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Annual report with a comprehensive overview of the company

10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

For the fiscal year ended December 31, 2015

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 000-1321002

 
AGRITEK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

 

     
Delaware   20-1321002
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
777 Brickell Ave. Suite 500    
Miami, FL   33131
(Address of principal executive offices)   (Zip Code)

 

 
(561) 249-6511
(Registrant’s telephone number, including area code)

 

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

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value

 

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

 

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

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑

 

 
 

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

 

Large accelerated filer ☐ Accelerated filer ☐
   
Non-accelerated filer☐ (Do not check if a smaller reporting company) Smaller reporting company ☑

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $836,563 on June 30, 2015.

 

The number of shares outstanding of the registrant’s $0.0001 par value Common Stock as of May 13, 2016, was 299,106,678 shares.

 

 
 

 

Table of Contents

 

 

  PART I Page
     
Item 1 Business 4
Item 1A Risk Factors 9
Item 1B Unresolved Staff Comments 13
Item 2 Properties 13
Item 3 Legal Proceedings 14
Item 4 Mine Safety Disclosures 14
     
  PART II  
     
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 14
Item 6 Selected Financial Data 17
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A Quantitative and Qualitative Disclosures About Market Risk 24
Item 8 Financial Statements and Supplementary Data 24
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24
Item 9A Controls and Procedures 24
Item 9B Other Information 25
     
  PART III  
     
Item 10 Directors, Executive Officers and Corporate Governance 26
Item 11 Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 29
Item 13 Certain Relationships and Related Transactions, and Director Independence 29
Item 14 Principal Accountant Fees and Services 31
     
  PART IV  
     
Item 15 Exhibits and Financial Statement Schedules 32
  Signatures 32

   

 
 

 

FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This report and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “project”, “believe”, “anticipate”, “plan”, “expect”, “estimate”, “intend”, “should”, “would”, “could”, or “may”, or other such words, verbs in the future tense and words and phrases that convey similar meaning and uncertainty of future events or outcomes to identify these forward–looking statements. There are a number of important factors beyond our control that could cause actual results to differ materially from the results anticipated by these forward–looking statements. While we make these forward–looking statements based on various factors and using numerous assumptions, you have no assurance the factors and assumptions will prove to be materially accurate when the events they anticipate actually occur in the future. Factors that could cause our actual results of operations and financial condition to differ materially are discussed in greater detail under Item 1A, “Risk Factors” of this annual report on Form 10-K.

 

The forward–looking statements are based upon our beliefs and assumptions using information available at the time we make these statements. We caution you not to place undue reliance on our forward–looking statements as (i) these statements are neither predictions nor guaranties of future events or circumstances, and (ii) the assumptions, beliefs, expectations, forecasts and projections about future events may differ materially from actual results. We undertake no obligation to publicly update any forward–looking statement to reflect developments occurring after the date of this report.

 

 

PART I

 

ITEM 1. DESCRIPTION OF BUSINESS.

 

General Business Development

 

Corporate History

 

Agritek Holdings, Inc. (referred to hereafter as “AGTK,” or, the “Company”), was initially incorporated under the laws of the State of Delaware in 1997 under the name Easy Street Online, Inc.

 

In 1997, the Company changed its name to Frontline Communications Corp. (“Frontline”) and operated as a regional Internet service provider (“ISP”) providing Internet access, web hosting, website design, and related services to residential and small business customers throughout the Northeast United States and, through a network partnership agreement, Internet access to customers nationwide.

 

On April 3, 2003, the Company acquired Proyecciones y Ventas Organizadas, S.A. de C.V. (“Provo Mexico”) and in December 2003 the Company changed the name to Provo International Inc. (“Provo”).

 

In 2008, Provo changed its name to Ebenefits Direct, Inc., which, through its wholly-owned subsidiary, L.A. Marketing Plans, LLC, engaged in the business of direct response marketing. The Company’s principal business was to market and sell non-insurance healthcare programs designed to complement medical insurance products and to provide savings for those who cannot afford or qualify for traditional health insurance products.

 

On October 14, 2008, Ebenefits Direct, Inc. changed its name to Seraph Security, Inc. (“Seraph”).

 

On April 25, 2009, Seraph acquired Commerce Online Technologies, Inc., a credit and debit card processing company.

 

On May 20, 2009, Seraph Security, Inc. changed its name to Commerce Online, Inc. to more accurately reflect its core business of merchant processing, and financial services.

 

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As of February 18, 2010, Commerce Online, Inc. changed its name to Cannabis Medical Solutions, Inc. (“CMSI”) as a provider of merchant processing payment technologies for the medical marijuana and wellness sector.

 

On March 8, 2010, the Company completed the acquisition of 800 Commerce, Inc. (“800 Commerce”) a Florida Corporation incorporated by the Company’s Chief Executive Officer. The company issued 1,000,000 shares of common stock to 800 Commerce for all the issued and outstanding stock of 800 Commerce, Inc.

 

In June 2010, 31,288,702 shares of common stock were issued as dividend shares (the “dividend”) to all existing shareholders of common stock of record.

 

On June 14, 2011, Cannabis Medical Solutions, Inc. changed its merchant name to MediSwipe Inc. (“MWIP”) as a result of its focus on the processing and financial services related to medical marijuana business.

 

On June 26, 2013, the Company formed American Hemp Trading Company, a wholly owned subsidiary.

 

On June 26, 2013, the Company formed Agritech Innovations, Inc. (“AGTI”), a wholly owned subsidiary. On September 3, 2013, AGTI changed its name to Agritech Venture Holdings, Inc. (“AVH”). 

 

On November 12, 2013, the Board of Directors of the Company approved a 1-for-10 reverse stock split (the “Reverse Stock Split”) and a decrease in the authorized common stock of the Company to 250,000,000. Pursuant to the Reverse Stock Split, each 10 shares of the Company’s common stock automatically converted into one share of Company common stock.

 

On November 12, 2013, the Financial Industry Regulatory Authority (“FINRA”) approved the Reverse Stock Split with an effective date of December 11, 2013. All the share amounts in this annual report on Form 10-K reflect the Reverse Stock Split.

 

On April 23, 2014, MWIP changed its name to Agritek Holdings, Inc. (“AGTK”) to more properly reflect the Company’s current business model.

 

On May 27, 2014, AVH changed its names to Agritek Venture Holdings, Inc. (“AVHI”).

 

On August 27, 2014, American Hemp Trading Company changed its name to Prohibition Products, Inc. (“PPI”)

 

Unless otherwise noted, references in this Form 10-K to “Seraph,” “Commerce Online, Inc.,” “Cannabis Medical Solutions,” “Mediswipe,” the “Company,” “we,” “our” or “us” means Agritek Holdings, Inc.

 

Description of Business

 

Agritek’s business plan is to acquire and lease real estate, then lease or sub-lease the real estate to licensed marijuana operators, including providing complete turnkey growing space and related facilities to licensed marijuana growers and dispensary owners. Additionally, the Company offers a variety of services and product lines to the medicinal marijuana sector, including the distribution of hemp- based nutritional products and a line of innovative solutions for electronically processing merchant transactions.

The Company does not grow, harvest, distribute or sell marijuana or any substances that violate the laws of the United States of America.

Real Estate Leasing

 

Our real estate leasing business primarily includes the acquisition and leasing of cultivation space and related facilities to licensed marijuana growers and dispensary owners for their operations. Management anticipates that these facilities will range in size from 5,000 to 50,000 square feet. These facilities will only be leased to tenants that possess the requisite state licenses to operate cultivation facilities. The leases with the tenants will provide certain requirements that permit us to continually evaluate our tenants’ compliance with applicable laws and regulations.

 

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As of the date of this report, we are a deed holder of one cultivation property that is located in a suburb of Pueblo, Colorado. The property consists of approximately 80 acres of land zoned for cultivating cannabis.  We are evaluating strategic options for this property.

 

On March 18, 2014, in conjunction with a land purchase of 80 acres in Pueblo County, Colorado, the Company paid $36,000 cash and entered into a promissory note in the amount of $85,750. The Company plans to lease individual parcels of the 80 acre parcel to fully-licensed and compliant growers and dispensaries within the regulated medicinal and recreational market of Colorado. The Company plans to receive rents and management fees for providing infrastructure, water, electricity, equipment leasing and security services to potential tenants. In November 2015, the Company was made aware that the land transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company was a party to the land purchase, however, it was recently discovered the second party to the land contract never filed the original quit claim deed on behalf of the Company, even though a copy of the notarized quit claim deed was sent to the Company. To date, the Company has paid a total of $47,438 ($36,000 at closing) and is on the deed of trust of the property. Accordingly, until the deed is properly recorded, the Company reduced the remaining balance of the note payable for the acquisition of the land of $74,313 and recorded a reserve allowance for the remaining balance of the asset of $54,490.

 

On April 28, 2014, the Company entered into a lease agreement for 20 acres of an agricultural farming facility located in South Florida, following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing low grade marijuana specifically for the use of treating epilepsy and cancer patients. Pursuant to the lease agreement, the Company has a first right of refusal to purchase the property for three years.

 

On July 11, 2014, the Company signed a 10- year lease agreement for 40 acres in Pueblo, Colorado, now bringing total land holdings in the country’s first recreational cannabis state to over 120 acres zoned for its planned agricultural and cultivation facilities located in Pueblo County, Colorado. The lease requires monthly rent payments of $10,000 during the first year and is subject to a 2% annual increase over the life of the lease. The lease also provides rights to 50 acres of certain tenant water rights for $50,000 annually plus cost of approximately $2,400 annually. The water rights ensure the Company’s non-interruption of operations on behalf of new tenants qualified as fully registered and licensed grow and manufacturing operations.

 

We plan to continue to acquire additional commercial real estate and lease land to licensed participants in the cannabis industry. These participants include, cultivators, dispensary owners, product packaging, lighting, cultivation supplies, and financial services. In exchange for certain services that may be provided to these tenants, we expect to receive rental income in the form of cash. In certain cases, we may acquire equity interests or provide debt capital to these businesses.

 

Equipment leasing and financing

 

We will expand our division to lease cultivation equipment and facilities to customers in the cannabis industry. We expect we will enter into sale lease-back transactions of grow lights, tenant improvements and other grow equipment. Since Colorado State law does not allow entities operating under a cannabis license to pledge the assets or the license of the cannabis operation for any type of general borrowing activity, we intend to provide loans to individuals and businesses in the cannabis industry on an unsecured basis.  Equipment will only be leased to tenants that possess the requisite state licenses to operate such facilities. The leases with the tenants will provide certain requirements that permit us to continually evaluate its tenants’ compliance with applicable laws and regulations.

 

We are exploring lending opportunities in Oregon, Washington, Colorado, and Arizona. Our finance strategy will include making direct term loans and providing revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products.  These loans will generally be secured to the maximum extent permitted by law.  We believe there is a significant demand for this financing.  We are pursuing other finance services including customized finance, capital formation, and banking, for participants in the cannabis industry.

 

Consulting and Advisory

 

Through AVH we offer comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, logistical support, facility design and building services.  Our business plan is based on the future growth of the regulated cannabis market in the United States. We will provide general advisory services for business development, facilities design and construction, cultivation and retail operations, marketing and the improvement and expansion of existing operations.

 

6
 

Through December 31, 2015, we operated in one reportable segment, wholesale sales.  

 

Employees

 

Other than the Company’s sole officer and director, the Company does not have any full-time employees. The Company relies on several independent contractors and other agreements it has with other companies to provide the services needed. Each management hire has been carefully selected to address immediate needs in particular functional areas, but also with consideration of the Company’s future needs during a period of expected rapid growth and expansion. Value is placed not only on outstanding credentials in specific areas of functional expertise, but also on cross-functionality, a strong knowledge of content acquisition and distribution, along with hands-on experience in scaling operations from initial beta and development stage through successful commercial deployment.

 

Sales and Marketing Strategy


Agritek’s plan is to gain market share within the medicinal and recreational cannabis industry. Agritek intends to accomplish this by providing infrastructure and turnkey solutions to operators and licensees within legal jurisdictions. Agritek canprovide these operations support with the licensing process, site selection, agriculture planning, build out, equipment leasing/financing, security and oversight by operational expertise. The Company additionally has expanded its product offerings to include a proprietary brand of vaporizers and accessories under its wholly owned subsidiary Prohibition Products Inc. and is planning to enter the edibles and nutraceutical markets through third party licenses.

 

Competition

 

Currently, there are a number of other companies that provide similar products and/or services, such as hydroponic supplies, hemp products, leasing of real estate and consulting services to the cannabis industry. In the future we fully expect that other companies will recognize the value of ancillary businesses serving the cannabis industry and enter into the marketplace as competitors.

 

The cannabis industry in the United States is highly fragmented, rapidly expanding and evolving. The industry is characterized by new and potentially disruptive or conflicting legislation propounded on a state-by-state basis. Our competitors may be local or international enterprises and may have financial, technical, sales, marketing and other resources greater than ours. These companies may also compete with us in recruiting and retaining qualified personnel and consultants.

 

Our competitive position will depend on our ability to attract and retain qualified licensees in regulated jurisdictions, consultants and advisors with industry depth, and talented managerial, operational and other personnel. Our competitive position will also depend on our ability to develop and acquire effective proprietary products and solutions, personal relationships of our executive officers and directors, and our ability to secure adequate capital resources. We compete to attract and retain customers of our services. We expect to compete in this area on the basis of price, regulatory compliance, vendor relationships, usefulness, availability, and ease of use of our services.

 

A few of the companies competing within the recreational cannabis sector including:  

 

Medbox, Inc. (OTCB: MDBX) is seeking to become a dispensary and cultivation infrastructure and licensing specialist, patented technology provider, and partner to the cannabis industry.

 

Terra Tech Corp (OTCB: TRTC) is integrating the best of the natural world with technology to create sustainable renewable solutions for food production, indoor cultivation, and agricultural research and development.

 

Cannabics Pharmaceuticals, Inc. (OTCQB: CNBX) is an emerging drug development company focused on the development and commercialization of advanced drugs, therapies, food supplements and administration routes based on the wide range of active ingredients found in diverse and unique strains of the Cannabis plant.

 

7
 

Government Regulation

 

As of March 31, 2016, there are 23 states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation. Conversely, the federal government regulates drugs through the Controlled Substances Act (“CSA”), which does not recognize the difference between medical and recreational use of cannabis. Under federal law, cannabis is treated like every other controlled substance, such as cocaine and heroin. The federal government places every controlled substance in a schedule, in principle according to its relative potential for abuse and medicinal value. Under the CSA, cannabis is classified as a Schedule I drug, which means that the federal government views medical cannabis as highly addictive and having no medical value. Pursuant to the CSA, it is unlawful for any person (1) to sell or offer for sale drug paraphernalia; (2) to use the mails or any other facility of interstate commerce to transport drug paraphernalia; or (3) to import or export drug paraphernalia.

The extent to which the regulation of drug paraphernalia under the CSA is applicable to our business and the sale of our product is found in the definition of drug paraphernalia. Drug paraphernalia means any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing processing, preparing, injecting ingesting, inhaling or otherwise introducing into the human body a controlled substance, possession of which is unlawful. Our products are primarily designed for general agricultural use.

 

In an effort to provide guidance to federal law enforcement, the Department of Justice (the “DOJ”) has issued Guidance Regarding Marijuana Enforcement to all United States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole (the “Cole Memo”) on August 29, 2013. Each memorandum provides that the DOJ is committed to enforcement of the CSA but the DOJ is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent and rational way.

The Cole Memo provides updated guidance to federal prosecutors concerning marijuana enforcement in light of state laws legalizing medical and recreational marijuana possession in small amounts. The memorandum sets forth certain enforcement priorities that are important to the federal government:

  Distribution of marijuana to children;

 

  Revenue from the sale of marijuana going to criminals;

 

  Diversion of medical marijuana from states where is legal to states where it is not;

 

  Using state authorized marijuana activity as a pretext of other illegal drug activity;

 

  Preventing violence in the cultivation and distribution of marijuana;

 

  Preventing drugged driving;

 

  Growing marijuana on federal property; and

 

  Preventing possession or use of marijuana on federal property.

The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but relied on state and local law enforcement to address marijuana activity. If the Department of Justice (the “DOJ”) Guidance Regarding Marijuana Enforcement to all United States Attorneys from Deputy Attorney General David Ogden on October 19, 2009, and from Deputy Attorney General James Cole on June 29, 2011 and again from Deputy Attorney General James Cole on August 29, 2013, were reversed and it was determined that the Company violated the regulation of drug paraphernalia under the CSA, then the Company would need to make appropriate modifications to its products to avoid violation of the CSA. Until Congress amends the CSA with respect to medical marijuana, there is a risk that federal authorities may enforce current federal law. Active enforcement of the current federal regulatory position on cannabis may thus indirectly, adversely and materially affect revenues and profits of the Company. The risk of strict enforcement of the CSA in light of congressional activity, judicial holdings and stated federal policy remains uncertain.

8
 

ITEM 1A – RISK FACTORS

 

You should carefully consider the risks described below, as well as other information provided to you in this document, including information in the section of this document entitled “Forward-Looking Statements.” The risks and uncertainties described below are not the only ones facing the Company. If any of the following risks actually occur, the Company’s business, financial condition or results of operations could be materially adversely affected.

 

Investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. Our business, financial condition and/or results of operation may be materially adversely affected by the nature and impact of these risks. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

Risk Related to Our Company

 

Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.

 

We incurred a net loss of $2,074,161 and $2,012,102 for the years ending December 31, 2015 and 2014, respectively. Because of our continued operating losses, negative cash flows from operations and working capital deficit, in their report on our financial statements for the year ended December 31, 2015, our independent auditors included an explanatory paragraph regarding their substantial doubt about our ability to continue as a going concern. We will continue to experience net operating losses in the foreseeable future. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loan from various financial institutions where possible. Our continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.

 

Federal regulation and enforcement may adversely affect the implementation of medical marijuana laws and regulations may negatively impact our revenues and profits.

 

Currently, there are 23 states plus the District of Columbia that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation. Conversely, under the Controlled Substances Act (the “CSA”), the policy and regulations of the Federal government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited. Until Congress amends the CSA with respect to medical marijuana, there is a risk that federal authorities may enforce current federal law, and we may be deemed to be facilitating the selling or distribution of drug paraphernalia in violation of federal law. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect revenues and profits of the Company. The risk of strict enforcement of the CSA in light of congressional activity, judicial holdings and stated federal policy remains uncertain.

 

Federal authorities have not focused their resources on such tangential or secondary violations of the Act, nor have they threatened to do so, with respect to the leasing of real property or the sale of equipment that might be used by medical cannabis gardeners, or with respect to any supplies marketed to participants in the emerging medical cannabis industry. We are unaware of such a broad application of the CSA by federal authorities, and we believe that such an attempted application would be unprecedented.

 

We depend on third party providers for a reliable Internet infrastructure and the failure of these third parties, or the Internet in general, for any reason would significantly impair our ability to conduct our business.

 

We outsource all of our data center facility management to third parties who host the actual servers and provide power and security in multiple data centers in each geographic location. These third party facilities require uninterrupted access to the Internet. If the operation of our servers is interrupted for any reason, including natural disaster, financial insolvency of a third party provider, or malicious electronic intrusion into the data center, our business would be significantly damaged. If either a third party facility failed, or our ability to access the Internet was interfered with because of the failure of Internet equipment in general or we become subject to malicious attacks of computer intruders, our business and operating results will be materially adversely affected.

9
 

The gathering, transmission, storage and sharing or use of personal information could give rise to liabilities or additional costs of operation as a result of governmental regulation, legal requirements, civil actions or differing views of personal privacy rights.

 

We transmit and plan to store a large volume of personal information in the course of providing our services. Federal and state laws and regulations govern the collection, use, retention, sharing and security of data that we receive from our customers and their users. Any failure, or perceived failure, by us to comply with U.S. federal or state privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business, operating results and financial condition. Additionally, we may also be contractually liable to indemnify and hold harmless our customers from the costs or consequences of inadvertent or unauthorized disclosure of their customers’ personal data which we store or handle as part of providing our services.

 

The interpretation and application of privacy, data protection and data retention laws and regulations are currently unsettled particularly with regard to location-based services, use of customer data to target advertisements and communication with consumers via mobile devices. Such laws may be interpreted and applied inconsistently from country to country and inconsistently with our current data protection policies and practices. Complying with these varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business, operating results or financial condition.

 

As privacy and data protection have become more sensitive issues, we may also become exposed to potential liabilities as a result of differing views on the privacy of personal information. These and other privacy concerns, including security breaches, could adversely impact our business, operating results and financial condition.

 

In the U.S., we have voluntarily agreed to comply with wireless carrier technological and other requirements for access to their customers’ mobile devices, and also trade association guidelines and codes of conduct addressing the provision of location-based services, delivery of promotional content to mobile devices and tracking of users or devices for the purpose of delivering targeted advertising. We could be adversely affected by changes to these requirements, guidelines and codes, including in ways that are inconsistent with our practices or in conflict with the rules or guidelines in other jurisdictions.

 

We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. During the fourth quarter of fiscal year 2015, management identified material weaknesses in our internal control over financial reporting as discussed in Item 9A of this Annual Report on Form 10-K. As a result of these material weaknesses, our management concluded that our internal control over financial reporting was not effective based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-An Integrated Framework. We are planning to engage in developing a remediation plan designed to address these material weaknesses. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and legal fees and shareholder litigation.

 

We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.

 

We monitor our capital adequacy on an ongoing basis. To the extent that our funds are insufficient to fund future operating requirements, we may need to raise additional funds through corporate finance transactions or curtail our growth and reduce our liabilities. Any equity, hybrid or debt financing, if available at all, may be on terms that are not favorable to us. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition and operating results could be adversely affected.

 

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Risks Relating to Ownership of Our Common Stock

 

Although there is presently a market for our common stock, the price of our common stock may be extremely volatile and investors may not be able to sell their shares at or above their purchase price, or at all. We anticipate that the market may be potentially highly volatile and may fluctuate substantially because of:

 

  Actual or anticipated fluctuations in our future business and operating results;

 

  Changes in or failure to meet market expectations;

 

  Fluctuations in stock market price and volume

 

As a public company, we will incur substantial expenses.

 

The U.S. securities laws require, among other things, review, audit, and public reporting of our financial results, business activities, and other matters. Recent SEC regulation, including regulation enacted as a result of the Sarbanes-Oxley Act of 2002, has also substantially increased the accounting, legal, and other costs related to becoming and remaining an SEC reporting company. If we do not have current information about our Company available to market makers, they will not be able to trade our stock. The public company costs of preparing and filing annual and quarterly reports, and other information with the SEC and furnishing audited reports to stockholders, will cause our expenses to be higher than they would be if we were privately-held. These increased costs may be material and may include the hiring of additional employees and/or the retention of additional advisors and professionals. Our failure to comply with the federal securities laws could result in private or governmental legal action against us and/or our officers and directors, which could have a detrimental effect on our business and finances, the value of our stock, and the ability of stockholders to resell their stock.

 

FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.

 

“FINRA” has adopted rules that relate to the application of the SEC’s penny stock rules in trading our securities and require that a broker/dealer have reasonable grounds for believing that the investment is suitable for that customer, prior to recommending the investment. Prior to recommending speculative, low priced securities to their non-institutional customers, broker/dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker/dealers to recommend that their customers buy our common stock, which may have the effect of reducing the level of trading activity and liquidity of our common stock. Further, many brokers charge higher transactional fees for penny stock transactions. As a result, fewer broker/dealers may be willing to make a market in our common stock, reducing a shareholder’s ability to resell shares of our common stock.

 

The Company’s common stock is currently deemed to be “penny stock”, which makes it more difficult for investors to sell their shares.

 

The Company’s common stock is currently subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If the Company remains subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for the Company’s securities. If the Company’s securities are subject to the penny stock rules, investors will find it more difficult to dispose of the Company’s securities.

 

11
 

We have raised capital through the use of convertible debt instruments that causes substantial dilution to our stockholders.

 

Because of the size of our Company and its status as a “penny stock” as well as the current economy and difficulties in companies our size finding adequate sources of funding, we have been forced to raise capital through the issuance of convertible notes and other debt instruments. These debt instruments carry favorable conversion terms to their holders of up to 50% discounts to the market price of our common stock on conversion and in some cases provide for the immediate sale of our securities into the open market. Accordingly, this has caused dilution to our stockholders in 2014 and may for the foreseeable future. As of December 31, 2015, we had approximately $472,514 in convertible debt and potential convertible debt outstanding. This convertible debt balance as well as additional convertible debt we incur in the future will cause substantial dilution to our stockholders.

 

Because we are quoted on the OTCQB instead of an exchange or national quotation system, our investors may have a tougher time selling their stock or experience negative volatility on the market price of our common stock.

 

Our common stock is quoted on the OTCQB. The OTCQB is often highly illiquid, in part because it does not have a national quotation system by which potential investors can follow the market price of shares except through information received and generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of volatility for securities that are quoted on the OTCQB as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.

 

We do not intend to pay dividends.

 

We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.

 

Our operating history and lack of profits which could lead to wide fluctuations in our share price. You may be unable to sell your common shares at or above your purchase price, which may result in substantial losses to you. The market price for our common shares is particularly volatile given our status as a relatively unknown company with a small and thinly traded public float.

 

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.

12
 

 

Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.

 

Should one or more of the foregoing risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable to a smaller reporting company. 

 

ITEM 2. DESCRIPTION OF PROPERTY

 

Office Space

 

Effective on April 1, 2013, the Company entered into a three year agreement to rent approximately 2,500 square feet of office space (the “Office Lease”) in Detroit, Michigan. The monthly rent under this lease was $2,200 per month. Effective August 28, 2013, the Company and the landlord amended the Office Lease allowing the Company to move to a new location in downtown Detroit. The new lease was for 3,657 square feet for monthly rent of $3,047. In November 2013, the Company was notified that the owner of the building (the Company’s landlord) was delinquent in its obligations to the mortgage holder of the building. In January 2014, due to the uncertainty of the Company’s Office Lease in Detroit, Michigan, the Company decided to relocate its administrative offices to West Palm Beach, Florida. Effective April 1, 2014, the Company entered into a rent sharing agreement for the use of 1,300 square feet with a company controlled by the Company’s CFO. The Company has agreed to pay $1,350 per month for the space. The Company terminated the agreement in September 2015.

 

In April 2014, the Company entered into a 10-year sublease agreement for the use of up to 7,500 square feet with a Colorado based oncology clinical trial and drug testing company and facility presently doing cancer research and testing for established pharmaceutical companies seeking FDA approval for new drugs. Pursuant to the lease, as amended, the Company has agreed to pay $3,500 per month for the space, and it will be utilized to market, sell and distribute products to Colorado dispensaries. The Company is currently in default of the lease.

 

Leased Properties

 

On April 28, 2014, the Company executed and closed a 10 year lease agreement for 20 acres of an agricultural farming facility located in South Florida following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing low grade marijuana specifically for the use of treating epilepsy and cancer patients.  Pursuant to the lease agreement, the Company maintains a first right of refusal to purchase the property for three years. The Company prepaid the first year lease amount of $24,000. The Company is currently in default of the lease agreement, as rents have not been for the second year of the lease beginning May 2015.

 

On July 11, 2014, the Company signed a ten year lease agreement for an additional 40 acres in Pueblo, Colorado. The lease requires monthly rent payments of $10,000 during the first year and is subject to a 2% annual increase over the life of the lease. The lease also provides rights to 50 acres of certain tenant water rights for $50,000 annually plus cost of approximately $2,400 annually. The Company paid the $50,000 in July 2014. The Company is currently in default of the lease agreement, as rents have not been paid since February 2015.

  

13
 

ITEM 3. LEGAL PROCEEDINGS.

 

On March 2, 2015, the Company, the Company’s CEO and the Company’s CFO at the time were named in a civil complaint filed by Erick Rodriguez in the District Court in Clark County, Nevada. The complaint alleges that Mr. Rodriguez never received 250,000 shares of Series B preferred stock that were initially approved by the Board of Directors in 2012. Mr. Rodriguez resigned in June 2013, and the Company cancelled the issuance of the shares to Mr. Rodriguez on the Company’s books and records.

 

On May 5, 2015, the Company’s CEO and the Company’s former CFO were named in a civil complaint filed by Justin Braune in the Circuit Court of Palm Beach County, Florida. The complaint alleges that the Company has not delivered to Mr. Braune certain stock certificates. Mr. Braune resigned on November 4, 2015, and his resignation letter as filed on Form 8-K with the SEC on November 9, 2015, included the statement from Mr. Braune that he was cancelling these certificates.

  

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s common stock is traded in the over-the-counter market, and quoted on the OTCQB tier of the OTC Markets Group Inc. under the symbol “AGTK.”

 

(a) Market Information

 

The following table sets forth for the periods indicated the high and low bid quotations for our common stock. These quotations represent inter-dealer quotations, without adjustment for retail markup, markdown, or commission and may not represent actual transactions.

 

Period   High    Low 
Fiscal Year 2015          
First Quarter (January 1, 2015 – March 31, 2015)  $0.064   $0.017 
Second Quarter (April 1, 2015 – June 30, 2015)  $0.0234   $0.007 
Third Quarter (July 1, 2015 – September 30, 2015)  $0.0089   $0.0015 
Fourth Quarter (October 1, 2015 – December 31,2015)  $0.0022   $0.0008 
           
Fiscal Year 2014          
First Quarter (January 1, 2014 – March 31, 2014)  $0.56   $0.20 
Second Quarter (April 1, 2014 – June 30, 2014)  $0.42   $0.22 
Third Quarter (July 1, 2014 - September 30, 2014)  $0.26   $0.09 
Fourth Quarter (October 1, 2014 – December 31, 2014)  $0.13   $0.05 

 

14
 

(b) Holders

 

The number of record holders of our common stock as of March 31, 2016 was approximately 256. This excludes shareholders who hold their stock in street name. The Company estimates that there are over 10,000 stockholders who hold their shares of common stock in street name.

 

(c) Dividends

 

The Company did not declare any cash dividends for the years ended December 31, 2015 and 2014. Our Board of Directors does not intend to distribute any cash dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.

 

(d) Securities authorized for issuance under equity compensation plans

 

None

 

Recent Sales of Unregistered Equity Securities

 

During the year ended December 31, 2015, the Company issued the following shares of common stock upon the conversions of portions of the 2014 Company Note and portions of the 2015 Convertible Notes:

 

Date 

Principal

Conversion

 

Interest

Conversion

 

Total

Conversion

 

Conversion

Price

 

Shares

Issued

  Issued to
 1/3/2015  $65,460   $9,540   $75,000   $0.045    1,665,445   Tonaquint
 1/28/2015  $54,123   $8,377   $62,500   $0.0334    1,869,187   Tonaquint
 2 20/2015  $55,901   $9,099   $65,000   $0.0244    2,668,309   Tonaquint
 3/13/2015  $60,000   $—     $60,000   $0.0244    2,463,045   Tonaquint
 3/31/2015  $66,555   $8,445   $75,000   $0.0125    5,985,634   Tonaquint
 5/5/2015  $66,731   $8,269   $75,000   $0.0125    6,008,171   Tonaquint
 6/2/2015  $67,277   $7,723   $75,000   $0.0095    7,917,238   Tonaquint
 6/29/2015  $67,483   $7,517   $75,000   $0.0055    13,678,643   Tonaquint
 7/29/2015  $29,368   $7,262   $36,630   $0.003663    10,000,000   Tonaquint
 8/13/2015  $27,473   $—     $27,473   $0.003663    7,500,000   Tonaquint
 9/3/2015  $10,000   $—     $10,000   $0.0019    5,263,158   Vis Vires
 9/10/2015  $19,800   $—     $19,800   $0.00083    16,500,000   Vis Vires
 10/1/2015  $2,750   $112   $2,862   $0.000812    3,524,027   LG
 10/9/2015  $4,500   $183   $4,683   $0.000638    7,340,834   Service
 10/12/2015  $3,500   $150   $3,650   $0.000812    4,494,567   GW
 10/13/2015  $5,000   $216   $5,216   $0.00087    5,995,275   LG
 10/16/2015  $10.549   $13,924   $24,473   $0.001003    24,400,000   Tonaquint
 11/6/2015  $5,500   $265   $5,765   $0.000638    9,036,379   LG
 11/16/2015  $14,005   $6,792   $20,797   $0.001    21,730,000   Tonaquint
     $635,975   $87,873   $723,848         158,039,912    

 

In addition to the above during the year ended December 31, 2015, the Company:

 

On October 14, 2015, the Company issued 12,500,000 shares of common stock to Mr. Friedman for services. The Company valued the shares of common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015.

 

15
 

On April 14, 2015, the Company appointed Dr. Stephen Holt to the Advisory Board of the Board of Directors of the Company. The Company issued 5,000,000 shares of restricted common stock to Dr. Holt for his appointment.

 

On March 20, 2015, the Company issued 15,000,000 shares of common stock to the Company’s CEO in connection with an employment and board of director’s agreement naming Mr. Braune as CEO, President and a member of our Board of Directors. The shares of common stock were to vest as follows: 5,000,000, shares on the six month anniversary of the Agreement and 10,000,000 shares on the one year anniversary of the Agreement. Mr. Braune resigned from the board of directors and as CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation.

 

In January 2014, the Company issued in the aggregate 8,467,388 shares of common stock to Typenex upon the conversion of $523,564 of the Company Note and accrued and unpaid interest of $3,716. The shares were issued at approximately $0.06227 per share.

 

On January 13, 2014, the Company issued 545,454 shares of common stock to Venture Equity upon the conversion of $60,000 of accrued management fees. The shares were issued at $0.11 per share, the market price of the common stock on December 31, 2013.

 

On January 14, 2014, the Company issued 2,460,968 shares of common stock upon the conversion of 100,000 shares of Class B Preferred Stock.

 

On January 30, 2014, February 3, 2014 and February 5, 2014, the Company issued in the aggregate 369,420 shares of common stock to Asher upon the conversion of $65,000 of the 2013 Notes and accrued and unpaid interest of $2,600. The shares were issued at approximately $0.18299.

 

In March 2014, the Company issued in the aggregate 843,654 shares of common stock to Typenex upon the conversion of $116,611 of the Company note and accrued and unpaid interest. The shares were issued at approximately $0.1382 per share.

 

On March 17, 2014, the Company issued 4,312,420 shares of common stock upon the conversion of 150,000 shares of Class B Preferred Stock.

 

On March 31, 2014, the Company issued 56,948 shares of common stock to Jayme Canton upon the conversion of $25,000 of accrued stock compensation.

 

On April 17, 2014, the Company issued 188,088 shares of common stock in satisfaction of $36,000 of the October 2013 Asher Note. The shares were issued at approximately $0.19 per share.

 

On April 20, 2014, the Company issued 202,867 shares of common stock in satisfaction of $34,000 of the October 2013 Asher convertible note and accrued and unpaid interest of $2,800. The shares were issued at approximately $0.18 per share.

 

On July 22, 2014, the Company issued 150,000 shares of Company common stock to Mr. Bartoletta as an advisor to the Board of the Directors of the Company.

 

On August 6, 2014, the Company issued 625,978 shares of common stock upon the conversion of $19,933 of principal of the 2014 Company Note and $80,067 of accrued and unpaid interest. The shares were issued at approximately $0.16 per share.

 

On September 5, 2014, the Company issued 871,460 shares of common stock upon the conversion of $88,804 of principal of the 2014 Company Note and $11,196 of accrued and unpaid interest. The shares were issued at approximately $0.115 per share.

 

On September 18, 2014, the Company issued 208,333 shares of common stock to Jayme Canton upon the conversion of $25,000 of accrued stock compensation.

 

On September 18, 2014, the Company issued 1,300,000 shares of common stock to Philip Johnston pursuant to a consulting agreement for services including but not limited to business modeling and strategies, strategic alliances, introduction to investment bankers, identify property acquisitions for agricultural use in Canada and to identify retail chains/outlets for wellness products throughout Canada.

 

16
 

On September 18, 2014, the Company issued in the aggregate 1,500,000 shares of common stock pursuant to the APA for the acquisition of Dry Vapes Holdings, Inc. The shares were valued at $0.12 per share.

 

On October 13, 2014, the Company issued 562,272 shares of common stock upon the conversion of $38,745 of principal of the 2014 Company Note and $11,255 of accrued and unpaid interest. The shares were issued at approximately $0.089 per share.

 

On October 21, 2014, the Company issued 2,011,142 shares of common stock upon the conversion of $89,369 of principal of the 2014 Company Note and $10,631 of accrued and unpaid interest. The shares were issued at approximately $0.05 per share.

 

On October 21, 2014 the Company issued 735,895 shares of common stock to a consultant for investor relation services.

 

On October 24, 2014, the Company received a payment of $100,000 on notes receivable issued in exchange for convertible promissory note.

 

On November 11, 2014, the Company issued 1,541,163 shares of common stock upon the conversion of $76,483 of principal of the 2014 Company Note and $147 of accrued and unpaid interest. The shares were issued at approximately $0.05 per share.

 

On December 5, 2014, the Company issued 1,712,241 shares of common stock upon the conversion of $90,007 of principal of the 2014 Company Note and $9,993 of accrued and unpaid interest. The shares were issued at approximately $0.058 per share.

 

On December 31, 2014, the Company issued 17,226,778 shares of restricted common stock to Mr. Friedman upon the conversion of 450,000 shares of Class B Preferred Stock.

 

On December 31, 2014, the Company issued 1,230,484 shares of restricted common stock to Venture Equity upon the conversion of 50,000 shares of Class B Preferred Stock. The Company also issued Venture Equity 444,444 shares of restricted common stock for accrued and unpaid management fees of $40,000 owed to Venture Equity.

 

On December 31, 2014, the Company issued 277,778 shares of common stock to Jayme Canton upon the conversion of $25,000 of accrued stock compensation.

 

All such shares were issued in reliance on the exemption found in Section 4(a)(2) of the Securities Act of 1933, as amended. Each share recipient was provided with access to information which would be required to be included in a registration statement and such issuances did not involve a public offering.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable to a smaller reporting company.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

The independent auditors’ reports on our financial statements for the years ended December 31, 2015 and 2014 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 10 to the consolidated financial statements filed herein.

 

17
 

While our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our auditors have raised a substantial doubt about our ability to continue as a going concern.

 

Results of Operations

 

Year ended December 31, 2015 compared to December 31, 2014

 

Revenues

 

Revenues for the years ended December 31, 2015 and 2014 were $7,221 and $47,261, respectively, and were comprised of the following:

 

   Year ended December 31,
   2015  2014
Wellness products  $7,221   $32,045 
Chillo products   —      15,216 
Total  $7,221   $47,261 

 

During 2013, the Company entered into an exclusive distributorship agreement with Chill Drinks, LLC for sales of Chill Drink’s products to dispensaries. Sales began in April 2013 and ceased upon the termination of the agreement.

 

Operating Expenses

 

Operating expenses were $1,375,162 for the year ended December 31, 2015 compared to $1,315,676 for the year ended December 31, 2014. The expenses were comprised of:

 

   Year Ended December 31,
Description  2015  2014
Administration and management fees  $225,042   $314,660 
Stock compensation expense, management   50,000    —   
Stock compensation expense, other   113,436    379,000 
Professional and consulting fees   61,750    58,532 
Impairment of goodwill   192,849    —   
Reserve for land loss   55,490    —   
Bad debt expense   267,082    16,654 
Advertising and promotional expenses   37,685    72,091 
Rent and occupancy costs   64,190    76,235 
Leased property for sub-lease including maintenance costs   201,327    227,088 
Travel and entertainment   36,339    71,029 
General and other administrative   69,972    100,387 
Total  $1,375,162   $1,315,676 

 

Stock compensation expense, management, (included in Administrative and management fees in the consolidated statements of operations) included the issuance on October 13, 2015, of 12,500,000 shares of common stock each to Mr. Friedman and Mr. Braune for services. The Company valued the shares of common stock at $50,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015.

 

18
 

Stock compensation expense, other (included in professional and consulting fees in the consolidated statements of operations) was $113,436 and $379,000 for the years ended December 31, 2015 and 2014. The 2015 period was comprised of the issuance on April 1, 2016, of 5,000,000 restricted shares of common stock issued to an advisor of our board of directors for his appointment. The Company valued the 5,000,000 shares of common stock at $100,000 ($0.02 per share, the market price of the common stock) and recorded the $100,000 as stock compensation expense. The Company also agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share. Option Shares of 400,000 vested immediately and 50,000 Option Shares vest each month form April 2015 through March 2016. Accordingly, as of December 31, 2015, 850,000 Option Shares have vested and the Company recorded $13,436 as stock compensation expense, based on Black-Scholes. The 2014 period is comprised of $133,000 to advisories to the board of directors and $246,000 for the issuance of 2,035,895 shares of common stock for services provided.

  

Professional and consulting fees (excluding stock compensation expense, other) increased for the year ended December 31, 2015 compared to December 31, 2014, and is comprised of the following:

 

   Year ended December 31,
   2015  2014
Legal fees  $21,633   $28,882 
Consulting fees   4,000    2,000 
Accounting fees   18,453    14,050 
Investor relation costs (including $5,000 related)   17,664    13,600 
   $61,750   $58,532 

  

Bad debt expense for the year ended December 31, 2015, includes $266,422 of related party expense for the allowance for uncollectible amount from the amount due from 80 Commerce. In February 2016, the Company agreed to accept 1,101,642 shares of common stock of 800 Commerce, Inc. (now known as Petrogress, Inc.) for the settlement of the amount due. Based on the market value of the Petrogress common stock received, the Company recorded an allowance of $266,422 for the year ended December 31, 2015.

 

Advertising and promotional expenses decreased for the year ended December 31, 2015 compared to the year ended December 31, 2014. During the year ended December 31, 2015, the expenses included to the engagement of 2 consultants for web site development and marketing research related to the Company’s new vaporizer it was planning to launch in the quarter ending September 30, 2015. The product has not been finalized and there have been no sales.

 

Rent and occupancy costs decreased for the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease was primarily as a result of the Company not renewing a Colorado apartment lease.

 

Leased property available for sub-lease and property maintenance costs were $201,327 and $227,088 for the years ended December 31, 2015 and 2014, respectively. The 2015 costs were primarily comprised of $169,644 for leased real estate, $27,083 for water rights that the Company planned to lease or sub-lease to licensed marijuana operators and $10,000 for fee paid to a property manager (terminated March 1, 2015). During the year ended December 31, 2015, the Company also received a refund of $8,400 for land surveys not completed by the vendor. The Company has not sub-leased either of these properties and is delinquent in rent payments on both properties. The 2014 costs were comprised of $85,246 for leased real estate that the Company plans to lease or sub-lease to licensed marijuana operators, $22,917 for water rights, $15,500 for land surveys and $2,425 on land maintenance. Additionally, the Company expensed $51,000 for fees paid to a property manager and $50,000 it had advanced to MYLO Construction for the management and construction of a proposed building in the Apex Industrial Park Complex, otherwise known as Nevada’s “Green Zone”. On December 16, 2015, the Company and AVHI, the Company’s wholly owned subsidiary entered into a Deed in Lieu of Foreclosure Agreement (the “DLF Agreement”) with Tonaquint, pursuant to which the Company conveyed its’ interest in the Green Zone Property.

 

19
 

General and other administrative costs for the year ended December 31, 2015, decreased compared to the year ended December 31, 2014. The significant expenses is comprised of the following:

 

    
Description   2015    2014 
Settlement expense  $—     $15,000 
Payroll taxes and fees   7,465    6,304 
Filing fees and transfer agent fees   18,216    12,236 
Office and moving expense   —      9,518 
Other taxes   13,943    —   
Insurance   5,222    —   
Telephone, internet and website expenses   13,082    17,225 
Office supplies   2,056    11,736 
Other general and other administrative   9,988    28,368 
Total  $69,972   $100,387 

 

Other Income (Expense), Net

 

Other expense for the year ended December 31, 2015 was $706,971 compared to $675,083 for the year ended December 31, 2014. The 2015 period included a net loss on debt settlements of $183,277, an increase in the fair value of derivatives of $30,916 and interest expense of $492,777. Loss on debt settlements was comprised of a a gain of $275,534 pursuant to the DLF Agreement with Tonaquint, as well as the write off of $8,700 of accounts payable to other vendors, and losses on debt settlements for the issuance of 1,000,000 shares of Series B preferred Stock, valued at $276,300, to Mr. Friedman in exchange for the extinguishment of $40,000 of accrued and unpaid management fees and $231,211 loss on the issuance of common stock to retire liabilities. Included in other expenses for the 2014 period was income from the decrease on the fair value of derivatives of $30,347 and interest income of $80,206, offset by interest expense of $785,636.

 

Interest expense decreased in the current period and was comprised of:

 

   Year ended December 31,
   2015  2014
Interest on face value and other  $45,037   $133,769 
Additional true-up interest   249,876    123,572 
Amortization of note discount   184,530    81,537 
Amortization of OID   22,755    167,245 
Amortization of deferred financing fees   13,268    35,378 
Interest income   (22,689)   (80,206)
Total  $492,777   $461,295 

 

Liquidity and Capital Resources.

 

For the year ended December 31, 2015, net cash used in operating activities was $472,613 compared to $749,764 for the year ended December 31, 2014. The net loss for the year ended December 31, 2015 of $2,115,828 was impacted by the impairment of goodwill of $192,849, bad debt expense of $267,082, the amortization of discounts on convertible notes of $207,284, stock and warrant based compensation of $163,436, reserve for land loss of $55,490, $82,239 for the initial fair value of derivative liabilities and the amortization of deferred financing fees of $13,268 related to the convertible promissory notes offset by the change in fair values of derivative liabilities of $51,323 and loss on settlements of debt of $183,277. Changes in operating assets and liabilities that reduced cash used in operating activities included an increase in accounts payable and accrued expenses of $494,047, a decrease in prepaid assets and other of $84,907 and a decrease in inventory of $42,061. Changes in operating assets and liabilities utilizing cash was the result of the return of $90,000 on tenant deposits and decrease in deferred compensation of $3,683.

 

20
 

The net loss for the year ended December 31, 2014 of $2,012,102 was impacted by stock compensation expense of $379,000 comprised of $133,000 to advisories to the board of directors and $246,000 for the issuance of 2,035,895 shares of common stock for services provided. Non cash interest expense included $363,991 for excess value of common stock issued for convertible notes payable, the amortization of discounts on convertible notes of $248,782 and the amortization of deferred financing fees of $35,379 related to the convertible promissory notes. Additional non-cash expenses for the year ended December 31, 2014 was a write-off to licensing costs of $15,000 and bad debt expense of $16,654, offset by the change in fair value of the derivative liability of $30,347. Changes in operating assets and liabilities included an increase in accounts payable and accrued expenses of $62,063, an increase in deferred compensation of $149,224 and the receipt of tenant deposits of $90,000. These amounts were offset by increases in prepaid expenses of $73,540 and a decrease in inventory of $6,423.

 

During the year ended December 31, 2015, net cash used in investing activities was $46,188 compared to $532,573 for the year ended December 31, 2014. The 2015 period was a result advances to a related party. The 2014 period was the result of land acquisition costs of $268,531, investments of $50,000 in non-marketable securities, advances to a related party of $169,573, security deposits paid of $14,700 and the purchase of office furniture of $9,769 and the cash payment portion of $20,000 for the acquisition of Dry Vapes, Holdings, Inc.

 

Net cash provided by financing activities was $411,921 and $1,292,000 for the years ended December 31, 2015 and 2014, respectively. The 2015 activity was comprised of proceeds received related to the Tonaquint notes and interest receivable of $233,358, the issuance of convertible promissory notes of $200,000 and payments of deferred financing fees of 13,887. The 2014 activity was comprised of proceeds received related to the Typenex notes receivable of $200,000, the issuance of convertible promissory notes of $1,100,000 and the payment of deferred financing fees of $8,000.

 

For the year ended December 31, 2015, cash and cash equivalents decreased by $106,881 compared to an increase of $9,663 for the year ended December 31, 2014. Ending cash and cash equivalents at December 31, 2015 was $11,548 compared to $118,429 at December 31, 2014.

 

We do not have cash and cash equivalents on hand to meet our obligations. We presently maintain our daily operations and capital needs through the sale of our products and financings available to us from our lenders.

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Critical Accounting Policies

 

Accounting Policies and Estimates

 

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

 

As such, in accordance with the use of accounting principles generally accepted in the United States of America, our actual realized results may differ from management’s initial estimates as reported. A summary of significant accounting policies are detailed in notes to the financial statements which are an integral component of this annual report on Form 10-K.

 

21
 

Revenue Recognition

 

The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” (“SAB No. 104”). SAB 104 clarifies application of generally accepted accounting principles related to revenue transactions. The Company also follows the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF Issue No. 00-21”), in arrangements with multiple deliverables.

 

The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.

 

The Company recognizes revenue during the month in which products are shipped or commissions were earned.

 

Use of Estimates

 

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

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.

 

Accounts Receivable

 

The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectibility is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term.

 

Inventory

 

Inventory is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving inventory is made based on management analysis or inventory levels and future sales forecasts.

 

Investment of Non-Marketable Securities

 

The Company’s investment in non-marketable securities consist of cash investments in a less than 10% interest in privately held companies that provide merchant processing services.

 

22
 

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed

 

We evaluate long-lived assets and identifiable intangible assets with finite useful lives in accordance with ASC 350-30 and ASC 360 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), and accordingly, management reviews our long-lived assets and identifiable intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize an impairment loss when the sum of the future undiscounted net cash flows expected to be realized from the asset is less than its carrying amount. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Considerable judgment is necessary to estimate the fair value of the assets and accordingly, actual results could vary significantly from such estimates. Our most significant estimates and judgments relating to the long-lived asset impairments include the timing and amount of projected future cash flows.

 

Fair Value of Financial Instruments

 

Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).

 

Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.

 

The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

The three hierarchy levels are defined as follows:

 

Level 1 – Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;

 

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.

 

The Company’s financial instruments consist primarily of cash, accounts payable and accrued expenses, and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.

 

23
 

Earnings (Loss) Per Share

 

Earnings (loss) per share are computed in accordance with ASC 260, “Earnings per Share”. Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. As of December 31, 2015 there were warrants to purchase 1,300,000 shares of common stock, the Company’s outstanding convertible debt is convertible into 562,113,231 shares of common stock. These amounts are not included in the computation of dilutive loss per share because their impact is antidilutive.

 

Accounting for Stock-Based Compensation

 

The Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. Stock awards granted to non-employees are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in which services are provided.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for smaller reporting companies.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See Index to Financial Statements and Financial Statement Schedules appearing on pages F-1 to F-12 of this annual report on Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), as of the end of the period covered by this annual report on Form 10-K, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report. Based on that review and evaluation, the CEO and CFO have concluded that as of December 31, 2015 disclosure controls and procedures were not effective at ensuring that the material information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in the application of SEC rules and forms.

 

Management’s Report on Internal Controls over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

24
 

 

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and disposition of our assets;
Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our CEO and CFO have evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). As a result of this evaluation, we concluded that our internal control over financial reporting was not effective as of December 31, 2015 as described below.

 

We assessed the effectiveness of the Company’s internal control over financial reporting as of evaluation date and identified the following material weaknesses:

 

Insufficient Resources: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.

 

Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.

 

Lack of Audit Committee: We do not have a functioning audit committee, resulting in lack of independent oversight in the establishment and monitoring of required internal controls and procedures.

 

We are committed to improving the internal controls and will (1) consider to use third party specialists to address shortfalls in staffing and to assist us with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may consider appointing additional outside directors and audit committee members in the future.

 

We have discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of these material weaknesses, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected.

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this annual report.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

25
 

 

PART III

 

ITEM 10, DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Identification of directors and executive officers.

 

Set forth below is information regarding the Company’s current directors and executive officers. There are no family relationships between any of our directors or executive officers. The directors are elected annually by stockholders. The executive officers serve at the pleasure of the Board of Directors:

 

Name Age Positions Held and Tenure
B. Michael Friedman 50 Chief Executive Officer and Director

 

B. Michael Friedman, Chief Executive Officer. From 2009 to March 2016, Mr. B. Michael Friedman had been the Company’s Chief Executive Officer and member of the Company’s Board of Directors. On November 4, 2016, Mr. Friedman was named interim CEO and was appointed to the Board of directors. In February 2010 (inception date) Mr. Friedman founded 800 Commerce and had been the President from inception date until his resignation on February 29, 2016. Mr. Friedman has over 20 years of investment banking experience, particularly in the areas of mergers and acquisitions, manufacturing, marketing, advertising, and licensing. Since 2008 Mr. Friedman operates in a managerial capacity, First Level Capital LLC, a mergers and acquisitions and financial consulting firm located in Los Angeles, California.  Mr. Friedman received his Bachelor of Science (BS) in Marketing and Management in 1986 from the University of Florida, in Gainesville, Florida.

 

Involvement in Certain Legal Proceedings

 

No director, executive officer, significant employee or control person of the Company has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.

 

Code of Ethics

 

We adopted a Code of Ethics for Senior Financial Management to promote honest and ethical conduct and to deter wrongdoing. This Code applies to our Chief Executive Officer and Chief Financial Officer and other employees performing similar functions. The obligations of the Code of Ethics supplement, but do not replace, any other code of conduct or ethics policy applicable to our employees generally.

 

Under the Code of Ethics, all members of the senior financial management shall:

 

Act honestly and ethically in the performance of their duties at our company,
Avoid actual or apparent conflicts of interest between personal and professional relationships,
Provide full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submits to, the SEC and in other public communications by our company,
Comply with rules and regulations of federal, state and local governments and other private and public regulatory agencies that effect the conduct of our business and our financial reporting,
Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing the member’s independent judgment to be subordinated
Respect the confidentiality of information in the course of work, except when authorized or legally obtained to disclosure such information,
Share knowledge and maintain skills relevant to carrying out the member’s duties within our company,
Proactively promote ethical behavior as a responsible partner among peers and colleagues in the work environment and community,
Achieve responsible use of and control over all assets and resources of our company entrusted to the member, and
Promptly bring to the attention of the Chief Executive Officer any information concerning (a) significant deficiencies in the design or operating of internal controls which could adversely affect to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in our financial reporting or internal controls.

 

26
 

Corporate Governance

 

During the quarter ended December 31, 2015, there were no material changes to procedures by which security holders may recommend nominees to our board of directors.

 

We currently have no standing audit, nominating or compensation committees of our board of directors. Our entire board of directors currently performs these functions. The functions of those committees are being undertaken by our officers and directors. Because we do not have any independent directors, our officers and directors believe that the establishment of committees of the Board would not provide any benefits to our company and could be considered more form than substance.

 

Director Independence

 

None of the members of our Board of Directors qualifies as an independent director in accordance with the published listing requirements of the NASDAQ Global Market. The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director, nor any of his family members has engaged in various types of business dealings with us. In addition, our Board has not made a subjective determination as to each director that no relationships exist which, in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, though such subjective determination is required by the NASDAQ rules. Had our Board of Directors made these determinations, our Board would have reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management.

 

In performing the functions of the audit committee, our board oversees our accounting and financial reporting process. In this function, our board performs several functions. Our board, among other duties, evaluates and assesses the qualifications of the Company’s independent auditors; determines whether to retain or terminate the existing independent auditors; meets with the independent auditors and financial management of the Company to review the scope of the proposed audit and audit procedures on an annual basis; reviews and approves the retention of independent auditors for any non-audit services; reviews the independence of the independent auditors; reviews with the independent auditors and with the Company’s financial accounting personnel the adequacy and effectiveness of accounting and financial controls and considers recommendations for improvement of such controls; reviews the financial statements to be included in our annual and quarterly reports filed with the Securities and Exchange Commission; and discusses with the Company’s management and the independent auditors the results of the annual audit and the results of our quarterly financial statements.

 

Our board as a whole considers executive officer compensation, and our entire board participates in the consideration of director compensation. Our board as a whole oversees our compensation policies, plans and programs, reviews and approves corporate performance goals and objectives relevant to the compensation of our executive officers, if any, and reviews the compensation and other terms of employment of our Chief Executive Officer and our other executive officers. Our board also administers our equity incentive and stock option plans, if any.

 

Each of our directors participates in the consideration of director nominees. In addition to nominees recommended by directors, our board will consider nominees recommended by shareholders if submitted in writing to our secretary. Our board believes that any candidate for director, whether recommended by shareholders or by the board, should be considered on the basis of all factors relevant to our needs and the credentials of the candidate at the time the candidate is proposed. Such factors include relevant business and industry experience and demonstrated character and judgment.

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based solely upon a review of such reports, and on written representations from certain reporting persons, the Company believes that, with respect to the fiscal year ended December 31, 2015, each director, executive officer and 10% stockholder made timely filings of all reports required by Section 16 of the Exchange Act.

 

27
 

ITEM 11. EXECUTIVE COMPENSATION.

 

The following tables set forth all of the compensation awarded to, earned by or paid to: (i) each individual serving as our principal executive officer; and (ii) each other individual that served as an executive officer at the conclusion of the fiscal year ended December 31, 2015 and who received in excess of $100,000.

 

Summary Compensation Table

 

  Name & Principal Position  Year   Salary  

Stock

Awards

(2)

  

Option

Awards

  

All Other

Compensation

(3)

   Total 
  B. Michael Friedman (1)  2015   $62,500   $25,000   $—     $236,300   $323,800 
  Chief Executive Officer  2014   $150,000   $—     $—     $—     $150,000 
                               
  Justin Braune  2015   $46,154   $—     $—     $—     $46,154 
  Former Chief Executive Officer  2014   $—     $—     $—     $—     $—   
                               
  Barry Hollander (4)  2015   $68,000   $—     $—     $—     $68,000 
  Former Chief Financial Officer  2014   $96,000   $—     $—     $—     $96,000 

 

(1)

Mr. Friedman resigned as an officer and director of the Company effective March 20, 2015, and was named interim CEO and as a member of the BOD on November 4, 2016. The 2015 salary is for the months Mr. Friedman was CEO, based on $12,500 per month for January through March and November and December 2015.

(2) On October 14, 2015, the Company issued 12,500,000 shares of common stock to Mr. Friedman for services. The Company valued the shares of common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date).
(3) Relates to the issuance of 1,000 shares of Class B Preferred Stock and includes the accounting value of the shares on a basis of their voting power. The shares are not convertible into common stock.
(4) Mr. Hollander resigned as an officer and director of the Company effective September 15, 2015. Mr. Hollander’s 2014 salary includes $40,000 of unpaid and accrued expenses paid in restricted shares of common stock, based on the market value of the common stock at the end of the period. The Company issued 444,444 shares of common stock on December 31, 2014 for the 2014 accrued expenses of $40,000. The shares were issued at $0.09, the market price of the common stock when issued.

 

We do not presently have pension, health, annuity, insurance, profit sharing or similar benefit plans; however, we may adopt plans in the future. There are presently no personal benefits available to our directors and officers.

 

Employment Agreements; Termination of Employment and Change of Control Arrangements

 

There are no current employment agreements between the Company and our executive officers or understandings regarding future compensation. There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person named in the summary compensation table set out above which would in any way result in payments to any such person because of his resignation, retirement, or other termination of such person’s employment with the Company or its subsidiaries, or any change in control of the Company, or a change in the person’s responsibilities following a changing in control of the Company.

 

Outstanding Equity Awards at Fiscal Year-End

 

Other than the awards included in the Summary Compensation Table above, no executive officer received any equity awards during 2015, or holds exercisable or unexercisable options, as of December 31, 2015.

 

Long-Term Incentive Plans

 

There are no arrangements or plans in which the Company would provide pension, retirement or similar benefits for directors or executive officers.

 

28
 

Compensation Committee

 

We currently do not have a compensation committee of our Board of Directors. The Board as a whole determines executive compensation.

 

Director Compensation

 

We do not pay fees to our directors for attendance at meetings of the board; however, we may adopt a policy of making such payments in the future. We will reimburse out-of-pocket expenses incurred by directors in attending board and committee meetings.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The following table sets forth information known to the Company with respect to the beneficial ownership (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of the outstanding common stock of the Company as of March 31, 2016 by: (1) each person known by the Company to beneficially own 5% or more of the Company’s outstanding common stock; (2) each of the named executive officers as defined in Item 402(m)(2); (3) each of the Company’s directors; and (4) all of the Company’s executive officers and directors as a group. The number of shares beneficially owned is determined under rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares.

 

  Common Stock
Name and Address of Beneficial Owner Amount and
Nature of
Beneficial
Ownership
  Percent of Class
(1)

B. Michael Friedman

319 Clematis St., Suite 812

West Palm Beach, FL 33401

31,526,778   10.5%
       
All directors and executive officers as a group – 1 person 31,526,778   10.5%

 

(1) Based on a total of an aggregate of 299,106,678 shares of common stock outstanding.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Management fees

 

Effective January 1, 2013, the Company agreed to an annual compensation of $150,000 for its CEO, Mr. Michael Friedman (resigned March 20, 2015, re-appointed November 4, 2015), and $96,000 for the CFO, Mr. Barry Hollander (resigned September 15, 2015). For 2014, the Company and Mr. Hollander agreed that up to $5,000 per month can be paid in cash and the balance in restricted shares of common stock. Effective March 20, 2015, Mr. Justin Braune was named CEO and President. Mr. Braune also was appointed to the Board of Directors. B. Michael Friedman resigned his role as CEO and also from the Board of Directors. The Company agreed to an annual compensation of $100,000 for Mr. Braune in his role of CEO and Director of the Company and to issue Mr. Braune 15,000,000 shares of restricted common stock. The Company also initially issued Mr. Braune 12,500,000 shares of common stock on October 13, 2015. On October 16, 2015, Mr. Braune advised the Company and the Company’s transfer agent at the time to cancel the shares. Mr. Braune resigned from the board of directors and as CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation.

 

29
 

For the years ended December 31, 2015 and 2014, the Company recorded expenses to its officers the following amounts included in Administrative and Management Fees in the consolidated statements of operations, included herein:

 

   2015  2014
Mr. Braune  $62,821   $—   
Mr. Friedman   62,500    150,000 
Mr. Hollander   68,000    96,000 
Total  $193,321   $246,000 

 

As of December 31, 2015 and 2014, the Company owed to its officers the following amounts, included in deferred compensation on the Company’s consolidated balance sheet:

 

   2015  2014
Mr. Friedman  $8,580   $80,082 
Mr. Braune   16,667    —    
Mr. Hollander   12,731    1,579 
Total  $37,978   $81,661 

 

Effective June 26, 2015, the Company issued 1,000 shares of Class B Preferred Stock (super voting rights, non-convertible securities) to Mr. Friedman, resulting in Mr. Friedman having majority control in determining the outcome of all corporate transactions subject to vote, including the election of officers.

 

On October 13, 2015, the Company issued 12,500,000 shares of common stock to Mr. Friedman for services. The Company valued the shares of common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015.

 

On October 13, 2015, the Company issued 12,500,000 shares of common stock to Mr. Braune for services. The Company valued the common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ending December, 31 2015. On October 16, 2015, Mr. Braune adviseed the Company and the Company’s transfer agent at the time to cancel the shares. Since then, Mr. Braune is claiming ownership of the shares, which the Company disputes.

 

On December 31, 2014, the Company issued 17,226,778 shares of restricted common stock to Mr. Friedman upon the conversion of 450,000 shares of Class B Preferred Stock.

 

On December 31, 2014, the Company issued 1,230,484 shares of restricted common stock to Venture Equity upon the conversion of 50,000 shares of Class B Preferred Stock.

 

On January 13, 2014, the Company issued 545,454 shares of common stock to Venture Equity, LLC, (“Venture Equity”) a Florida limited liability Company, controlled by the Company’s former CFO, upon the conversion of $60,000 of accrued management fees. The shares were issued at $0.11 per share, the market price of the common stock on December 31, 2013, the date on which the board of directors approved the issuance. On December 31, 2014, the Company issued 444,444 shares of restricted common stock to Venture Equity, upon the conversion of $40,000 of accrued and unpaid management fees as of December 31, 2014, the date on which the board of directors approved the issuance. The shares were issued at $0.09 per share, the average market price of the common stock for the period.

  

Agreements with prior management

 

In December 2011 the Company issued a $50,000 convertible promissory note as part of a guaranty fee due to a Company that is affiliated with a former officer of the Company. Terms of the note include an eight percent per annum interest rate and the note matured on the one year anniversary on December 20, 2012. Additionally, the holder of the Note has the right to convert the note into shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the lowest closing bid price of the common stock within five (5) days of the conversion. On March 31, 2013, the Company and the noteholder elected to convert the remaining balance of the note of $32,000 and accrued and unpaid interest of $6,060 into 369,928 shares of common stock.

30
 

 

Also in December 2011, the Company agreed to pay an additional $50,000 in common stock, which is included in accounts payable and accrued expenses on the December 31, 2015 and 2014 balance sheets.

 

Amounts Due from 800 Commerce, Inc.

 

As of December 31, 2012, the Company owned 6,000,000 shares of 800 Commerce’s common stock, representing approximately 32% of 800 Commerce’s outstanding common stock. Effective September 4, 2013, Agritek distributed the 6,000,000 shares of the Company’s common stock to their shareholders of record as of September 3, 2013. Through February 29, 2016, the Company and 800 Commerce were commonly controlled due to common management and board members. 800 Commerce owes Agritek $282,947 and $236,759 as of December 31, 2015 and December 31, 2014, respectively, as a result of advances received from Agritek. These advances are non-interest bearing and are due on demand and are included in amounts due related parties on the December 31, 2015, balance sheet herein. In February 2016, the Company agreed to accept 1,101,642 shares of common stock of 800 Commerce, Inc. (now known as Petrogress, Inc.) for the settlement of the amount due. Based on the market value of the Petrogress common stock received, the Company recorded an allowance of $266,422 for the year ended December 31, 2015.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table shows the fees that were billed for the audit and other services provided by L & L, CPA’s (for the reporting period beginning September 30, 2015) and D. Brooks and Associates CPA’s P.A. (through reporting period ending June 30, 2015) for the years ended December 31, 2015 and 2014.

 

   2015  2014
  Audit Fees  $9,845   $14,050 
  Audit-Related Fees   —      —   
  Tax Fees   —      —   
  All Other Fees   —      —   
  Total  $9,845   $14,050 

 

Audit Fees — This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.

 

Audit-Related Fees — This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.

 

Tax Fees — This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice.

 

All Other Fees — This category consists of fees for other miscellaneous items.

 

Our board of directors has adopted a procedure for pre-approval of all fees charged by our independent registered public accounting firm. Under the procedure, the board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the board. All audit and permissible non-audit services provided by the auditors with respect to 2015 and 2014 were pre-approved by the board of directors.

 

 

31
 

PART IV

 

ITEM 15. EXHIBITS AND REPORTS.

 

(a) 1. Financial Statements
     
    The consolidated financial statements and Report of Independent Registered Public Accounting Firms are included on pages F-1 through F-xx
     
  2. Financial Statement Schedules
     
    All schedules for which provisions made in the applicable accounting regulations of the Securities and Exchange Commission (the “Commission”) are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the financial statements included herein.
     
  3. Exhibits (including those incorporated by reference).

 

Exhibit

Number 

  Description of Exhibit
31.1*   Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer and Principal Financial Officer
31.2*   Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.1*   Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
101.INS   XBRL Instance
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase
101.LAB   XBRL Taxonomy Extension Labels Linkbase
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

*Filed herewith

 

 

Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Agritek Holdings, Inc.

 

  By: /s/ B. Michael Friedman
  B. Michael Friedman
  Chief Executive Officer
   
  Date: May 19, 2016
   

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

  Signature   Title   Date
         
  /s/ B. Michael Friedman   Chief Executive Officer, President and Director (principal executive officer and principal accounting officer)    May 19, 2016
  B. Michael Friedman        
         
32
 

AGRITEK HOLDINGS, INC.

FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

INDEX TO FINANCIAL STATEMENTS

 

 

Reports of Independent Registered Public Accounting Firm F-2 – F-3
Balance Sheets as of December 31, 2015 and 2014 F-4
Statements of Operations for the years ended December 31, 2015 and 2014 F-5
Statement of Changes in Stockholders Deficit for the years ended December 31, 2015 and 2014 F-6
Statements of Cash Flows for the years ended December 31, 2015 and 2014 F-7
Notes to Financial Statements F-8 – F-25

 

 

 

 

 

 

 

F-1
 

 

 

 

To the Board of Directors and

Agritek holdings, Inc.

 

We have audited the accompanying balance sheet of Agritek holdings, Inc. (the “Company”) as of December 31, 2015 and related statements of operations, stockholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

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

 

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

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has suffered recurring operating losses, has an accumulated stockholders’ deficit, has negative working capital, has had minimal revenues from operations, and has yet to generate an internal cash flow that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 11. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ L&L CPAS, PA

L&L CPAS, PA

Certified Public Accountants

Cornelius, NC

The United States of America

May 17, 2016

 

F-2
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNT FIRM

 

To the Board of Directors and

Shareholders of Agritek Holdings, Inc.

 

We have audited the accompanying balance sheets of Agritek holdings, Inc. as of December 31, 2014 and the related statements of operations, stockholders’ deficiency, and cash flows for the year then ended. Agritek Holdings, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

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

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Agritek Holdings, Inc. as of December 31, 2014 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 11 to the financial statements, the COmpany has incurred operating losses, has incurred negative cash flows from operations and has a working capital deficit. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is also described in Note 11 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

 

D. Brooks and Associates CPA’s, P.A.

West Palm Beach, Florida

April 14, 2015

  

 

 

F-3
 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   December 31,
   2015  2014
ASSETS  
Current Assets:          
Cash and cash equivalents  $11,548   $118,429 
Accounts receivable, net   —      173 
Inventory, net   —      42,061 
Notes receivable   —      400,000 
Interest receivable   —      28,954 
Deferred financing costs   —      1,518 
Due from related party   16,525    236,759 
Prepaid assets and other   3,333    44,586 
Total current assets   31,405    872,480 
           
Other   825    15,525 
Goodwill   —      192,849 
Property and equipment, net of accumulated depreciation of $4,742 (2015) and $1,976 (2014)   9,087    366,122 
Investments in non-marketable securities   50,000    50,000 
           
Total assets  $91,318   $1,496,976 
           
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current Liabilities:          
Accounts payable and accrued expenses  $323,607   $242,857 
Due to related party   37,978    81,661 
Note payable, current portion   —      34,300 
Tenant deposits   —      90,000 
Convertible notes payable, net of discount of $27,220 (2015) and $22,755 (2014)   445,294    1,233,903 
Derivative liabilities   167,014    —   
Total current liabilities   973,893    1,682,721 
           
Note payable, long term   —      51,450 
           
Total liabilities   973,893    1,734,171 
           
Commitments and Contingencies          
           
Stockholders' Deficit:          
Series B convertible preferred stock, $0.01 par value; 1,000,000 shares authorized, and 1,000 shares issued and outstanding (2015)   10    —   
Common stock, $.0001 par value; 500,000,000 shares authorized; 281,540,332 (2015) and 93,500,420 (2014) shares issued and outstanding   28,155    9,351 
Additional paid-in capital   12,536,138    11,084,504 
Accumulated deficit   (13,446,878)   (11,331,050)
Total stockholders' deficit   (882,575)   (237,195)
           
Total liabilities and stockholders' deficit  $91,318   $1,496,976 
           
See notes to consolidated financial statements.

 

F-4
 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   December 31,
   2015  2014
Product revenue  $7,221   $47,261 
Cost of revenue   40,916    68,604 
Gross profit (loss)   (33,695)   (21,343)
           
Operating Expenses:          
Administrative and management fees (including $50,000 of stock based compensation for the year ended December 31, 2015)   275,042    314,660 
Professional and consulting fees (including $113,436 and $379,000 of stock based compensation for the year ended December 31, 2015 and 2014, respectively)   175,186    437,532 
Impairment of goodwill   192,849    —   
Reserve for land loss   55,490    —   
Bad debt expense (including $266,422 related party for the year ended December 31, 2015)   267,082    16,654 
Rent and other occupancy costs   64,190    76,235 
Leased property expense   201,327    227,088 
Advertising and promotion   37,685    72,091 
Travel and entertainment   36,339    71,029 
Other general and administrative expenses   69,972    100,387 
           
           
Total operating expenses   1,375,162    1,315,676 
           
Operating loss   (1,408,857)   (1,337,019)
           
Other Income (Expense):          
Gain/(loss) on debt settlement   (183,277   —   
Interest expense   (492,777)   (705,430)
Derivative liability (expense) income   (30,916)   30,347 
           
Total other expense, net   (706,971)   (675,083)
           
Net loss  $(2,115,828)  $(2,012,102)
           
Basic and diluted loss per share  $(0.01)  $(0.03)
           
Weighted average number of common shares outstanding Basic and diluted   163,663,783    64,028,715 
           
See notes to consolidated financial statements.

 

F-5
 

AGRITEK HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
                         
   Common stock  Series B
Preferred stock
  Additional
Paid-in
  Deferred
Stock
  Accumulated  Total
Stockholders'
   Shares  Amount  Shares  Amount  Capital  Compensation  Deficit  Deficiency
Balances, January 1, 2014   45,655,245    $4,566    1,000,000    $100    $8,448,035    —      $(9,318,948)   $(866,247)
                                         
Issuance of common stock upon conversion of preferred stock   25,230,650    2,523    (1,000,000)   (100)   (2,423)   —      —      —   
                                         
Common stock issued upon conversion of convertible debt and accrued interest   17,395,673    1,740    —      —      1,549,602    —      —      1,551,341 
                                         
Common stock issued for services   2,185,895    219    —      —      278,781    —      —      279,000 
                                         
Common stock issued upon settlement of accounts payable   543,059    54    —      —      74,946    —      —      75,000 
                                         
Common stock issued upon settlement of deferred compensation, related party   989,898    99    —      —      99,901    —      —      100,000 
                                         
Common stock issued for acquisition   1,500,000    150    —      —      179,850    —      —      180,000 
                                         
Reclassification of embedded derivatives upon conversion of convertible debt   —      —      —      —      455,813    —      —      455,813 
                                         
Net loss   —      —      —      —      —      —      (2,012,102)   (2,012,102)
                                         
Balances, December 31, 2014   93,500,420    9,351    —      —      11,084,504    —      (11,331,050)   (237,195)
                                         
Common stock issued upon conversion of convertible debt and accrued interest   158,039,912    15,804    —      —      1,014,908    —      —      1,030,712 
                                         
Common stock issued for services   30,000,000    3,000    —      —      147,000    —      —      150,000 
                                         
Issuance of common stock warrants for board advisory services   —      —      —      —      13,436    —      —      13,436 
                                         
Preferred stock issued for payment of accrued salaries   —      —      1,000    10    276,290    —      —      276,300 
                                         
Net loss                                 (2,115,878)   (2,115,878)
                                         
Balances, December 31, 2015   281,540,332   $28,155    1,000   $10    12,536,138   $0   $(13,446,878)  $(882,575)
                                         
See notes to consolidated financial statements.

 

F-6
 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
       
   December 31,
   2015  2014
Cash flow from operating activities:          
Net loss  $(2,115,828)  $(2,012,102)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock and warrants issued for consulting services   163,436    379,000 
Amortization of deferred financing costs   13,268    35,379 
Impairment of goodwill   192,849    —   
Reserve for land loss   55,490    —   
Depreciation   2,766    1,789 
Bad debt related party   266,422    —   
Initial expense for fair value of derivative liabilities   82,239    —   
Amortization of discounts on convertible notes   207,284    248,782 
Write off of licensing costs   —      15,000 
Change in fair values of derivative liabilities   (51,323)   (30,347)
Loss on debt settlement   183,277   363,991 
Bad debt expense   660    16,654 
Changes in operating assets and liabilities:          
Decrease (increase) in :          
Accounts receivable   (487)   (2,080)
Inventory   42,061    6,423 
Prepaid assets and other   84,907    (73,540)
Increase (decrease) in:          
Accounts payable and accrued expenses   494,047    62,063 
Due to related party   (3,683)   149,224 
Tenant deposits   (90,000)   90,000 
Net cash used in operating activities   (472,614)   (749,764)
           
Cash flows from investing activities:          
Land acquisition costs   —      (268,531)
Purchase of equipment and furniture   —      (9,769)
Advances to related party   (46,188)   (169,573)
Investments   —      (50,000)
Cash payment portion of acquisition   —      (20,000)
Security deposits paid   —      (14,700)
Net cash used in investing activities   (46,188)   (532,573)
           
Cash flows from financing activities:          
Payments received on notes receivable issued for convertible debt   223,358    200,000 
Proceeds from issuance of convertible debt   200,000    1,100,000 
Proceeds from issuance of note payable, shareholder   2,450    —   
Payments made on note payable   (13,887)   —   
Payment of deferred financing costs   —      (8,000)
Net cash provided by financing activities   411,921    1,292,000 
           
Net (decrease) increase in cash and cash equivalents   (106,881)   9,663 
           
Cash and cash equivalents, Beginning   118,429    108,766 
           
Cash and cash equivalents, Ending  $11,548   $118,429 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $—     $—   
Cash paid for income taxes  $—     $—   
           
Schedule of non-cash financing activities:          
Conversion of notes payable and interest into common stock  $723,847   $1,551,341 
Conversion of deferred compensation into preferred stock (2015) and common stock (2014)  $40,000   $100,000 
Conversion of accounts payable and accrued expenses into common stock  $—     $75,000 
Issuance (cancellation) of note payable for land acquisition  $(74,313)  $85,750 
Reduction of convertible note in exchange for deed in lieu of foreclosure  $224,466   $—   
           
Common stock issued for acquisition  $—     $180,000 
Cash paid for acquisition   —      20,000 
Total consideration for acquisition   —      200,000 
Allocation of purchase price to inventory   —      (7,151)
Allocation of purchase price to goodwill   —      (192,849)
   $—     $—   
           
See notes to consolidated financial statements.

 

F-7
 

AGRITEK HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Organization

 

Business

 

Agritek Holdings, Inc. (the “Company” or “Agritek”), formerly known as Mediswipe, Inc., and its wholly owned subsidiary, Agritek Venture Holdings, Inc. (“AVHI”), acquires and leases real estate to licensed marijuana operators, including providing complete turnkey growing space and related facilities to licensed marijuana growers and dispensary owners. Additionally, the Company offers a variety of services and product lines to the medicinal marijuana sector including the distribution of hemp based nutritional products and a line of innovative solutions for electronically processing merchant transactions.

The Company does not grow, harvest, distribute or sell marijuana or any substances that violate the laws of the United States of America.

On June 26, 2015, the Company filed with the Delaware Secretary of State the Amended and Restated Designation Preferences and Rights (the “Certificate of Designation”) of Class B Preferred Stock (the “Series B Preferred Stock”). Pursuant to the Certificate of Designation, 1,000 shares constitute the Series B Preferred Stock. The Series B Preferred Stock and any accrued and unpaid dividends thereon shall, with respect to rights on liquidation, winding up and dissolution, rank senior to the Company’s issued and outstanding common stock and Series A preferred stock.

 

The Series B Preferred Stock has the right to vote in aggregate, on all shareholder matters equal to 51% of the total vote, no matter how many shares of common stock or other voting stock of the Company are issued or outstanding in the future. The Series B Preferred Stock has a right to vote on all matters presented or submitted to the Company’s stockholders for approval in pari passu with the common stockholders, and not as a separate class. The holders of Series B Preferred Stock have the right to cast votes for each share of Series B Preferred Stock held of record on all matters submitted to a vote of common stockholders, including the election of directors. There is no right to cumulative voting in the election of directors. The holders of Series B Preferred Stock vote together with all other classes and series of common stock of the Company as a single class on all actions to be taken by the common stockholders except to the extent that voting as a separate class or series is required by law.

 

On June 26, 2015, the Company issued 1,000 shares of Series B Preferred Stock to Mr. B. Michael Friedman resulting in Mr. Friedman having majority control in determining the outcome of all corporate transactions subject to vote (super voting rights, non-convertible securities), including the election of directors of the Company (see Note 8).

On October 5, 2015, the Company filed an amendment with the Secretary of State Delaware to increase the Company’s authorized common stock from 250,000,000 shares to 500,000,000 shares.

Note 2 – Summary of Significant Account Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America ("US GAAP"). The consolidated financial statements of the Company include the consolidated accounts of Agritek and its’ wholly owned subsidiaries AVHI and PPI. PPI, a Florida corporation, was originally formed on July 1, 2013 as The American Hemp Trading Company, Inc. (“AHTC”) and on August 27, 2014, AHTC changed its’ name to PPI. All intercompany accounts and transactions have been eliminated in consolidation. 

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.

 

F-8
 

Accounts Receivable

 

The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectability is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term. As of December 31, 2015, based on the above criteria, the Company has an allowance for doubtful accounts of $43,408.

 

Inventory

 

Inventory consists of finished goods and is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving inventory is made based on management analysis or inventory levels and future sales forecasts.

 

Deferred Financing Costs

 

The costs related to the issuance of debt are capitalized and amortized to interest expense using the effective interest method through the maturities of the related debt.

 

Derivative Financial Instruments

 

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income.

 

For option-based simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

 

Debt Issue Costs and Debt Discount

 

The Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt.  These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

 

Original Issue Discount

 

For certain convertible debt issued, the Company may provide the debt holder with an original issue discount.  The original issue discount would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.

 

Investment of Non-Marketable Securities

 

The Company’s investment in non-marketable securities consist of cash investments in a less than 10% interest in two privately held companies that provide merchant processing services. Petrogress, Inc. (formerly 800 Commerce, Inc. and a subsidiary of the Company through its’ deconsolidation in May 2012) derived substantially all of its’ revenues, through April 2015, form these privately held companies.

 

F-9
 

Property and Equipment

 

Property and equipment are stated at cost, and except for land, depreciation is provided by use of a straight-line method over the estimated useful lives of the assets. The Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable. In November 2015, the Company was made aware that the land transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company was a party to the land purchase, however, it was recently discovered, and the second party to the land contract never filed the original quit claim deed on behalf of the Company, even though a copy of the notarized quit claim deed was sent to the Company. To date, the Company has paid a total of $47,438.00 ($36,000 at closing) and is on the deed of trust of the property with a remaining note balance of approximately $75,000 held by the original owner. Accordingly, until the deed is properly recorded, the Company reduced the remaining balance of the note payable for the acquisition of the land of $74,313 and recorded a reserve allowance for the remaining balance of the asset of $54,490. The estimated useful lives of property and equipment are as follows:

 

Furniture and equipment 5 years

 

The Company's property and equipment consisted of the following at December 31, 2015 and December 31, 2014:

 

  

2015

2014
Land  $129,803   $354,269 
Allowance for land loss, including note elimination of $74,313   (129,803)   —   
Furniture and equipment   13,829    13,829 
Accumulated depreciation   (4,742)   (1,976)
Balance  $9,087   $366,122 

 

Depreciation expense of $2,766 and $1,789 was recorded for the year ended December 31, 2015 and 2014, respectively.

 

Long-Lived Assets

 

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on events and changes in circumstances on June 30, 2015, the Company reviewed the carrying amount of goodwill initially recorded from an acquisition in September 2014, and determined that the carrying amount may not be recoverable and accordingly recognized an impairment loss of $192,849 for the year ended December 31, 2015. The Company also recorded a reserve for inventory loss of $37,639 for the year ended December 31, 2015.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured. The Company recognizes revenue during the month in which products are shipped or commissions are earned. No revenue has been recognized from leasing arrangements to date.

 

Fair Value of Financial Instruments

 

Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).

 

Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.

 

F-10
 

The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

The three hierarchy levels are defined as follows:

 

Level 1 – Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;

 

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.

 

The Company's financial instruments consist primarily of cash, accounts receivable, notes receivable, accounts payable and accrued expenses, note payable and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.  The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

 

ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid, any interest or penalties.

 

Uncertain tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized. The Company’s tax years subsequent to 2005 remain subject to examination by federal and state tax jurisdictions.

 

Earnings (Loss) Per Share

 

Earnings (loss) per share are computed in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. As of December 31, 2015 there were warrants to purchase 1,300,000 shares of common stock and the Company’s outstanding convertible debt is convertible into 546,802,924 shares of common stock These amounts are not included in the computation of dilutive loss per share because their impact is antidilutive.

 

F-11
 

Accounting for Stock-based Compensation

 

The Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. Stock awards granted to non-employees are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in which services are provided.

 

For the years ended December 31, 2015 and December 31, 2014, the Company recorded stock and warrant based compensation of $163,436 and $379,000, respectively. (See Notes 7 and 8).

 

Use of Estimates

 

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

 

Advertising

 

The Company records advertising costs as incurred. For the years ended December 31, 2015 and December 31, 2014, advertising expense was $37,685 and $72,091, respectively.

 

Note 3 – Recent Accounting Pronouncements

 

Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

 

Note 4 – Impairment of Goodwill

 

On September 12, 2014, the Company completed the asset acquisition of the entire line of products, technology and customers of Dry Vapes Holdings, Inc.

 

The Company recorded the acquisition using the acquisition method, which requires the Company to record the acquired assets and assumed liabilities (if any) at their acquisition date fair values and record any excess of the consideration given, including liabilities assumed (if any) over the fair value of the assets acquired as goodwill. The acquired assets consisted solely of inventory. The transaction resulted in the Company recording goodwill of $192,849. Based on events and changes in circumstances on June 30, 2015, the Company reviewed the carrying amount of the goodwill, and determined that the carrying amount may not be recoverable and accordingly recognized an impairment loss of $192,849 for the year ended December 31, 2015.

 

Note 5 – Sales Concentration and Concentration of Credit Risk

 

Cash

 

Financial   instruments   that   potentially   subject   the   Company to concentrations of credit risk consist principally of cash. The Company maintains cash balances at one financial institution, which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insured institution insures up to $250,000 on account balances. The company maintains its’ cash balance at a large financial institution and has not experienced any losses in such accounts.

 

F-12
 

Sales and Accounts Receivable

 

Following is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the years ended December 31, 2015 and 2014 and the accounts receivable balance as of December 31, 2015:

 

  Customer 

Sales % Year Ended

December 31, 2015

 

Sales % Year Ended

December 31, 2014

 

Accounts Receivable

Balance as of

December 31, 2015

 A    —      24.7%  $—   
 B    —      21.5%  $—   
 C    —      18.2%  $—   

 

Purchases

 

For the year end December 31, 2014, the Company’s purchases were from two vendors related to the purchase of our tobacco product line.

 

Note 6 – Convertible Debt and Note Payable

 

2014 Convertible Note

 

In January 2014, the Company entered into a Secured Promissory Note for $1,660,000 (the “2014 Company Note”) to Tonaquint, Inc. (“Tonaquint”) which includes a purchase price of $1,500,000 and transaction costs of $160,000. On January 31, 2014, the Company received $300,000 of the purchase price. Tonaquint also issued to the Company 6 secured promissory notes, each in the amount of $200,000 (the 2014 “Investor Notes”). All or any portion of the outstanding balance of the 2014 Investor Notes may be prepaid, without penalty, along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay Tonaquint any amounts on the unfunded portion of the 2014 Company Note. The 2014 Company Note bears interest at 8% per annum (increases to 22% per annum upon an event of default) and is convertible into shares of the Company’s common stock at Tonaquint’s option at a price of $0.55 per share, exercisable in seven tranches, consisting of a first tranche of $340,000 of principal and any interest, fees costs or charges, and six additional tranches of $220,000 each, plus any interest, costs, fees or charges.

 

Beginning on the date that is six (6) months after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid to the Company (the “Initial Installment Date”), and on each applicable Installment Date thereafter, the Company is to pay the Holder, the applicable Installment Amount due on such date. Ten Installment Amounts of $166,000 plus the sum of any accrued and unpaid interest, fees, costs or charges may be made (a) in cash (a “Company Redemption”), (b) by converting such Installment Amount into shares of Common Stock (a “Company Conversion”), or (c) by any combination of a Company Conversion and a Company Redemption so long as the entire amount of such Installment Amount due shall be converted and/or redeemed by the Company on the applicable Installment Date. The 2014 Company Note matured fifteen months after the Issuance Date.

 

During the year ended December 31, 2014, the Company received an additional $800,000 of the purchase price and an additional $200,000 (including $21,188 of interest) during the year ended December 31, 2015. On December 16, 2015, the Company and AVHI, the Company’s wholly owned subsidiary entered into a Deed in Lieu of Foreclosure Agreement (the “DLF Agreement”) with Tonaquint, pursuant to which in exchange for the Company conveying its’ interest in the Company’s Nevada owned real estate (the “Property”), Tonaquint agreed to refrain and forbear from exercising and enforcing its remedies under their 2014 Convertible Note. Additionally, the Company received $25,000 and a reduction of the Note balance of $500,000. AVHI had a cost of approximately $224,466 for the Property.

 

During the year ended December 31, 2015, the Company recorded interest expense of $281,607, and increased accrued interest expense by $281,607 for amounts due Tonaquint, pursuant to the 2014 Company Note. Additionally, as of the date of the DLF Agreement, the Company and Tonaquint agreed to offset the remaining unpaid principal balance of the Investor Notes of $176,642 to the Note. The parties further agreed that accrued and unpaid interest of $316,723 would be added to the Note and further agree that the Note balance as the DLF Agreement the Note balance was $311,815, resulting in a net gain of debt forgiveness of $292,372. As of December 31, 2015, $311,815 of principal and accrued interest of $1,041 is outstanding on the 2014 Company Note.

 

F-13
 

A summary of the Company Note balance as of December 31, 2015 is as follows:

 

   2015
Beginning Balance  $1,256,658 
Accrued interest added to Note   316,723 
Conversion of convertible notes   (584,925)
Investor Notes applied to Note   (176,642)
Property applied to Note   (224,466)

Gain on debt settlement

   (277,533)
Ending Balance  $311,815 

 

During the year ended December 31, 2015, the Company issued the following shares of common stock upon the conversions of portions of the 2014 Company Note:

 

  Date 

Principal

Conversion

 

Interest

Conversion

 

Total

Conversion

 

Conversion

Price

 

Shares

Issued

 1/3/15  $65,460   $9,540   $75,000   $.045    1,665,445 
 1/28/15  $54,123   $8,377   $62,500   $.0334    1,869,187 
 2/20/15  $55,901   $9,099   $65,000   $.0244    2,668,309 
 3/13/15  $60,000   $—     $60,000   $.0244    2,463,045 
 3/31/15  $66,555   $8,445   $75,000   $.0125    5,985,634 
 5/5/15  $66,731   $8,269   $75,000   $.0125    6,008,171 
 6/2/15  $67,277   $7,723   $75,000   $.0095    7,917,238 
 6/29/15  $67,483   $7,517   $75,000   $.0055    13,678,643 
 7/29/15  $29,368   $7,262   $36,630   $.003663    10,000,000 
 8/13/15  $27,473   $—     $27,473   $.003663    7,500,000 
 10/16/15  $10,549   $13,924   $24,473   $.001003    24,400,000 
 11/16/15  $14,005   $6,792   $20,797   $.001    21,730,000 
     $584,925   $86,947   $671,873         105,885,685 

 

2015 Convertible Notes

 

On March 2, 2015, the Company issued a Convertible Promissory Note for $79,000 to Vis Vires Group (“Vis Vires”). The Company received net proceeds of $75,000 after debt issuance costs of $4,000 paid for lender legal fees. The Note matured on November 25, 2015 and can be converted at a 39% discount to the market price as defined in the Note. On September 3, 2015, Vis Vires converted $10,000 of principal at a conversion price of $0.0019 and the Company issued 5,263,158 shares of common stock. On September 10, 2015, Vis Vires converted $19,800 of principal at a conversion price of $0.0012 and the Company issued 16,500,000 shares of common stock. As of December 31, 2015, the principal balance of the Vis Vires note is $49,200.

 

On March 27, 2015, the Company issued a Convertible Promissory Note for $27,000 to GW Holding Group, LLC (“GW”). On March 31, 2015, the Company received net proceeds of $25,000 after debt issuance costs of $2,000 paid for lender legal fees. The Note matures March 27, 2016 and converts at a 42% discount to the market price as defined in the Note. On October 12, 2015, the Company issued 4,494,567 shares of common stock upon the conversion of $3,500 of principal and $150 accrued and unpaid interest on the 2015 GW Note. The shares were issued at approximately $0.000812 per share. As of December 31, 2015, the principal balance of the GW note is $23,500.

 

March 27, 2015, the Company issued a Convertible Promissory Note for $78,750 to LG Capital Funding, LLC (“LG”). The Company received net proceeds of $75,000 after debt issuance costs of $3,750 paid for lender legal fees. The Note matures March 27, 2016 and converts at a 42% discount to the market price as defined in the Note. On October 1, 2015, the Company issued 3,524,027 shares of common stock upon the conversion of $2,750 of principal and $112 accrued and unpaid interest on the 2015 LG Note. The shares were issued at approximately $0.000812 per share. On October 13, 2015, the Company issued 5,995,275 shares of common stock upon the conversion of $5,000 of principal and $216 accrued and unpaid interest on the 2015 LG Note. The shares were issued at approximately $0.00087 per share. On November 5, 2015, the Company issued 9,036,379 shares of common stock upon the conversion of $5,500 of principal and $265 accrued and unpaid interest on the 2015 LG Note. The shares were issued at approximately $0.000638 per share. As of December 31, 2015, the principal balance of the LG Note is $65,500.

 

F-14
 

On March 30, 2015, the Company issued a Convertible Promissory Note for $27,000 to Service Trading Company, LLC (“Service”). On April 6, 2015, the Company received net proceeds of $25,000 after debt issuance costs of $2,000 paid for lender legal fees. The Note matures March 30, 2016 and converts at a 42% discount to the market price as defined in the Note. On October 9, 2015, the Company issued 7,340,834 shares of common stock upon the conversion of $4,500 of principal and $184 accrued and unpaid interest on the 2015 Service Note. The shares were issued at approximately $0.000638 per share. As of December 31, 2015, the principal balance of the Service Note is $22,500.

 

The debt issuance costs of $11,750 in the aggregate included in the 2015 Convertible Notes, will be amortized over the earlier of the terms of the Note or any redemptions and accordingly, $10,187 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2015. As of December 31, 2015, $160,700 of principal and accrued interest of $8,750 is outstanding on the 2015 Convertible Notes, and the principal amount is carried at $133,480, net of a remaining note discount of $27,220.

 

Among other terms the 2015 Notes are due nine to twelve months from their issuance date, bearing interest at 8% per annum, payable in cash or shares at a conversion price (the “Conversion Price”) for each share of common stock equal to 39% - 42% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s common stock for the ten to eighteen trading days immediately preceding the date of conversion. Upon the occurrence of an event of default, as defined in the 2015 Convertible Notes, the Company was required to pay interest at 22% per annum and the holders could at their option declare a Note, together with accrued and unpaid interest, to be immediately due and payable. In addition, the 2015 Convertible Notes provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.

 

The Company determined that the conversion feature of the 2015 Convertible Notes represent an embedded derivative since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the 2015 Convertible Notes were not considered to be conventional debt under EITF 00-19 and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The embedded feature included in the 2015 Convertible Notes resulted in an initial debt discount of $211,750, an initial derivative liability expense of $71,761 and an initial derivative liability of $283,511.

 

As of December 31, 2015 the Company revalued the embedded conversion feature of the 2015 Convertible Notes and warrants (see Note 8). The fair value of the 2015 Convertible Notes was calculated at December 31, 2015 based on the Black Scholes method consistent with the terms of the related debt.

 

A summary of the derivative liability balance as of December 31, 2015 is as follows:

 

   2015
Beginning Balance  $—   
Initial Derivative Liability   283,511 
Fair Value Change   (40,845)
Reduction for conversions   (75,652)
Ending Balance  $167,014 

 

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of December 31, 2015:

 

    Commitment date    Remeasurement date 
Expected dividends   -0-    -0- 
Expected volatility   121%-194%    190%-239% 
Expected term   3-12 months    3-6 months 
Risk free interest   .06%-.27%    .02%-.16% 

 

F-15
 

A summary of the convertible notes payable balance as of December 31, 2015 is as follows:

 

   2015
Beginning Balance  $1,256,658 
Convertible notes-newly issued   211,750 
Accrued interest added to Note   333,562 
Conversion of convertible notes   (635,975)
Investor Notes applied to Note   (176,642)
Property applied to Note   (224,466)
Gain on debt settlement   (292,372)
Unamortized discount   (27,220)
Ending Balance  $445,294 

 

Note Payable Land

 

On March 18, 2014, in conjunction with the land purchase of 80 acres in Pueblo County, Colorado, the Company paid $36,000 cash and entered into a promissory note in the amount of $85,750. The promissory note is being amortized on the basis of five (5) years, with principal payments of $17,150 plus interest at 3.5% due annually on December 1 of each year. Payments begin December 1, 2014, and shall be due on the first day of each succeeding December, with any balance of principal and accrued interest due December 1, 2020. On March 4, 2015, and May 4, 2015, the Company paid $9,000 and $2,437, respectively, of the December 1, 2014 amount. As of September 30, 2015, the balance of note is $74,313, including a past due amount of $5,713 of the December 2014 amount due. In November 2015, the Company was made aware that the land transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company was a party to the land purchase, however, it was recently discovered the second party to the land contract never filed the original quit claim deed on behalf of the Company, even though a copy of the notarized quit claim deed was sent to the Company. To date, the Company has paid a total of $47,438 ($36,000 at closing) and is on the deed of trust of the property. Accordingly, until the deed is properly recorded, the Company reduced the remaining balance of the note payable for the acquisition of the land of $74,313 and recorded a reserve allowance for the remaining balance of the asset of $54,490.

 

Future principle payments due on the Company’s convertible debt and note payable as of December 31, 2015, are as follows

 

Twelve months ending

December 31,

  Amount
2016  $472,514 
Less current portion   445,294 
Less discounts   27,220 
Long term portion  $-0- 

 

Note 7 – Related Party Transactions

 

Management Fees and Stock Compensation Expense

 

Effective January 1, 2013, the Company agreed to an annual compensation of $150,000 for its CEO, Mr. Michael Friedman (resigned March 20, 2015, re-appointed November 4, 2015), and $96,000 for the CFO, Mr. Barry Hollander (resigned September 15, 2015). For 2014, the Company and Mr. Hollander agreed that up to $5,000 per month can be paid in cash and the balance in restricted shares of common stock. Effective March 20, 2015, Mr. Justin Braune was named CEO and President. Mr. Braune also was appointed to the Board of Directors. B. Michael Friedman resigned his role as CEO and also from the Board of Directors. The Company agreed to an annual compensation of $100,000 for Mr. Braune in his role of CEO and Director of the Company and to issue Mr. Braune 15,000,000 shares of restricted common stock. The Company also initially issued Mr. Braune 12,500,000 shares of common stock on October 13, 2015. On October 16, 2015, Mr. Braune advised the Company and the Company’s transfer agent at the time to cancel the shares. Mr. Braune resigned from the board of directors and as CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation.

 

F-16
 

For the years ended December 31, 2015 and 2014, the Company recorded expenses to its officers the following amounts included in Administrative and Management Fees in the consolidated statements of operations, included herein:

 

    
    2015    2014 
Mr. Braune  $62,821   $—   
Mr. Friedman   62,500    150,000 
Mr. Hollander   68,000    96,000 
Total  $193,321   $246,000 

 

As of December 31, 2015 and 2014, the Company owed the following amounts, included in deferred compensation on the Company’s consolidated balance sheet:

 

       
   2015  2014
Mr. Friedman  $8,580   $80,082 
Mr. Braune   16,667    —   
Mr. Hollander   12,731    1,579 
Total  $37,978   $81,661 

 

On April 14, 2015, the Company appointed Dr. Stephen Holt to the Advisory Board of the Board of Directors of the Company. The Company issued 5,000,000 shares of restricted common stock to Dr. Holt for his appointment. The Company valued the 5,000,000 shares of common stock at $100,000 ($0.02 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015. Additionally, the Company agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share. 400,000 Option Shares vested immediately and the remaining 600,000 Option Shares vest over 12 months. Accordingly, as of December 31, 2015, 850,000 option shares have vested and the Company has recorded $13,436 for the year ended December 31, 2015 in stock compensation expense.

 

Effective June 26, 2015, the Company issued 1,000 shares of Class B Preferred Stock (super voting rights, non-convertible securities) to Mr. Friedman, resulting in Mr. Friedman having majority control in determining the outcome of all corporate transactions subject to vote, including the election of officers.

 

On October 13, 2015, the Company issued 12,500,000 shares of common stock to Mr. Friedman for services. The Company valued the shares of common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015.

 

On October 13, 2015, the Company issued 12,500,000 shares of common stock to Mr. Braune for services. The Company valued the common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ending December, 31 2015. On October 16, 2015, Mr. Braune adviseed the Company and the Company’s transfer agent at the time to cancel the shares. Since then, Mr. Braune is claiming ownership of the shares, which the Company disputes.

 

On December 31, 2014, the Company issued 17,226,778 shares of restricted common stock to Mr. Friedman upon the conversion of 450,000 shares of Class B Preferred Stock.

 

On December 31, 2014, the Company issued 1,230,484 shares of restricted common stock to Venture Equity upon the conversion of 50,000 shares of Class B Preferred Stock.

 

On January 13, 2014, the Company issued 545,454 shares of common stock to Venture Equity, LLC, (“Venture Equity”) a Florida limited liability Company, controlled by the Company’s former CFO, upon the conversion of $60,000 of accrued management fees. The shares were issued at $0.11 per share, the market price of the common stock on December 31, 2013, the date on which the board of directors approved the issuance. On December 31, 2014, the Company issued 444,444 shares of restricted common stock to Venture Equity, upon the conversion of $40,000 of accrued and unpaid management fees as of December 31, 2014, the date on which the board of directors approved the issuance. The shares were issued at $0.09 per share, the average market price of the common stock for the period.

 

F-17
 

Amounts Due from 800 Commerce, Inc.

 

800 Commerce, Inc., a commonly controlled entity until February 29, 2016, owed Agritek $282,947 and $236,759 as of December 31, 2015 and 2014, respectively, as a result of advances received from or payments made by Agritek on behalf of 800 Commerce. These advances are non-interest bearing and are due on demand and are included in Due from Related Party on the balance sheet herein. In February 2016, the Company entered into a Debt Settlement Agreement (the “Settlement Agreement”) with 800 Commerce, Inc. (now known as Petrogress, Inc.) whereby the Company accepted 1,101,642 shares of common stock of Petrogress in settlement of the amount due. Based on the market value of the Petrogress common stock on the date of the Settlement Agreement, the Company recognized a loss of $266,422 for the year ended December 31, 2015.

 

Note 8 – Common and Preferred Stock

 

Common Stock

 

2015 Issuances

 

During the year ended December 31, 2015, the Company issued the following shares of common stock upon the conversions of portions of the 2014 Company Note and portions of the 2015 Convertible Notes:

 

Date 

Principal

Conversion

 

Interest

Conversion

 

Total

Conversion

 

Conversion

Price

 

Shares

Issued

 

 

Issued to

 1/3/15  $65,460   $9,540   $75,000   $.045    1,665,445   Tonaquint
 1/28/15  $54,123   $8,377   $62,500   $.0334    1,869,187   Tonaquint
 2/20/15  $55,901   $9,099   $65,000   $.0244    2,668,309   Tonaquint
 3/13/15  $60,000   $—     $60,000   $.0244    2,463,045   Tonaquint
 3/31/15  $66,555   $8,445   $75,000   $.0125    5,985,634   Tonaquint
 5/5/15  $66,731   $8,269   $75,000   $.0125    6,008,171   Tonaquint
 6/2/15  $67,277   $7,723   $75,000   $.0095    7,917,238   Tonaquint
 6/29/15  $67,483   $7,517   $75,000   $.0055    13,678,643   Tonaquint
 7/29/15  $29,368   $7,262   $36,630   $.003663    10,000,000   Tonaquint
 8/13/15  $27,473   $—     $27,473   $.003663    7,500,000   Tonaquint
 9/3/15  $10,000   $—     $10,000   $.0019    5,263,158     Vis Vires
 9/10/15  $19,800   $—     $19,800   $.00083    16,500,000     Vis Vires
 10/1/15  $2,750   $112   $2,862   $.000812    3,524,027  LG
 10/9/15  $4,500   $183   $4,683   $.000638    7,340,834   Service
 10/12/15  $3,500   $150   $3,650   $.000812    4,494,567   GW
 10/13/15  $5,000   $216   $5,216   $.00087    5,995,275   LG
 10/16/15  $10,549   $13,924   $24,473   $.001003    24,400,000   Tonaquint
 11/6/15  $5,500   $265   $5,765   $.000638    9,036,379   LG
 11/16/15  $14,005   $6,792   $20,797   $.001    21,730,000   Tonaquint
     $635,975   $87,873   $723,848         158,039,912    

 

In addition to the above during the year ended December 31, 2015, the Company:

 

On October 13, 2015, the Company issued 12,500,000 shares of common stock to Mr. Friedman for services. The Company valued the shares of common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015.

 

On October 13, 2015, the Company issued 12,500,000 shares of common stock to Mr. Braune for services. The Company valued the common stock at $25,000 ($0.002 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ending December, 31 2015. On October 16, 2015, Mr. Braune adviseed the Company and the Company’s transfer agent at the time to cancel the shares. Since then, Mr. Braune is claiming ownership of the shares, which the Company disputes.

 

F-18
 

On April 14, 2015, the Company appointed Dr. Stephen Holt to the Advisory Board of the Board of Directors of the Company. The Company issued 5,000,000 shares of restricted common stock to Dr. Holt for his appointment.

 

On March 20, 2015, the Company issued 15,000,000 shares of common stock to the Company’s CEO in connection with an employment and board of director’s agreement naming Mr. Braune as CEO, President and a member of our Board of Directors. The shares of common stock were to vest as follows: 5,000,000, shares on the six month anniversary of the Agreement and 10,000,000 shares on the one year anniversary of the Agreement. Mr. Braune resigned from the board of directors and as CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation.

 

2014 Issuances

 

In January 2014 the Company issued in the aggregate 8,467,388 shares of common stock to Typenex upon the conversion of $523,564 of the Company Note and accrued and unpaid interest of $3,716. The shares were issued at approximately $0.06227 per share.

 

On January 13, 2014, the Company issued 545,454 shares of common stock to Venture Equity upon the conversion of $60,000 of accrued management fees. The shares were issued at $0.11 per share, the market price of the common stock on December 31, 2013.

 

On January 14, 2014, the Company issued 2,460,968 shares of common stock upon the conversion of 100,000 shares of Class B Preferred Stock.

 

On January 30, 2014, February 3, 2014 and February 5, 2014, the Company issued in the aggregate 369,420 shares of common stock to Asher upon the conversion of $65,000 of the 2013 Notes and accrued and unpaid interest of $2,600. The shares were issued at approximately $0.18299.

 

In March 2014, the Company issued in the aggregate 843,654 shares of common stock to Typenex upon the conversion of $116,611 of the Company note and accrued and unpaid interest. The shares were issued at approximately $0.1382 per share.

 

On March 17, 2014, the Company issued 4,312,420 shares of common stock upon the conversion of 150,000 shares of Class B Preferred Stock.

 

On March 31, 2014, the Company issued 56,948 shares of common stock to James Canton upon the conversion of $25,000 of accrued stock compensation.

 

On April 17, 2014, the Company issued 188,088 shares of common stock in satisfaction of $36,000 of the October 2013 Asher Note. The shares were issued at approximately $0.19 per share.

 

On April 20, 2014, the Company issued 202,867 shares of common stock in satisfaction of $34,000 of the October 2013 Asher convertible note and accrued and unpaid interest of $2,800. The shares were issued at approximately $0.18 per share.

 

On July 22, 2014, the Company issued 150,000 shares of Company common stock to Mr. Bartoletta as an advisor to the Board of the Directors of the Company. The Company recorded an expense of $33,000 (based on the market price of the Company’s common stock of $0.22 per share) and is included in professional and consulting fees in the consolidated statements of operations for the year ended December 31, 2014, respectively.

 

On August 6, 2014, the Company issued 625,978 shares of common stock upon the conversion of $19,933 of principal of the 2014 Company Note and $80,067 of accrued and unpaid interest. The shares were issued at approximately $0.16 per share.

 

On September 5, 2014, the Company issued 871,460 shares of common stock upon the conversion of $88,804 of principal of the 2014 Company Note and $11,196 of accrued and unpaid interest. The shares were issued at approximately $0.115 per share.

 

F-19
 

On September 18, 2014, the Company issued 208,333 shares of common stock to James Canton upon the conversion of $25,000 of accrued stock compensation.

 

On September 18, 2014, the Company issued 1,300,000 shares of common stock to Philip Johnston pursuant to a consulting agreement for services including but not limited to business modeling and strategies, strategic alliances, introduction to investment bankers, identify property acquisitions for agricultural use in Canada and to identify retail chains/outlets for wellness products throughout Canada. The Company recorded an expense of $156,000 (based on the market price of the Company’s common stock of $0.12 per share) and is included in professional and consulting fees in the consolidated statements of operations for the year ended December 31, 2014, respectively.

 

On September 18, 2014, the Company issued in the aggregate 1,500,000 shares of common stock pursuant to the APA for the acquisition of Dry Vapes Holdings, Inc. The shares were valued at $0.12 per share.

 

On October 13, 2014, the Company issued 562,272 shares of common stock upon the conversion of $38,745 of principal of the 2014 Company Note and $11,255 of accrued and unpaid interest. The shares were issued at approximately $0.089 per share.

 

On October 21, 2014, the Company issued 2,011,142 shares of common stock upon the conversion of $89,369 of principal of the 2014 Company Note and $10,631 of accrued and unpaid interest. The shares were issued at approximately $0.05 per share.

 

On October 21, 2014 the Company issued 735,895 shares of common stock to a consultant for investor relation services. The Company recorded an expense of $90,000 (based on the market price of the Company’s common stock of approximately $0.12 per share) and is included in professional and consulting fees in the consolidated statements of operations for the year ended December 31, 2014, respectively.

 

On November 11, 2014, the Company issued 1,541,163 shares of common stock upon the conversion of $76,483 of principal of the 2014 Company Note and $147 of accrued and unpaid interest. The shares were issued at approximately $0.05 per share.

 

On December 5, 2014, the Company issued 1,712,241 shares of common stock upon the conversion of $90,007 of principal of the 2014 Company Note and $9,993 of accrued and unpaid interest. The shares were issued at approximately $0.058 per share.

 

On December 31, 2014, the Company issued 17,226,778 shares of restricted common stock to Mr. Friedman upon the conversion of 450,000 shares of Class B Preferred Stock.

 

On December 31, 2014, the Company issued 1,230,484 shares of restricted common stock to Venture Equity upon the conversion of 50,000 shares of Class B Preferred Stock. The Company also issued Venture Equity 444,444 shares of restricted common stock for accrued and unpaid management fees of $40,000 owed to Venture Equity.

 

On December 31, 2014, the Company issued 277,778 shares of common stock to James Canton upon the conversion of $25,000 of accrued stock compensation.

 

Previously the Company appointed Mr. James Canton to be an advisor to the Company’s Board of Directors. In April 2013, the Company agreed to issue to Mr. Canton 200,000 shares of common stock, a warrant to purchase 300,000 shares of common stock at an exercise price of $0.50 per share with an expiration date on the third year anniversary of the grant, and $25,000 to be paid in shares of common stock to be issued at the end of each calendar quarter beginning on June 30, 2013 and ending on the earlier of March 31, 2015 (the term of Canton’s advisor role) or the date Canton is no longer serving as an advisor to the board of directors. The Company included $100,000 in stock based compensation expense for the year ended December 31, 2014. As of December 31, 2015, the Company owed Mr. Canton $25,000, which is included in accounts payable and accrued expenses on the consolidated balance sheet herein.

 

Preferred Stock

 

On June 26, 2015, the Company filed with the Delaware Secretary of State the Amended and Restated Designation Preferences and Rights (the “Certificate of Designation”) of Class B Preferred Stock (the “Series B Preferred Stock”). Pursuant to the Certificate of Designation, 1,000 shares constitute the Series B Preferred Stock. The Series B Preferred Stock and any accrued and unpaid dividends thereon shall, with respect to rights on liquidation, winding up and dissolution, rank senior to the Company’s issued and outstanding common stock and Series A preferred stock.

 

F-20
 

The Series B Preferred Stock has the right to vote in aggregate, on all shareholder matters equal to 51% of the total vote, no matter how many shares of common stock or other voting stock of the Company are issued or outstanding in the future. The Series B Preferred Stock has a right to vote on all matters presented or submitted to the Company’s stockholders for approval in pari passu with the common stockholders, and not as a separate class. The holders of Series B Preferred Stock have the right to cast votes for each share of Series B Preferred Stock held of record on all matters submitted to a vote of common stockholders, including the election of directors. There is no right to cumulative voting in the election of directors. The holders of Series B Preferred Stock vote together with all other classes and series of common stock of the Company as a single class on all actions to be taken by the common stockholders except to the extent that voting as a separate class or series is required by law.

 

On June 26, 2015, the Company issued 1,000 shares of Class B Preferred Stock. The Company estimated the fair value of the shares of the Series B Preferred Stock (super voting rights, non-convertible securities) at $276,300 for purposes of solely determining the proper accounting treatment and valuation in accordance with ASC 820, Fair Value in Financial Instruments. The Company recorded $40,000 as payment towards accrued and unpaid fees owed Mr. Friedman and $236,300 as a loss on settlement of debt extinguishment.

 

As of December 31, 2015 and 2014, there were 1,000 and -0- shares of Class B Preferred Stock outstanding, respectively.

 

Warrants

 

On April 14, 2015, in connection with the appointment of Dr. Stephen Holt to the advisory board, the Company agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share and expiring April 14, 2018. Option Shares of 400,000 vested immediately and 50,000 Option Shares vest each month form April 2015 through March 2016. Accordingly, as of December 31, 2015, 850,000 Option Shares have vested and the Company recorded $13,436 as stock compensation expense, based on Black-Scholes.

 

On April 26, 2013 and in connection with the appointment of Mr. James Canton to the Company’s advisory board, the Company issued a warrant to Mr. Canton to purchase 300,000 shares of common stock. The warrant has an exercise price of $0.50 per share, remains outstanding and expires April 26, 2016.

 

Additionally, the Company also evaluated all outstanding warrants to determine whether these instruments may be tainted. All warrants outstanding were considered tainted as a result of the Company not having reserved the underlying shares of common stock of the warrants. The Company valued the embedded derivatives within the warrants using the Black-Scholes valuation model.  In 2015, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of .29 to 3.0 years; (2) a computed volatility rate of 127% to 239%; (3) a discount rate of .24% to 1.091%; and (4) zero dividends. The valuation of $10,478 of these embedded derivatives was initially recorded as an expense and based on the fair value as of December 31, 2015, the Company reduced the liability by $9,545 with an offsetting gain on derivative liability.

 

Note 9 – Income Taxes

 

Deferred income taxes reflect the net tax effects of operating loss and tax credit carry forwards and temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of the Company’s ability to realize the benefit of the deferred tax assets, the deferred tax assets are fully offset by a valuation allowance at December 31, 2015 and 2014.

 

F-21
 

Income tax expense for 2015 and 2014 is as follows:

 

   2015  2014
       
Current:          
  Federal  $—    $—  
  State   —     —  
           
    —      —   
           
Deferred:          
  Federal  $(657,937)  $(682,302)
  State   (70,244)   (72,846)
  Change in Valuation allowance   728,181    755,148 
   $—     $—   

 

The following is a summary of the Company’s deferred tax assets at December 31, 2015 and 2014:

 

   2015  2014
           
Deferred Tax Assets:          
  Net operating losses  $1,414,628   $1,005,711 
  Stock compensation   1,632,947    1,491,934 
  Debt discounts and derivatives   277,597    199,228 
  Other   120,990    20,487 
      Net deferred tax assets   3,446,162    2,717,360 
Valuation allowance   (3,446,162)   (2,717,360)
   $—     $—   

 

A reconciliation between the expected tax expense (benefit) and the effective tax rate for the years ended December 31, 2015 and 2014 are as follows:

 

   2015  2014
           
Statutory federal income tax rate   (34.00%)   (34.00%)
State taxes, net of federal income tax   (3.63%)   (3.63%)
Effect of change in valuation allowance   —      —   
Non-deductible expenses   37.63%   37.63%
    0%   0%

 

As of December 31, 2015, the Company had a tax net operating loss carry forward of approximately $3,759,000. Any unused portion of this carry forward expires in 2030. Utilization of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.

 

Note 10 – Commitments and Contingencies

 

Office Space

 

Effective April 1, 2014, the Company entered into a rent sharing agreement for the use of 1,300 square feet with a company controlled by the Company’s CFO. The Company agreed to pay $1,350 per month for the space. The Company terminated the agreement in September 2015.

 

F-22
 

In April 2014, the Company entered into a ten year sublease agreement for the use of up to 7,500 square feet with a Colorado based oncology clinical trial and drug testing company and facility presently doing cancer research and testing for established pharmaceutical companies seeking FDA approval for new drugs. Pursuant to the lease, as amended, the Company agreed to pay $3,500 per month for the space, and it will be utilized to market, sell and distribute products to Colorado dispensaries. The Company is currently in default of the lease.

 

Effective April 10, 2015, the Company entered into a four month lease agreement for the use of 170 square feet in California, for office space for our CEO. The Company agreed to pay $1,300 for the use of the space. The agreement expired in August 2015.

 

For the years ended December 31, 2015 and 2014, the Company recorded rent expense of $72,936 and $63,489, respectively.

 

On April 10, 2015, the Company entered into a Consulting Agreement (the “Agreement”) with Windsor McKenna (the “Consultant”). Pursuant to the Agreement, the Consultant will provide professional marketing and strategy consulting services to the Company for a one year period unless terminated by either party with a 30-day written notice. The Company will compensate the Consultant a one-time fee of $9,000 plus $2,500 in additional costs for travel during Phase 1, expected to be 30-45 days, $8,000 a month for the following 3 months and $10,000 a month for the remainder of the term of the Agreement.

 

On May 29, 2015, the Company entered into a Contract Services Agreement (the “Services Agreement”) with Kazzlo International, LLC (“Kazzlo”). Pursuant to the Services Agreement, Kazzlo will test, develop and deploy a new, responsive website to the Company for a one year period unless terminated by either party with a 10 day written notice. The Company will compensate Kazzlo at a rate of $40 per hour, not to exceed $7,000 for the website development.

 

Leased Properties

 

On April 28, 2014, the Company executed and closed a 10 year lease agreement for 20 acres of an agricultural farming facility located in South Florida following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing low grade marijuana specifically for the use of treating epilepsy and cancer patients.  Pursuant to the lease agreement, the Company maintains a first right of refusal to purchase the property for three years. The Company prepaid the first year lease amount of $24,000 and based on the straight line expense over the term of the lease, the Company has recorded $38,244 and $25,496 of expense (included in leased property expenses) for the years ended December 31, 2015 and 2014, respectively. The Company is currently in default of the lease agreement, as rents have not been for the second year of the lease beginning May 2015.

 

On July 11, 2014, the Company signed a ten year lease agreement for an additional 40 acres in Pueblo, Colorado. The lease requires monthly rent payments of $10,000 during the first year and is subject to a 2% annual increase over the life of the lease. The lease also provides rights to 50 acres of certain tenant water rights for $50,000 annually plus cost of approximately $2,400 annually. The Company paid the $50,000 in July 2014. Based on the straight line expense over the lease term the Company has recorded $158,485 and $77,667 of expense for the years ended December 31, 2015 and 2014, respectively, (included in leased property expenses) related to the land and water rights. The Company is currently in default of the lease agreement, as rents have not been paid since February 2015.

 

Future rent payments for the next five years and thereafter are as follows:

 

 

Twelve months ending December 31,  Amount
 2016   $152,460 
 2017    157,832 
 2018    163,544 
 2019    169,626 
 2020    176,112 
 Thereafter    655,490 
     $1,475,065 

 

F-23
 

Note 11 – Going Concern

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of December 31, 2015 the Company had an accumulated deficit of $13,405,211 and working capital deficit of $925,820. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Note 12 – Segment Reporting

 

Description of Segments

 

During the years ended December 31, 2015 and 2014, the Company operated in one reportable segment, wholesale sales.

 

Note 13 – Subsequent Events

 

2016 Debt Purchase Agreements

 

On January 6, 2016, the Company accepted and agreed to a Debt Purchase Agreement (the “DPA”), whereby LG Capital Funding, LLC (“LG”) acquired the 2015 convertible promissory note from Vis Vires. The Company issued an 8% Replacement Note to LG for $53,613 (the “First Replacement Note”). The First Replacement Note is due January 5, 2017 and is convertible into shares of the Company’s common stock at any time at the discretion of LG at a variable conversion price (“VCP”). The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.

 

On January 19, 2016, the Company accepted and agreed to a DPA, whereby LG acquired $157,500 of the Tonaquint 2014 Convertible Note in exchange for $75,000. The Company issued an 8% Replacement Note to LG for $157,500 (the “Second Replacement Note”). The Second Replacement Note is due January 19, 2017 and is convertible into shares of the Company’s common stock at any time at the discretion of LG at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.

 

On January 19, 2016, the Company accepted and agreed to a DPA, whereby Cerebrus Finance Group, LTD (“Cerebrus”) acquired $156,749.09 of the Tonaquint 2014 Convertible Note in exchange for $75,000. The Company issued an 8% Replacement Note to Cerebrus for $156,749.09 (the “Third Replacement Note”). The Third Replacement Note is due January 19, 2017 and is convertible into shares of the Company’s common stock at any time at the discretion of LG at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.

 

The LG DPA and the Cerebrus DPA resulted in the Tonaquint Note being paid in full, accordingly as of January 19, 2016, the Company does not owe any amounts to Tonaquint.

 

2016 Convertible Notes

 

On January 19, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $76,080, and delivered on January 31, 2016, gross proceeds of $62,500 excluding transaction costs, fees, and expenses.

 

On January 19, 2016, the Company completed the closing of a private placement financing transaction with Cerebrus, pursuant to a Securities Purchase Agreement (the “Cerebrus Purchase Agreement”). Pursuant to the Cerebrus Purchase Agreement, Cerebrus purchased an 8% Convertible Debenture (the “Cerebrus Debenture”) in the aggregate principal amount of $34,775, and delivered on January 25, 2016, gross proceeds of $25,000 excluding transaction costs, fees, and expenses.

 

On March 23, 2016, the Company completed the closing of a private placement financing transaction with Cerebrus, pursuant to a Securities Purchase Agreement (the “Cerebrus Purchase Agreement”). Pursuant to the Cerebrus Purchase Agreement, Cerebrus purchased an 8% Convertible Debenture (the “Cerebrus Debenture”) in the aggregate principal amount of $22,000, and delivered on March 28, 2016, gross proceeds of $20,000 excluding transaction costs, fees, and expenses.

 

F-24
 

On April 15, 2016, the Company completed the closing of a private placement financing transaction with LG. Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture in the aggregate principal amount of $65,625, and delivered on April 15, 2016, gross proceeds of $62,500 excluding transaction costs, fees, and expenses.

 

Principal and interest on the above three is due and payable one year from their respective funding date, and the LG and Cerebrus Debentures are convertible into shares of the Company’s common stock at any time at the discretion of LG and Cerebrus, respectively, at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.

 

The Company may prepay the LG and/or the Cerebrus Debentures, subject to prior notice to the holder within an initial 30 day period after issuance, by paying an amount equal to 118% multiplied by the amount that the Company is prepaying. For each additional 30 day period the amount being prepaid is multiplied by an additional 6%, up to a maximum of 148% on the 180th day from issuance. Beginning on the 180th day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing.

 

2016 Convertible Note Conversions   

 

Since January 1, 2016 the Company issued the following shares of common stock upon the conversions of portions of the 2015 Convertible Notes (see Note 6):

 

Date 

Principal

Conversion

 

Interest

Conversion

 

Total

Conversion

 

Conversion

Price

 

Shares

Issued

  Issued to
 3/7/16  $6,500   $489   $6,989   $.00174    4,016,471   LG
 3/8/16  $7,425   $928   $8,353   $.00174    4,800,354   GW
 3/17/16  $9,000   $696   $9,696   $.002436    3,980,431   LG
 3/17/16  $3,000   $138   $3,138   $.000638    4,918,624   Service
     $25,925   $2,251   $28,176         17,715,880    

 

Effective February 29, 2016, the Company received 1,102,462 shares of common stock of Petrogress, Inc. (formerly known as 800 Commerce, Inc.) as settlement of the $282,947 owed to the Company.

 

On May 6, 2016, the Company, B. Michael Freidman and Barry Hollander (former CFO) were named as defendants in a Summons/Complaint filed by Justin Braune in Palm Beach County Civil Court, Florida. The complaint alleges that Mr. Braune is entitled to 27,500,000 shares of common stock of the Company. The defendants will defend this lawsuit as Mr. Braune sent an email to the Company and the Company’s transfer agent cancelling 12,500,000 shares on October 16, 2015 and his letter of resignation dated November 4, 2015, clearly stated that he confirmed he had cancelled 15,000,000 shares of common stock. Mr. Braune’s letter of resignation was filed as Exhibit 5.1 on Form 8-K with the SEC on November 9, 2015.

 

 

 

 

 

F-25

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, B. Michael Friedman, certify that:

 

1. I have reviewed this Form 10-K of Agritek Holdings, Inc..;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods present in this report;

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(c) Disclosed in this report any change in the small business issuer's internal control over financing reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

 

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

 

Date: May 19, 2016
 
/s/ B. Michael Friedman

B. Michael Friedman, Principal Executive Officer and Principal Financial Officer

Agritek Holdings, Inc.

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the accompanying Annual Report on Form 10-K of Agritek Holdings, Inc., for the Year ended December 31, 2015, I, B. Michael Friedman hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

 

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 19, 2016
 
/s/ B. Michael Friedman

B. Michael Friedman

Principal Executive Officer and Principal Financial Officer

Agritek Holdings, Inc.