operations. 17
(1)
The Company
valued the derivative liabilities at September 30, 2017 at $23,610. The Company recognized a change in the fair value of derivative
liabilities for the three months ended September 30, 2017 of $(640), which were credited to operations. In determining the
indicated values at September 30, 2017, since the debt is in default the company used the maximum value these embedded options
represent, with a trading price of $.14, and conversion prices of $0.11 per share.
18
(N)
On January
8, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is
convertible into common shares at $0.03 per share. Note was Due in January of 2017 . On January 1, 2017, this note
was amended to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the
amount of $5,983 was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company
accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation
is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized
to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued,
the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging
from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September 30, 2017
is $55,983. The derivative liability associated with this note as of September 30, 2017 was $229,967.
(O)
On March
31, 2016, the Company received $100,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest
is convertible into common shares at $0.03 per share. Note was Due in January of 2017. On January 1, 2017, this note was amended
to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $9,167
was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these
Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially
valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest
expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130%
of 157%, trading prices ranging from $.05 per share to $0.49 per share.The principal balance as of September 30, 2017 is $109,167.
The derivative liability associated with this note as of September 30, 2017 was $448,334.
(P)
On July
13, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest
is convertible into common shares at $0.03 per share. Note was Due in January of 2017. On January 1, 2017, this note was amended
to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $2,767
was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these
Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially
valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest
expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130%
of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September 30, 2017 is $52,767.
The derivative liability associated with this note as of September 30, 2017 was $216,706.
(Q)
On August
30, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest
is convertible into common shares at $0.03 per share. Note was Due in January of 2017. On January 1, 2017, this note was amended
to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $2,050
was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these
Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note
issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility
ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September
30, 2017 is $52,050. The derivative liability associated with this note as of September 30, 2017 was $213,763.
19
(R)
On November
3, 2016, the Company received $200,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest
is convertible into common shares at $0.03 per share. Note is Due in January of 2018. On January 1, 2017, this note was amended
to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $3,867
was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these
Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued,
the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging
from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September 30, 2017
is $203,867. The derivative liability associated with this note as of September 30, 2017 was $837,255.
(S)
On December
1, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 10% The Note and Interest is
convertible into common shares at $0.03 per share. Note is Due in January of 2018. On January 1, 2017, this note was amended to
extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $400
was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these
Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note
issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility
ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September
30, 2017 is $50,400. The derivative liability associated with this note as of September 30, 2017 was $206,986.
(T)
On December
30, 2016 the Company received $250,000 from the issuance of convertible debt. Interest is stated at 10% The Note and Interest
is convertible into common shares at $0.04 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining
the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest
rate of ranging from 0.05% to 1.08%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49
per share. The derivative liability associated with this note as of September 30, 2017 was $731,553.
(U)
On March
13, 2016, the Company received $25,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest
is convertible into common shares at $0.03 per share. Note was Due in January of 2017. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining
the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest
rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $.09.
The Note and Interest was converted to common shares on September 13, 2016
(V)
On September
13, 2016 the Company received $25,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is
convertible into common shares at $0.045 per share. Note is Due in January of 2018. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining
the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest
rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49.
The derivative liability associated with this note as of September 30, 2017 was $58,970.
20
(W)
On October
16, 2016 the Company received $15,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is
convertible into common shares at $0.03 per share. Note is Due in January of 2018. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the
indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate
of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per
share. The derivative liability associated with this note as of September 30, 2017 was $60,417.
(X)
On November
18, 2016 the Company received $60,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is
convertible into common shares at $0.03 per share. Note is Due in January of 2018. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the
indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate
of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per
share. The derivative liability associated with this note as of September 30, 2017 was $239,768.
(Y)
On December
7, 2016 the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is
convertible into common shares at $0.03 per share. Note is Due in January of 2018. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the
indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate
of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per
share. The Note and Interest was converted to common shares in July of 2017
(Z)
On October
1, 2015, the Company renegotiated a convertible notes payable. The original note was issued March 13, 2015 and due September 30,
2015, with conversion rate of $0.06 per share. The new note had an extended the due date to January 1, 2017 and convertible into
the Company’s common stock at a conversion rate of $0.045 per share. This note has a price adjustment provision. Therefore,
the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value
of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from
0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The Note
and Accrued interest was converted to common stock on September 23, 2016
(AA)
On July
27, 2015, the Company issued a note payable for $28,500. The Company agrees to pay to the Holder $28,500 plus accrued interest
pursuant to the following schedule:
· An
initial payment of $5,000 is due no later than December 1, 2015. This amount represents
the balance of the security deposit due for the lease of Commercial/Manufacturing Space
occupied by MJAI Oregon 1, LLC, an indirect controlled subsidiary of the Company.
· A
final payment of $42,700 principal, plus any accrued Interest at 10% is due no later
than April 1, 2017. This amount represents the balance of accrued rent due for the initial
monthly lease payments from August 1, 2015 through December 31, 2016. 21
The note
was convertible after March 31, 2016 and is convertible into the Company’s common stock at a conversion rate of $0.10 per
share or 20% discount to the thirty day moving average stock price. This note has a price adjustment provision. Therefore, the
Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value
of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from
0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. This note
was paid in full as a result of a settlement agreement on March 31, 2017. The remaining balance is zero.
(BB)
On September
23, 2015, the Company received a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $50,000 with interest accruing at 10%. The note and interest is convertible after September 23, 2015 into the Company’s
common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible
was $0.089. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15
“Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading
prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30,
2017 was $184,507. The note has been extended to January 1, 2019
(CC)
On September
23, 2015, the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $100,000 with interest accruing at 10%. The note and interest is convertible after September 23, 2015 into the Company’s
common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible
was $0.078. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15
“Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading
prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30,
2017 was $368,997. The note has been extended to January 1, 2019
(DD)
On September
23, 2015, the Company received a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $50,000 with interest accruing at 10%. The note and interest is convertible after September 23, 2015 into the Company’s
common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible
was $0.078. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15
“Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading
prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30,
2017 was $184,507. The note has been extended to November 30, 2017
(EE)
and (FF)
At December
31, 2013, 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 there is no accrued interest or principal due until
December 31, 2017. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares of AFAI, which if converted
are subject to resale restrictions through December 31, 2017. The two-year note in the aggregate amount of $500,000 is convertible
into the Company’s preferred stock at a conversion rate of $10.00 per share of preferred. At a conversion rate of 433.9297
common shares to 1 preferred share, this would result in a total of 21,696,485 common shares issued if all debt was converted.
The market value of the stock at the date of issuance of the debt was $0.04. The remaining $250,000 is not convertible. The company
has imputed interest on both the convertible debt and the non-convertible debt. The company used an interest rate of 4% for calculation
purposes. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet. This note was modified
and restated as of June 20, 2015, see Footnote 9. As of September 30, 2017, the balance of the convertible portion of the debt
was $500,000. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15
“Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading
prices ranging from $.05 per share to $0.49 per share.The derivative liability associated with this convertible portion of the
note as of September 30, 2017 was $2,539,521.
22
The net
balance reflected on the balance sheet is for the convertible portion net of remaing debt discount is $399,090. The remaining
$250,000 is not convertible. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet.
(KK)
On January
4, 2017 the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.04 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion
price of $0.04 per share. The derivative liability associated with this note as of September 30, 2017 was $438,472.
(LL)
On January
20, 2017 the Company received $600,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.07 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of September 30, 2017 was $872,083.
(MM)
On January
31, 2017 the Company received $100,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.07 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.08%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of September 30, 2017 was $145,011.
(NN)
On February
7, 2017 the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.10 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of September 30, 2017 was $451,464.
(OO)
On February
21, 2017 the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.10 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of September 30, 2017 was $450,129.
23
(PP)
On May 11,
2017 the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible
into common shares at $0.05 per share. Note is Due in January of 2020. This note has a price adjustment provision. Therefore,
the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the
obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts
are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible
note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility
ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated
with this note as of September 30, 2017 was $1,183,165.
(QQ)
On July
17, 2017 the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.05 per share. Note is Due in January of 2020. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of September 30, 2017 was $349,668.
(GG),
(HH), (II), (JJ)(KK)
September 30, 2017
December 31, 2016
Note
GG
-0-
68,555
Note HH
-0-
68,555
Note II
37,780
65,262
Note JJ
37,780
65,262
Note
KK
13,571
31,661
Total
Non-Convertible Debt
89,131
299,295
(GG) On
September 8, 2015, the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the
aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the
company 3,161,583 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant
Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $100,000 10% promissory
note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note”
or September 9, 2017. The note and interest has been paid in full
(HH) On
September 9, 2015, the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the
aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the
company 3,161,583 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant
Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $100,000 10% promissory
note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note”
or September 9, 2017. The note and interest has been paid in full
24
(II) 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%. The note holder is entitled to subscribe for and purchase from the company 2,371,187
paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
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.
(JJ) 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%. The note holder is entitled to subscribe for and purchase from the company 2,371,187
paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
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
(KK) On
September 16, 2016 the Company received a total of $31,661 to be used for equipment in exchange for a two year note in the aggregate
amount of $31,661 with interest accruing at 18% per year and a 10% loan fee. The note is due September of 2018 with monthly payments
of principal and interest.
B-Related Party
Loan payable - Stockholder, 0%, Due December 31, 2017 (1)
$ 250,000
$ 250,000
$ 250,000
$ 250,000
(1)
25
Balance
as of December 31, 2016
$ 19,346,348
Initial Derivative
Value
16,221,943
Change in
Derivative Values-reclassified to APIC
(22,114,526)
Conversion
or amendment
(1,091,615)
$ 12,362,150 26 27
Weighted
Weighted
Average
Average
Warrants
Exercise
Contract
Issued
Price
Terms
Years
Balance
as of December 31, 2016
11,065,540
0.0316297
1.79
Granted
-
-
-
Exercised
-
-
-
Expired
-
-
-
Balance
as of September 30, 2017
11,065,540
0.0316297
.66 28
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In this Quarterly Report on Form 10-Q, the terms “Kaya Holdings,” “KAYS,” “the Company,” “we,” “us” and “our” refer to Kaya Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.
Cautionary Note Regarding Forward-Looking Statements
Information contained in this Quarterly Report on Form 10-Q 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 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
Business Overview
Background
Kaya Holdings 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.
Legal Medical and Recreational Marijuana Operation in Oregon
In January 2014 KAYS incorporated a subsidiary, Marijuana Holdings Americas, Inc. a Florida corporation (“MJAI”). to focus on opportunities in the legal recreational and medical marijuana in the United States. MJAI has concentrated its efforts in Oregon, where through controlled Oregon limited liability companies, it initially secured licenses to operate a medical marijuana dispensary (an “MMD”) and following legalization of recreational cannabis use in Oregon, has secured licenses to operate three retail outlets (with the license application for a fourth outlet pending) and purchased 26 acres for development as a legal cannabis cultivation and manufacturing facility. The Company has developed the Kaya Shack™ brand for its retail operations.
In March 2014, we applied for and were awarded our first license to operate an MMD 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.
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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, our first 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
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.
Accordingly, in 2016 the Company applied for OLLC licenses for its two initial Kaya Shack™ retail outlets (Portland, Oregon and South Salem, Oregon), and also submitted license applications for its two new locations under construction and development at that time.
In late December 2016, we received our OLCC recreational license for the South Salem Kaya Shack™ Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #1) and recreational and medical sales continued without interruption from 2016 through the present at that location.
On March 21, 2017, we received our North Salem Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #2) a 2,600-square foot Kaya Shack™ Marijuana Superstore in North Salem, Oregon, whereupon the location opened for business with both recreational and medical sales.
On May 2, 2017, we received our OLCC recreational license for our Portland Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #3) and after a delay of approximately four months. During that period we were limited to solely medical sales at the Portland location. Upon receipt of Kaya Shack™ OLCC Marijuana Retailer License #3, recreational sales recommenced at that location.
Our OLCC License for the Central Salem Kaya Shack™ Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #4) has been filed and is pending completion, inspection and final licensing. We expect to complete construction and licensing during the fourth quarter of 2017 and commence recreational and medical sales at this location as soon as possible thereafter.
Additional Kaya Shack™ Marijuana Superstores
During 2016 and the first nine months of 2017, 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. 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 18 to 24 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.
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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. 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.
In August 2017, we acquired a 26 acre parcel in Lebanon, Oregon, which KAYS intends to develop as a legal cannabis cultivation and manufacturing facility. KAYS believes that the acquisition of a property will position the Company for future development, including increased Marijuana Canopy production to the maximum extent allowed by law through use of both greenhouse and outdoor grows, as well as expansion of its production capabilities with brands in oils, vape cartridges, concentrates, a selection of edibles, and infused creams and lotions.
$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 “$2.1M Financing Agreement”) entered into between the Company and the Investor in December 2016. Pursuant to the $2.1M Financing Agreement, the Investor purchased $2.1 million in principal amount of convertible notes (the “$2.1M Notes”) from the Company as follows:
| • | $400,000 in principal amount of $2.1M Notes which are convertible into shares of the Company’s common stock at a conversion price of $0.04; |
| • | $700,000 in principal amount of $2.1M Notes which are convertible into shares of the Company’s common stock at a conversion price of $0.07; and |
| • | $1,000,000 in principal amount of $2.1M Notes which are convertible into shares of the Company’s common stock at a conversion price of $0.10. |
The purchase price for the $2.1M Notes is equal to the principal amount thereof. The $2.1M 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 $2.1M 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 $2.1M 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.
May 2017 Financing Agreement
On May 11, 2017, we entered into a financing agreement with an institutional investor (the “Investor”) to provide the Company with up to $5.8 million in convertible note funding through July 31, 2018 (the “May 2017 Financing Agreement”). The May 2011 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding available to the Company thereunder to $6.3 million and to extend the time period for such funding to May 31, 2019 and was additionally amended as of November 15, 2017 to further increase the amount of funding available to the Company thereunder to $7.0 million and to extend the time period for such funding to November 30, 2019.
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Funding under the May 2017 Financing Agreement, as amended, takes the form of the offer and sale of Convertible Notes (the “$7.0M Notes”). The $7.0 Notes are substantially similar in form and substance to the $2.1M Notes that were part of the $2.1 million Financing Agreement entered into between the Company and the Investor in December 2016 and completed in March of 2017 (as well as the approximately $1.2 million in financing previously received from the Investor in 2014 and 2015), except that the $7.0M Notes are due and payable on January 1, 2020.
As of the date of this Quarterly Report, the Investor has purchased an aggregate of $1,150,000 in principal amount of $7.0M Notes from the Company under the May 2017 Financing Agreement, as amended to date, of which (a) $500,000 in principal amount of $7.0M Notes are convertible into shares of the Company’s common stock at a conversion price of $0.05 (the “$0.05Notes”); (b) $150,000 in principal amount of $7.0M Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.03 (the “$0.03Notes”); and (c) $500,000 in principal amount of $7.0M Notes, which are (i) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (ii) secured by a mortgage lien on the 26 acre property acquired by the Company during the third quarter of 2017 (the $0.03 Secured Notes”).
Under the May 2017 Financing Agreement, as amended to date, the Investor has the right to purchase another tranche of $0.03 Notes up to an aggregate of $1,050,000 in principal amount, at any time and from time to time throughMarch 31, 2018.
Provided the Investor has fulfilled its obligation to purchase the additional $1,050,000 in principal amount of $0.03 Notes from the Company on or before March 31, 2018, the Investor will have the right to purchase another tranche of $0.05 Notes up to an aggregate of $1,000,000 in principal amount, at any time and from time to time through July 31, 2018.
Provided the Investor has fulfilled its obligation to purchase the additional $1,000,000 in principal amount of $0.05 Notes from the Company on or before July 31, 2018, the Investor will have the right to purchase up to an aggregate of $1,600,000 in principal amount of $7.0M Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.08 per share, at any time and from time to time through January 31, 2019 (the “$0.08 Notes”).
Provided the Investor has fulfilled its obligation to purchase all $1,600,000 in principal amount of $0.08 Notes from the Company on or before January 31, 2019, the Investor will have the right to purchase up to an additional $2,200,000 in principal amount of $7.0N Notes from the Company at any time and from time to time through November 30, 2019, which Notes will be convertible into shares of common stock at a conversion price of $0.11.
The proceeds from the offer and sale of the $2.1M and $7.0M Notes are and will be used to fund the Company’s growth plan, including expansion of our chain of Kaya Shack™ Marijuana Superstores in Oregon, acquisition and development of our Lebanon, Oregon legal cannabis cultivation and manufacturing facility and the introduction of new Kaya Shack™ branded cannabis products.
Corporate Information
Our corporate office is located at 888 South Andrews Avenue, Suite 302, Fort Lauderdale, Florida, 33316 and out telephone number is (954) 892-6911. Our website is www.kayaholdings.com. Information contained on our website does not constitute part of this Quarterly 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.”
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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).
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The Kaya Shack™ Brand
Kaya Holdings operates the Kaya Shack™ brand of legal medical and recreational retail marijuana stores.
Kaya Holdings operates three recreational marijuana retail outlets and medical marijuana dispensaries in Oregon under the Kaya Shack™ brand and anticipates opening its fourth location during the last 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 24 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 OLCC regulations.
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Kaya Shack™ Retail Outlets
I. Kaya Shack™, 1719 SE Hawthorne Blvd., Portland, Oregon
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Located in the trendy Hawthorne district in southeast Portland, the first Kaya Shack™ is approximately 700 square feet and is the model for the Company’s small urban shops. The store features an 8’ display case showcasing at least 25 strains of marijuana flower, an additional 8’ display case with a varied selection of oils, concentrates and topicals, and a standing display case with edibles such as cookies, chocolates, gummies, hard candies and more. The store also has a hospitality area that offers free water, coffee, tea and hot cocoa. As required by law, all products containing marijuana are either behind locked glass or behind the counter and out of customer reach.
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The store is located next door to a cell phone repair shop, and near to Devil’s Dill restaurant and No Fun pub. There are also a McMenamins restaurant, tattoo parlor, convenience store, hair/nail salon and a soccer sports bar. The area around the shop is primarily residential.
Our Portland outlet 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 in 2016. 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 May 2, 2017, when we received Kaya Shack TM OLCC Marijuana Retailer License #3 for this location, sales at the Portland, Oregon location were limited to medical marijuana and as such our revenues from this location were impacted.
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II. Kaya Shack™ Marijuana Superstore, South Salem, Oregon
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Our second location (the first Kaya Shack TM Marijuana Superstore) opened for business on October 17, 2015 in South Salem, Oregon in time to take advantage of early recreational sales. Our South Salem Kaya Shack ™ Marijuana superstore received Kaya Shack TM OLCC Marijuana Retailer License prior to the January 1, 2017 deadline to do so and both recreational and medical marijuana sales have continued at this location seamlessly.
Located in the southern portion of Oregon’s capital city, Salem, this Kaya Shack™ is approximately 2,100 square feet and is the model for the Company’s marijuana superstore. The store features an 8’ display case with more than 25 strains of marijuana flower, an additional 8’ display case with a varied selection of oils, concentrates and topicals, an 8’ display case with accessories such as pipes, papers and brand related merchandise, and a standing display case with edibles such as cookies, chocolates, gummies, hard candies and more. The store also has a hospitality area that offers free water, coffee, tea and hot cocoa, and a “third space” sitting area. A fresh juice bar and a production room offering customers a chance to watch as the Company’s branded marijuana cigarettes, Kaya Buddies™, are produced are being installed.
The store is located in a strip mall alongside a Caesar’s Pizza, Aaron’s furniture, a convenience store, a tanning salon, and a nail salon. The plaza also has a Subway, a sports bar and a laundromat. The area around the shop is primarily commercial with residential complexes to be constructed beginning in 2018.
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III. Kaya Shack™ Marijuana Superstore, North Salem, Oregon
Our third Kaya Shack™ (located in North Salem, Oregon) received Kaya Shack TM OLCC Marijuana Recreational Retailer License #3 on March 21, 2017.
| 41 |
Located in the northern portion of Oregon’s capital city, Salem, this Kaya Shack™ is 2,600 square feet. The store features an 8’ display case with more than 25 strains of marijuana flower, an additional 8’ display case with a varied selection of oils, concentrates and topicals, an 8’ display case with accessories such as pipes, papers and brand related merchandise, and standing display cases with edibles such as cookies, chocolates, gummies, hard candies and more. The store also has a hospitality area that offers free water, coffee, tea and hot cocoa and a “third space” sitting area. The Company plans to install a fresh juice bar, and a glassed-off kitchen facility slated to produce edibles and confections.
The store is located in a strip mall alongside a Starbucks Coffee, laundromat, and Adam’s Rib. The plaza also has medical offices and an Applebee’s. The area around the shop is primarily commercial.
| 42 |
IV. Kaya Shack TM Marijuana Superstore, Central Salem, Oregon
| 43 |
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 last quarter of 2017.
Located in the central portion of Oregon’s capital city, Salem, this Kaya Shack™ is 2,770 square feet. The store features an 8’ display case with more than 25 strains of marijuana flower, an additional 8’ display case with a varied selection of oils, concentrates and topicals, an 8’ display case with accessories such as pipes, papers and brand related merchandise, and standing display cases with edibles such as cookies, chocolates, gummies, hard candies and more. The store also has a hospitality area that offers free water, coffee, tea and hot cocoa. The superstore concept also provides for a “third space” sitting area, a fresh juice bar, and in this location, an area for the production of the Company’s brand of custom glass pipes.
The store is located in a strip mall directly behind Carl Jr. and Popeye’s Chicken restaurants and alongside a microbrewery sports bar, laundromat, and Hawaiian sandwich shop. The area around the shop is primarily commercial with residential complexes to be constructed in 2018.
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As discussed in the following section, the Company intends to initiate its Kaya Car™ Home Delivery Service during the fourth quarter of 2017, 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.
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Kaya Shack™ Home Delivery
In February 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 Quarterly Report, the Company has received approvals from the OLCC to add Home Delivery to their three currently OLCC licensed locations, and is also applying for and expects to receive approval 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 and spent the summer of 2017 conducting doing test marketing to our target consumers to determine the final version of and begin building the Kaya Shack™ Home Delivery Service fleet. The “winning design” for the cars is featured below with its distinctive Kaya Car™ 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 Shack™ Home Delivery Service utilizing its initial Kaya Car™ fleet during the fourth quarter of 2017, 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. The Company has reserved and is developing the website kayadelivers.com to advance the growth of its delivery service.
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Kaya Farms™ Cannabis and Cannabis Products
General
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. 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.
In August 2017, we acquired a 26 acre parcel in Lebanon, Oregon, which KAYS intends to develop as a legal cannabis cultivation and manufacturing facility. KAYS believes that the acquisition of a property will position the Company for future development, including increased Marijuana Canopy production to the maximum extent allowed by law through use of both greenhouse and outdoor grows, as well as expansion of its production capabilities with brands in oils, vape cartridges, concentrates, a selection of edibles, and infused creams and lotions.
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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 and 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.
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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 multilocation 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:
| • | All operations are to be conducted in accordance with state and local laws and regulations and guidance outlined in the U.S. Department of Justice “Cole Memo” dated August 29, 2013. |
| • | The Company will seek to operate in a vertically integrated manner (grow, process and sell) wherever permitted by law. In states where vertical integration is not permitted, the Company plans to determine which of the permitted activities offers the most potential for growth and value creation. |
| • | The Company will seek to engage, sponsor or lead local advocacy and lobbying groups that have a significant impact on the evolution and character of laws and the regulations under which legal marijuana operations are implemented in select markets. |
| • | The Company shall work with law enforcement and government officials to insure compliance with all regulations. |
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:
| • | Promoting and establishing the Kaya Shack™ brand. |
| • | A positive and active online presence. |
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| • | Daily specials and promotions. |
| • | Quirky and fun holiday specials. |
Our core strategic marketing objectives include:
| • | Establish the Kaya Shack™ Brand – positioning the Company’s brand to have positive and value related associations with all prospective and existing customers. |
| • | Operate Cooperatively cooperation, as a strategy, helps develop a network of suppliers and marketing channels able to promote Kaya Shack™. |
| • | Deliver Value customer value is achieved when the perceived value of what we sell along with the value of the experience we deliver exceeds the price we charge. |
| • | Drive Customer Traffic the only two ways to increase store income is to sell more to our existing customers and attract new customers. Programs are in place to accomplish both tasks. |
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 Quarterly Report, our Oregon operations have a total of seventeen (17) part-time store employees including budtenders, trimmers, growers, and 4 fulltime employees, consisting of 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.
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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.
The Company recognizes 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.
Results of Operations
Three months ended September 30, 2017 compared to three months ended September 30, 2016
Revenues
We had revenues of $320,950 for the three months ended September 30, 2017, as compared to revenues of $263,345 for the three months ended September 30, 2016. The increase in revenues reflects sales at our three retail outlets, all of which were open and operating during the third quarter of 2017, as opposed to only two locations open and operating in the third quarter of 2016.
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Operating Expenses
General and administrative expenses increased to $367,975 for the three months ended September 30, 2017, from $109,417 for the three months ended September 30, 2016. Salaries and wages increased to $131,762 for the three months ended September 30, 2017 from $65,358 for the three months ended September 30, 2016. The increases in these expense categories from the 2016 quarter to the 2017 quarter reflect our increased level of operations, including construction and licensing of our third Kaya Shack™ Marijuana Superstore (and fourth Kaya Shack™ retail outlet), which is expected to open during the fourth quarter of 2017. Professional fees for the three months ended September 30, 2017, decreased to $166,150 from $815,508 for the three months ended September 30, 2016, reflecting the completion of licensing work with respect to the Company’s third and fourth retail outlets. As a result of the significant decrease in professional fees, total operating expenses decreased to $665,887 for the three months ended September 30, 2017, from $990,283 for the three months ended September 30, 2016, notwithstanding the increased level of the Company’s operations. Accordingly, our operating loss decreased to $467,724 for the three months ended September 30, 2017, from $853,168 for the three months ended September 30, 2016.
Interest expense
Interest expense increased to $115,552 for the three months ended September 30, 2017 from $45,982 for the three months ended September 30, 2016, reflecting additional debt incurred in the 2017 period to fund expansion of our operations.
Net Loss
After giving effect to an operating loss of $467,724, interest expense of $115,552, amortization of debt discount of $569,497 and derivative liabilities from the conversion of debt of $375,950, offset by other income from a change in derivative liability expense of $1,260,200 (arising from the stabilization of our stock prices which reduced the volatility factors used in the derivative calculations), we incurred a net loss of $578,900 for the three months ended September 30, 2017. This compares with a net loss of $1,122,694 for the three months ended September 30, 2016, after giving effect to an operating loss of $853,168, interest expense of $45,982 and amortization of debt discount of $405,530, offset by other income from a change in derivative liability expense of $181,986.
The majority of our net loss during the three-month period ending September 30, 2017 was a result of the derivative liabilities from the conversion of debt in the three months ended September 30, 2017 and from. In addition, as noted above, our revenues were impacted during the 2017 quarter as a result of our inability to process legal recreational marijuana sales at our Portland outlet because of delays in securing OLCC licensing for the facility.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Revenues
We had revenues of $667,601 for the nine months ended September 30, 2017, as compared to revenues of $754,093 for the nine months ended September 30, 2016. The decrease in revenues in the 2017 period from the comparable period in 2016 resulted from the delay in receiving OLCC licensing for our Portland retail outlet until May 2, 2017, which rendered such location unable to process legal recreational sales for the first four calendar months of 2017, which was offset in part by sales from our third retail location (and second Kaya Shack™ Marijuana Superstore), which received its OLCC license and commenced recreational and medical marijuana sales in March 2017.
Operating Expenses
General and administrative increased to $911,598 for the nine months ended September 30, 2017, from $338,073 for the nine months ended September 30, 2016. Salaries and wages increased to $311,253 for the nine months ended September 30, 2017, from $216,691 for the nine months ended September 30, 2016. The increases in these expense categories from the 2016 to the 2017 periods, reflects our increased level of operations, including construction and licensing of two additional Kaya Shack™ Marijuana Superstores, the first of which opened in March 2017 and the second of which is expected to open during the fourth quarter of 2017. Professional fees for the nine months ended September 30, 2017, decreased to $523,551 from $1,205,293 for the nine months ended September 30, 2016, reflecting the completion of licensing work with respect to the Company’s third and fourth retail outlets. The significant increase in general and administrative expenses was offset by the significant decrease in professional fees, resulting in total operating expenses of $1,746,402 for the nine months ended September 30, 2017. This compares to total operating expenses of $1,760,067 for the nine months ended September 30, 2016. Accordingly, our operating loss decreased to $1,351,465 for the nine months ended September 30, 2017, from $1,426,966 for the nine months ended September 30, 2016, notwithstanding the increased level of the Company’s operations.
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Interest expense
Interest expense increased to $260,295 for the nine months ended September 30, 2017, as compared to $195,968 for the nine months ended September 30, 2016, reflecting additional debt incurred in the 2017 period to fund expansion of our operations.
Net Income (Loss)
After giving effect to an operating loss of $1,351,465, interest expense of $260,295, legal settlement of $247,500, amortization of debt discount of $1,678,899, derivative liabilities expense of $16,221,943 and loss on extinguishment of debt of $67,442, offset by other income from a change in derivative liabilities expense of $22,114,526 (arising from the stabilization of our stock prices which reduced the volatility factors used in the derivative calculations), we had net income of $2,286,982 for the nine months ended September 30, 2017. This compares with a net loss of $960,825 for the nine months ended September 30, 2016, after giving effect to an operating loss of $1,426,966, interest expense of $195,968, amortization of debt discount of $978,288, derivative liabilities expense of $129,340 and loss on extinguishment of debt of $126,000, offset by other income from a change in derivative liabilities expense of $1,895,657 (arising from the stabilization of our stock prices which reduced the volatility factors used in the derivative calculations).
Liquidity and Capital Resources
The discussion that follows is derived from our interim unaudited Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 and the interim unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 (“2017”) and 2016 (“2016”).
Overview
During 2017 our cash position decreased by $21,282 to $285,603 and our negative working capital decreased by $407,139 to $1,401,463, excluding derivative liabilities. As of September 30, 2017, our working capital consisted of cash of $285,603; inventories of $150,936; and prepaid expenses of $20,274. Our current liabilities include accounts payable of $147,798 and $13,586, accrued expenses of $395,739 and notes payable of $1,050,000.
The following table sets forth the major sources and uses of cash for the nine months ended September 30, 2017 and 2016:
| 2017 | 2016 | |||||||
| Net cash used in operating activities | $ | (1,705,128 | ) | $ | (576,960 | ) | ||
| Net cash used in investing activities | (679,824 | ) | (28,224 | ) | ||||
| Net cash provided by financing activities | 2,363,671 | 522,422 | ||||||
| Net (decrease) increase in cash | $ | (21,281 | ) | $ | (82,762 | ) | ||
Cash Used in Operating Activities
During 2017 we used cash of $1,705,128 (2016 - $576,960) in operating activities. This was made up of the net income (loss) of $2,286,982 (2016 – (899,566)), adjusted for non-cash items such as: Depreciation of $54,403 (2016 - $59,964); Imputed interest of $30,000 (2016 - $90,000); change in derivative liabilities $(22,114,526) (2016 – ($1,895,656)); Derivative expense $16,221,943 (2016 - $129,340); Loss on extinguishment of debt $67,442 (2016-$126,000); amortization of debt discount of $1,678,899 (2016 - $978,208); and shares for interest of $29,638 (2016 - $9,000). Inventory decrease of $66,939 (2016 – an increase of $40,915); a decrease in prepaid expenses of $15,774 (2016 – $14,000); an increase in accrued interest of $188,683 (2016- $104,005); and an increase in accounts payable and accrued expenses of $40,582 (2016 – an increase of $142,382).
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Cash Used in Investing Activities
During 2017 we used cash of $679,824 in investing activities. This amount was spent on the purchase of our 26 acre real property in Lebanon, Oregon, the buildout of location #4 in Salem, Oregon and on furniture and equipment.
During 2016 we used cash of $28,224 in investing activities. A total of $28,224 was spent on furniture and equipment.
Cash Provided by Financing Activities
During 2017 $2,500,000 of convertible debt was issued to provide working capital. The Company used $23,500 to repay convertible debt and $112,829 to repay an equipment note payable and other notes payable.
During 2016 the Company raised a total of $575,000 through the private sale of debt and equity securities and used $52,578 to repay notes payable and $100,000 from the sale of stock.
Additional Capital
As of September 30, 2017, we had cash of $285,602 and a working capital deficiency of $1,401,463, excluding derivative liabilities.
On May 11, 2017, we entered into a financing agreement with an institutional investor (the “Investor”) to provide the Company with up to $5.8 million in convertible note funding through July 31, 2018 (the “May 2017 Financing Agreement”). The May 2011 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding available to the Company thereunder to $6.3 million and to extend the time period for such funding to May 31, 2019 and was additionally amended as of November 15, 2017 to further increase the amount of funding available to the Company thereunder to $7.0 million and to extend the time period for such funding to November 30, 2019.
Funding under the May 2017 Financing Agreement, as amended, takes the form of the offer and sale of Convertible Notes (the “$7.0M Notes”). The $7.0 Notes are substantially similar in form and substance to the $2.1M Notes that were part of the $2.1 million Financing Agreement entered into between the Company and the Investor in December 2016 and completed in March of 2017 (as well as the approximately $1.2 million in financing previously received from the Investor in 2014 and 2015), except that the $7.0M Notes are due and payable on January 1, 2020.
As of the date of this Quarterly Report, the Investor has purchased an aggregate of $1,150,000 in principal amount of $7.0M Notes from the Company under the May 2017 Financing Agreement, as amended to date, of which (a) $500,000 in principal amount of $7.0M Notes are convertible into shares of the Company’s common stock at a conversion price of $0.05 (the “$0.05Notes”); (b) $150,000 in principal amount of $7.0M Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.03 (the “$0.03Notes”); and (c) $500,000 in principal amount of $7.0M Notes, which are (i) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (ii) secured by a mortgage lien on the 26 acre property acquired by the Company during the third quarter of 2017 (the $0.03 Secured Notes”).
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Cash Used in Investing Activities
During 2017 we used cash of $679,825 in investing activities. This amount was spent on the purchase of our 26 acre real property in Lebanon, Oregon, the buildout of location #4 in Salem, Oregon and on furniture and equipment.
During 2016 we used cash of $28,224 in investing activities. A total of $28,224 was spent on furniture and equipment.
Cash Provided by Financing Activities
During 2017 $2,500,000 of convertible debt was issued to provide working capital. The Company used $23,500 to repay convertible debt and $112,829 to repay an equipment note payable and other notes payable.
During 2016 the Company raised a total of $575,000 through the private sale of debt and equity securities and used $52,578 to repay notes payable.
Additional Capital
As of September 30, 2017, we had cash of $285,602 and a working capital deficiency of $1,401,463.
On May 11, 2017, we entered into a financing agreement with an institutional investor (the “Investor”) to provide the Company with up to $5.8 million in convertible note funding through July 31, 2018 (the “May 2017 Financing Agreement”). The May 2011 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding available to the Company thereunder to $6.3 million and to extend the time period for such funding to May 31, 2019 and was additionally amended as of November 15, 2017 to further increase the amount of funding available to the Company thereunder to $7.0 million and to extend the time period for such funding to November 30, 2019.
Funding under the May 2017 Financing Agreement, as amended, takes the form of the offer and sale of Convertible Notes (the “$7.0M Notes”). The $7.0 Notes are substantially similar in form and substance to the $2.1M Notes that were part of the $2.1 million Financing Agreement entered into between the Company and the Investor in December 2016 and completed in March of 2017 (as well as the approximately $1.2 million in financing previously received from the Investor in 2014 and 2015), except that the $7.0M Notes are due and payable on January 1, 2020.
As of the date of this Quarterly Report, the Investor has purchased an aggregate of $1,150,000 in principal amount of $7.0M Notes from the Company under the May 2017 Financing Agreement, as amended to date, of which (a) $500,000 in principal amount of $7.0M Notes are convertible into shares of the Company’s common stock at a conversion price of $0.05 (the “$0.05Notes”); (b) $150,000 in principal amount of $7.0M Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.03 (the “$0.03Notes”); and (c) $500,000 in principal amount of $7.0M Notes, which are (i) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (ii) secured by a mortgage lien on the 26 acre property acquired by the Company during the third quarter of 2017 (the $0.03 Secured Notes”).
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the direction of Chief Executive Officer and Acting Chief Financial Officer (our principal executive, financial and accounting officer), we evaluated our disclosure controls and procedures as of September 30, 2017. Our Chief Executive Officer and Acting Chief Financial Officer (our principal executive, financial and accounting officer) concluded that our disclosure controls and procedures were not effective as of September 30, 2017 for the reasons set forth in our Annual Report on Form 10-K for the year ended 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 Securities Exchange Act of 1934 (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 Chief Executive Officer and Acting Chief Financial Officer (our principal executive, financial and accounting 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 13a15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Financial Officer (our principal executive, financial and accounting 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 Chief Executive Officer and Acting Chief Financial Officer (our principal executive, financial and accounting officer) 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
Changes in Internal Controls
There was no change in our internal controls or in other factors that could affect these controls during the quarter ended September 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. We do not anticipate any changes to our internal controls at this time.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
On June 22, 2016, Daniel A. Goldin and Wally Goldin commenced an action in Oregon Circuit Court, Multnomah County, against the Company, MJAI, its direct majority-owned subsidiary, Craig Frank, our Chairman, President and Chief Executive Officer, William David Jones, a consultant to our Company and BMN Capital Group, LLC (the “Action”). The plaintiffs alleged 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 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 sought in excess of $1.7 million in damages.
The Company believed that not only was the Action without merit, but that it had various counterclaims against the plaintiffs, particularly Daniel L. Goldin. The Company defended against the Action and pursued its counterclaims both in the Action and in a separate lawsuit commenced against the plaintiffs in the U.S. District Court for the Southern District of Florida in which the Company alleged fraud by the plaintiffs and sought damages and the return of the common stock issued to the Company’s treasury
In September 2017, the parties entered in a settlement agreement, pursuant to which Mr. Goldin waived any rights to a total of 1.2 million shares of KAYS stock (200,000 shares of our common stock which were already issued in his name and an additional 1,000,000 shares which were to be issued) and $40,000 in cash compensation payable to him under the employment agreement. The Company paid the plaintiffs the sum of $247,500, in exchange for the return of the stock and the waiver of claims against any further stock or cash, all litigation was dismissed by the parties and the parties exchanged mutual releases.
In entering into the settlement agreement, the Company also took into consideration that legal fees and litigation costs incurred in proceeding further might very well exceed any judgment that would be awarded to the Company and the other defendants, and that even if a judgment were awarded, that there was significant doubt of the collectability of any such judgment from the Goldins.
Item 1A. Risk Factors.
See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 11, 2017, we entered into a financing agreement with an institutional investor (the “Investor”) to provide the Company with up to $5.8 million in convertible note funding through July 31, 2018 (the “May 2017 Financing Agreement”). The May 2011 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding available to the Company thereunder to $6.3 million and to extend the time period for such funding to May 31, 2019 and was additionally amended as of November 15, 2017 to further increase the amount of funding available to the Company thereunder to $7.0 million and to extend the time period for such funding to November 30, 2019.
Funding under the May 2017 Financing Agreement, as amended, takes the form of the offer and sale of Convertible Notes (the “$7.0M Notes”). The $7.0 Notes are substantially similar in form and substance to the $2.1M Notes that were part of the $2.1 million Financing Agreement entered into between the Company and the Investor in December 2016 and completed in March of 2017 (as well as the approximately $1.2 million in financing previously received from the Investor in 2014 and 2015), except that the $7.0M Notes are due and payable on January 1, 2020.
As of the date of this Quarterly Report, the Investor has purchased an aggregate of $1,150,000 in principal amount of $7.0M Notes from the Company under the May 2017 Financing Agreement, as amended to date, of which (a) $500,000 in principal amount of $7.0M Notes are convertible into shares of the Company’s common stock at a conversion price of $0.05 (the “$0.05Notes”); (b) $150,000 in principal amount of $7.0M Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.03 (the “$0.03Notes”); and (c) $500,000 in principal amount of $7.0M Notes, which are (i) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (ii) secured by a mortgage lien on the 26 acre property acquired by the Company during the third quarter of 2017 (the $0.03 Secured Notes”).
Under the May 2017 Financing Agreement, as amended to date, the Investor has the right to purchase another tranche of $0.03 Notes up to an aggregate of $1,050,000 in principal amount, at any time and from time to time through March 31, 2018.
Provided the Investor has fulfilled its obligation to purchase the additional $1,050,000 in principal amount of $0.03 Notes from the Company on or before September 30, 2018, the Investor will have the right to purchase another tranche of $0.05 Notes up to an aggregate of $1,000,000 in principal amount, at any time and from time to time through July 31, 2018.
Provided the Investor has fulfilled its obligation to purchase the additional $1,000,000 in principal amount of $0.05 Notes from the Company on or before March 31, 2018, the Investor will have the right to purchase up to an aggregate of $1,600,000 in principal amount of $7.0M Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.08 per share, at any time and from time to time through January 31, 2019 (the “$0.08 Notes”).
Provided the Investor has fulfilled its obligation to purchase all $1,600,000 in principal amount of $0.08 Notes from the Company on or before January 31, 2019, the Investor will have the right to purchase up to an additional $2,200,000 in principal amount of $7.0N Notes from the Company at any time and from time to time through November 30, 2019, which Notes will be convertible into shares of common stock at a conversion price of $0.11.
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.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Other Information.
None
Item 6. Exhibits
| Exhibit No. | Description of Exhibit | |
10.1 |
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31.1 |
|
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| 32.1 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 20, 2017
KAYA HOLDINGS, INC.
By: /s/ Craig Frank
Craig Frank, Chairman, President, Chief Executive Officer and Acting Chief Financial Officer
(Principal Executive, Financial and Accounting Officer)
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