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Quarterly report with a continuing view of a company's financial position

10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: June 30, 2016

 

OR

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from ________________ to __________________

 

Commission File Number 000-1321002

 

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

 

Delaware   20-8484256
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

777 Brickell Avenue, Suite 500, Miami, FL 33131

(Address of principal executive offices)

 

(305) 721-2727

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 whether the registrant is a larger accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one)

 

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 Exchange Act). Yes No

 

The number of shares outstanding of the Registrant's $0.0001 par value Common Stock as of November 7, 2016, was 394,371,307 shares.

   

 

AGRITEK HOLDINGS, INC.

FORM 10-Q

Quarterly Period Ended June 30, 2016

 

INDEX

 

FORWARD-LOOKING STATEMENTS Page
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets at June 30, 2016 (Unaudited) and December 31, 2015 2
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 (Unaudited) 3
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (Unaudited)   4
  Notes to Condensed Financial Statements (Unaudited) 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                                                     19
Item 3. Quantitative and Qualitative Disclosures about Market Risks 24
Item 4. Controls and Procedures 24
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Mine Safety Disclosures 25
Item 5. Other Information 25
Item 6. Exhibits 27
     
SIGNATURES  

 

   

 

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this quarterly report on Form 10-Q. Additionally, statements concerning future matters are forward-looking statements.

 

Although forward-looking statements in this quarterly report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the fiscal year ended December 31, 2015, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this quarterly report on Form 10-Q and in other reports that we file with the Securities and Exchange Commission (the “SEC”). You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report on Form 10-Q.

 

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with, or furnish to, the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this quarterly report on Form 10-Q, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

 
 

 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   June 30,  December 31,
   2016  2015
   (Unaudited)  (Audited)
ASSETS          
Current Assets:          
Cash and cash equivalents  $—     $11,548 
Marketable Securities   14,542    —   
Due from related party   —      16,525 
Prepaid assets and other   —      3,333 
Total current assets   14,542    31,406 
           
Other   825    825 
Property and equipment, net of accumulated depreciation of $6,194 and $4,742 as of June 30, 2016 and December 31, 2015, respectively   9,300    9,087 
Investments in non-marketable securities   50,000    50,000 
           
Total assets  $74,667   $91,318 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current Liabilities:          
Accounts payable and accrued expenses  $433,319   $323,607 
Bank overdraft   462    —   
Due to related party   46,609    37,978 
Customer deposits   2,400    —   
Convertible notes payable, net of discount of $343,530 and $27,220 as of June 30, 2016 and December 31, 2015, respectively   279,199    445,294 
Derivative liabilities   814,542    167,014 
Total current liabilities   1,576,531    973,893 
           
Commitments and Contingencies          
           
Stockholders' Deficit:          
Series B convertible preferred stock, $0.01 par value; 1,000,000 shares authorized, and 1,000 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively   10    10 
Common stock, $.0001 par value; 1,000,000,000 and 500,000,000 shares authorized; 333,407,920 and 281,540,332 shares issued and outstanding, as of June 30, 2016 and December 31, 2015, respectively   33,341    28,155 
Additional paid-in capital   12,790,168    12,536,138 
Accumulated comprehensive gain   (1,983)   —   
Accumulated deficit   (14,323,400)   (13,446,878)
Total stockholders' deficit   (1,501,864)   (882,575)
           
Total liabilities and stockholders' deficit  $74,667   $91,318 
           
See notes to unaudited condensed consolidated financial statements.

 2 

 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
             
   Three Months Ended June 30,  Six Months Ended June 30,
   2016  2015  2016  2015
Product revenue  $—     $—     $3,228   $7,221 
Cost of revenue   —      —      3,161    3,284 
Gross profit   —      —      67    3,937 
                     
Operating Expenses:                    
Administrative and management fees (including $93,256 and $109,740 of stock based compensation for the three and six months ended June 30, 2015, respectively)   45,497    150,752    84,647    248,445 
Professional and consulting fees (including $0 and $2,371 of stock based compensation for the three and six months ended June 30, 2016, respectively, and $344,994 for the three and six months ended June 30, 2015, respectively)   37,528    364,169    73,869    384,757 
Impairment of goodwill   —      —      —      192,849 
Reserve for inventory loss   —      —      —      32,529 
Rent and other occupancy costs   14,209    19,082    24,709    34,211 
Leased property expense   42,411    54,911    84,822    109,822 
Advertising and promotion   2,941    30,212    6,000    37,754 
Property maintenance costs   —      3,000    —      3,000 
Travel and entertainment   2,626    9,729    14,761    24,774 
Other general and administrative expenses   11,824    24,427    31,845    44,414 
                     
Total operating expenses   157,036    656,282    320,653    1,112,555 
                     
Operating loss   (157,036)   (656,282)   (320,586)   (1,108,618)
                     
Other Income (Expense):                    
Interest income   —      6,335    —      13,981 
Interest expense   (162,889)   (188,169)   (304,106)   (503,062)
Gain (loss) on debt settlement   —      —      84,057    —   
Derivative liability (expense) income   (4,338)   (6,992)   (335,884)   (7,603)
                     
Total other expense, net   (167,227)   (188,826)   (555,933)   (496,684)
                     
Net loss  $(324,263)  $(845,108)  $(876,519)  $(1,605,302)
                     
Other Comprehensive gain, net of tax:                    
                     
Unrealized gain on marketable securities   (17,516)   —      (1,983)   —   
                     
    Other comprehensive gain   (17,516)   —      (1,983)   —   
                     
Comprehensive loss  $(341,779)  $(845,108)  $(878,502)  $(1,605,302)
                     
Basic and diluted loss per share  $*  $(0.01)  $*  $(0.01)
                     
Weighted average number of common shares outstanding Basic and diluted   309,092,522    134,505,583    295,316,427    118,232,198 
‘*Less than 0.01                    
See notes to unaudited condensed consolidated financial statements.

 

3
 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   Six months ended June 30,
   2016  2015
Cash flow from operating activities:          
Net loss  $(876,519)  $(1,605,302)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock issued for consulting services   —      100,000 
Stock compensation expense   2,371    236,300 
Amortization of deferred stock compensation   —      118,434 
Amortization of deferred financing costs   —      5,232 
Impairment of goodwill   —      192,849 
Reserve for inventory loss   —      32,529 
Depreciation   1,452    1,383 
Financing costs   28,481    —   
Gain on debt settlement   (84,057)   —   
Non cash interest expense for excess value of common stock issued for convertible notes payable   —      236,305 
Amortization of discounts on convertible notes   250,033    73,410 
Initial expense for change in derivative liabilities   426,126    —   
Change in fair values of derivative liabilities   (90,242)   7,603 
Changes in operating assets and liabilities:          
Decrease (increase) in :          
Accounts receivable   —      173 
Inventory   —      4,422 
Prepaid assets and other   3,333    44,935 
Increase (decrease) in:          
Accounts payable and accrued expenses   109,708    284,098 
Accrued interest payable   37,938    —   
Deferred compensation   3,233    4,434 
Tenant deposits   2,400    (90,000)
Net cash used in operating activities   (185,743)   (353,197)
           
Cash flows from investing activities:          
Purchase of equipment and furniture   (1,665)   —   
Advances to related party   —      (34,610)
Net cash used in investing activities   (1,665)   (34,610)
           
Cash flows from financing activities:          
Bank overdraft   462    —   
Payments received on notes receivable issued for convertible debt   170,000    82,391 
Proceeds from issuance of convertible debt   —      200,000 
Payments made on note payable   —      (11,437)
Proceeds from note payable, related party   5,398    —   
Net cash provided by financing activities   175,860    270,954 
           
Net decrease in cash and cash equivalents   (11,548)   (116,853)
           
Cash and cash equivalents, Beginning   11,548    118,429 
           
Cash and cash equivalents, Ending  $—     $1,576 
           
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  $86,205   $562,500 
Included in issuances of convertible notes for fees  $—     $40,000 
Fair value of marketable securities issued in exchange for debt  $16,525   $—   
Change in fair value for available for sale marketable securities  $(1,983)  $—   
           
See notes to unaudited condensed consolidated financial statements.

 4 

 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2016

(Unaudited)

 

Note 1 - Organization

 

Business

 

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

 

On May 23, 2016, the Company filed a certificate of amendment (a “Certificate of Amendment”), increasing the authorized capital of the Company to 1,001,000,000 shares of capital stock; consisting of 1,000,000,000 shares of common stock par value $0.0001 and 1,000,000 shares of preferred stock, par value $0.01. The majority of the Company’s shareholders consented to the Certificate of Amendment increasing the authorized capital.

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present the financial position, results of operations and cash flows for the stated periods have been made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated unaudited financial statements should be read in conjunction with a reading of the Company’s consolidated financial statements and notes thereto. Interim results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of future results for the full year. Certain amounts from the 2015 period have been reclassified to conform to the presentation used in the current period.

 

The condensed consolidated unaudited financial statements of the Company include the consolidated accounts of Agritek and its wholly owned subsidiaries, AVHI and Prohibition Products, Inc. (“PPI”). PPI, a Florida corporation, was originally formed on July 1, 2013 as The American Hemp Trading Company, Inc. (“AHTC”) and on August 27, 2014, AHTC changed its name to PPI. All intercompany accounts and transactions have been eliminated in consolidation. 

 

Cash and Cash Equivalents

 

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

 

Accounts Receivable

 

The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectability is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term. As of June 30, 2016, based on the above criteria, the Company has a full allowance for doubtful accounts of $43,408.

 

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.

 

5
 

Deferred Financing Costs

 

The costs related to the issuance of debt are capitalized and amortized to interest expense using the straight-line 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.

 

Marketable Securities

 

The Company classifies its marketable securities as available-for-sale securities, which are carried at their fair value based on the quoted market prices of the securities with unrealized gains and losses, net of deferred income taxes, reported as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Realized gains and losses on available-for-sale securities are included in net earnings in the period earned or incurred.

 

Investment of Non-Marketable Securities

 

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

 

Property and Equipment

 

Property and equipment are stated at cost, and except for land, depreciation is provided by use of a straight-line method over the estimated useful lives of the assets. The Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable. In November 2015, the Company was made aware that the land transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company was a party to the land purchase, however, 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 ($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: 

6
 

 

Furniture and equipment 5 years

 

The Company's property and equipment consisted of the following at June 30, 2016 and December 31, 2015:

 

   June 30,
2016
  December 31,
2015
Furniture and equipment  $15,494   $13,829 
Accumulated depreciation   (6,194)   (4,742)
Balance  $9,300   $9,087 

 

Depreciation expense of $761 and $1,452 was recorded for the three and six months ended June 30, 2016, respectively, compared to $936 and $1,383 for the three and six months ended June 30, 2015, 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 six months ended June 30, 2015.

 

Revenue Recognition

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

The three hierarchy levels are defined as follows:

 

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

 

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

 

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

7
 

 

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 June 30, 2016 there were warrants and options to purchase 1,000,000 shares of common stock and the Company’s outstanding convertible debt is convertible into approximately 536,836,311 shares of common stock. These amounts are not included in the computation of dilutive loss per share because their impact is antidilutive.

 

Accounting for Stock-Based Compensation 

 

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

 

For the three and six months ended June 30, 2016, the Company recorded stock and warrant based compensation of $0 and $2,371, respectively compared to $438,250 and $454,734 for the three and six months ended June 30, 2015, respectively. (See Note 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.

 

8
 

Advertising

 

The Company records advertising costs as incurred. For the three and six months ending June 30, 2016, advertising expense was $2,941 and $6,000, respectively, compared to $30,212 and $37,754 for the three and six months ended June 30, 2015, 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 six months ended June 30, 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.

 

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 six months ended June 30, 2016 and 2015 and the accounts receivable balance as of June 30, 2016:

 

  Customer  

Sales % Six

Months Ended

June 30, 2016

 

Sales % Six

Months Ended

June 30, 2015

 

Accounts

Receivable

Balance as of

June 30, 2016

  A       100 %     —       $ —    
  B       —         70 %   $ —    
  C       —         22 %   $ —    

 

Purchases

 

For the six months ended June 30, 2016 the Company’s purchases were from one vendor.

 

9
 

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.

 

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 each party confirmed that the Note balance as of the DLF Agreement was $311,815. As of December 31, 2015, $311,815 of principal and accrued interest of $1,041 is outstanding on the 2014 Company Note.

 

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

 

On January 19, 2016, the Company accepted and agreed to a DPA, whereby Cerebrus Finance Group, LTD (“Cerebrus”) acquired $154,315 of principal and $2,434.09 of accrued and unpaid interest 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.

 

As of June 30, 2016, the 2014 Company Note was paid in full.

 

10
 

2015 Convertible Notes

 

On March 2, 2015, the Company issued a Convertible Promissory Note for $79,000 to Vis Vires Group (“Vis Vires”). The Company received net proceeds of $75,000 after debt issuance costs of $4,000 paid for lender legal fees. The Note matured on November 25, 2015 and can be converted at a 39% discount to the market price as defined in the Note. As of December 31, 2015, the principal balance of the Vis Vires note was $49,200. On January 6, 2016, the Company accepted and agreed to a DPA, whereby LG acquired the 2015 convertible promissory note from Vis Vires. The Company issued an 8% Replacement Note to LG for $53,613 (the “First Replacement Note”). The First Replacement Note is due January 5, 2017 and is convertible into shares of the Company’s common stock at any time at the discretion of LG at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. As of June 30, 2016, the balance of the First Replacement Note is $53,613.

 

On March 27, 2015, the Company issued a Convertible Promissory Note for $27,000 to GW Holding Group, LLC (“GW”). On March 31, 2015, the Company received net proceeds of $25,000 after debt issuance costs of $2,000 paid for lender legal fees. The Note matured on March 27, 2016 and converts at a 42% discount to the market price as defined in the Note. In the six months ended June 30, 2016, the Company issued 17,844,348 shares of common stock upon the conversion of $23,500 of principal and $4,002 accrued and unpaid interest on the 2015 GW Note. The shares were issued at approximately $0.00161 per share. As of June 30, 2016 and December 31, 2015, the principal balance of the GW note is $0 and $23,500, respectively.

 

March 27, 2015, the Company issued a Convertible Promissory Note for $78,750 to LG. The Company received net proceeds of $75,000 after debt issuance costs of $3,750 paid for lender legal fees. The Note matured on March 27, 2016 and converts at a 42% discount to the market price as defined in the Note. On March 7, 2016, the Company issued 4,016,471 shares of common stock upon the conversion of $6,500 of principal and $489 accrued and unpaid interest on the 2015 LG Note. The shares were issued at approximately $0.00174 per share. In the six months ended June 30, 2016, the Company issued 17,829,852 shares of common stock upon the conversion of $31,500 of principal and $2,713 accrued and unpaid interest on the 2015 LG Note. The shares were issued at approximately $0.001918 per share. As of June 30, 2016 and December 31, 2015, the principal balance of the LG Note was $34,000 and $65,500, respectively.

 

On March 30, 2015, the Company issued a Convertible Promissory Note for $27,000 to Service Trading Company, LLC (“Service”). On April 6, 2015, the Company received net proceeds of $25,000 after debt issuance costs of $2,000 paid for lender legal fees. The Note matures March 30, 2016 and converts at a 42% discount to the market price as defined in the Note. In the six months ending June 30, 2016, the Company issued 16,993,388 shares of common stock upon the conversion of $22,500 of principal and $1,990 accrued and unpaid interest on the 2015 Service Note. The shares were issued at approximately $0.001441 per share. As of June 30, 2016 and December 31, 2015, the principal balance of the Service Note was $0 and $22,500, respectively.

 

The debt issuance costs included in the 2015 Convertible Notes were amortized over the earlier of the terms of the Note or any redemptions and have been expensed as debt issuance costs (included in interest expense).

 

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

 

11
 

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 ASC 815-40 (formerly EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock) and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The embedded feature included in the 2015 Convertible Notes resulted in an initial debt discount of $211,750, an initial derivative liability expense of $71,761 and an initial derivative liability of $283,511.

 

2016 Convertible Notes

 

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

 

On January 19, 2016, the Company completed the closing of a private placement financing transaction with 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 31, 2016, gross proceeds of $20,000 excluding transaction costs, fees, and expenses.

 

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

 

Principal and interest on the above four convertible debentures 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.

 

The Company determined that the conversion feature of the 2016 Convertible Notes represent an embedded derivative since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the 2016 Convertible Notes were not considered to be conventional debt under ASC 815-40 (formerly EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock) and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The embedded feature included in the 2016 Convertible Notes resulted in an initial debt discount of $566,343, an initial derivative liability expense of $426,126 and an initial derivative liability of $992,469.

12
 

 

As of June 30, 2016, the Company revalued the embedded conversion feature of the 2015 and 2016 Convertible Notes. The fair value of the 2015 and 2016 Convertible Notes was calculated at June 30, 2016 based on the Black Scholes method consistent with the terms of the related debt.

 

A summary of the derivative liability balance as of June 30, 2016 is as follows:

 

Beginning Balance  $167,014 
Initial Derivative Liability   992,469 
Fair Value Change   (83,218)
Debt extinguishment   (84,057)
Reduction for conversions   (177,666)
Ending Balance  $814,542 

 

The fair value at the commitment date for the 2016 Convertible Notes and the re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of June 30, 2016:

 

   Commitment date  Remeasurement date
Expected dividends   -0-    -0- 
Expected volatility   243%-268%    263%
Expected term   12 months    1-12 months 
Risk free interest   .44%-.68%    .18%-.65% 

 

A summary of the convertible notes payable balance as of June 30, 2016 is as follows:

 

   2016
Beginning Principal Balance  $472,515 
Convertible notes-newly issued   198,481 
Accrued interest added to Note   6,848 
Conversion of convertible notes   (77,500)
Unamortized discount   (343,530)
Ending Principal Balance  $256,814 
Accrued interest payable   22,385 
Ending Convertible Notes Balance  $279,199 

 

During the six months ended June 30, 2016, the Company issued the following shares of common stock upon the conversion of portions of the 2015 Convertible Notes and accrued interest thereon:

 

Date  Principal Conversion  Interest Conversion  Total
Conversion
  Conversion
Price
  Shares
Issued
  Issued to
 6/22/16  $5,000   $973   $5,973   $0.001450    4,119,414   GW
 6/20/16  $10,500   $1,003   $11,503   $0.001450    7,933,377   Cerberus
 6/20/16  $5,000   $967   $5,967   $0.001450    4,114,879   GW
 6/20/16  $6,000   $589   $6,589   $0.001450    4,544,241   LG
 6/10/16  $6,075   $1,134   $7,209   $0.001798    4,009,701   GW
 6/9/16  $5,000   $479   $5,479   $0.001798    3,047,219   LG
 6/2/16  $9,000   $848   $9,848   $0.002378    4,141,387   Cerberus
 5/23/16  $5,000   $460   $5,460   $0.002436    2,241,490   LG
 3/17/16  $9,000   $696   $9,696   $0.002436    2,668,309   LG
 3/17/16  $3,000   $138   $3,138   $0.000638    2,463,045   Service
 3/8/16  $7,425   $928   $8,353   $0.00174    1,869,187   GW
 3/7/16  $6,500   $489   $6,989   $0.00174    4,016,471   LG
     $77,500   $8,704   $86,204         45,168,720    
                               

13
 

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 then 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 during the year ended December 31, 2015, recorded a reserve allowance for the remaining balance of the asset of $54,490.

 

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). Effective March 20, 2015, Mr. Justin Braune was named CEO and President. Mr. Braune also was appointed to the Board of Directors. The Company agreed to an annual compensation of $100,000 for Mr. Braune in his role of CEO and Director of the Company and to issue Mr. Braune 15,000,000 shares of restricted common stock. Mr. Braune resigned from the board of directors and as CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation. The Company also initially issued Mr. Braune 12,500,000 shares of common stock on October 13, 2015. On October 16, 2015, Mr. Braune advised the Company’s transfer agent at the time to cancel the shares. 

 

For the three and six months ended June 30, 2016 and 2015, the Company recorded expenses to its officers the following amounts included in Administrative and Management Fees in the condensed consolidated statements of operations, included herein:

 

   Three months ended June 30,  Six months ended June 30,
   2016  2015  2016  2015
Braune, Former CEO  $—     $25,769   $—     $29,615 
Friedman, CEO   37,500    —      75,000    37,500 
Hollander, Former CFO   —      24,000    —      48,000 
Total  $37,500   $49,769   $75,000   $115,115 

 

As of June 30, 2016 and December 31, 2015, the Company owed the following amounts, included in due to related party on the Company’s consolidated balance sheet:

 

   June 30,  December 31,
   2016  2015
Mr. Friedman  $13,798   $8,580 
Mr. Braune   16,667    16,667 
Mr. Hollander   12,731    12,731 
Total  $43,376   $37,798 

 

14
 

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, the Company has recorded $2,371 for the six months ended June 30, 2016 in stock compensation expense and all of the options have vested. 

 

Amounts Due from 800 Commerce, Inc.

 

800 Commerce, Inc., a commonly controlled entity until February 29, 2016, owed Agritek $282,947 as of February 29, 2016, as a result of advances received from or payments made by Agritek on behalf of 800 Commerce. These advances were non-interest bearing and were due on demand. 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.

 

Note 8 – Common and Preferred Stock  

 

On May 23, 2016, the Company filed a certificate of amendment (a “Certificate of Amendment”), increasing the authorized capital of the Company to 1,001,000,000 shares of capital stock; consisting of 1,000,000,000 shares of common stock par value $0.0001 and 1,000,000 shares of preferred stock, par value $0.01. The majority of the Company’s shareholders consented to the Certificate of Amendment increasing the authorized capital.

 

Common Stock

 

During the six months ended June 30, 2016, the Company issued the following shares of common stock upon the conversions of portions of the convertible notes:

 

Date  Principal Conversion  Interest Conversion  Total
Conversion
  Conversion
Price
  Shares
Issued
  Issued to
 6/22/16  $5,000   $973   $5,973   $0.001450    4,119,414   GW
 6/20/16  $10,500   $1,003   $11,503   $0.001450    7,933,377   Cerberus
 6/20/16  $5,000   $967   $5,967   $0.001450    4,114,879   GW
 6/20/16  $6,000   $589   $6,589   $0.001450    4,544,241   LG
 6/10/16  $6,075   $1,134   $7,209   $0.001798    4,009,701   GW
 6/9/16  $5,000   $479   $5,479   $0.001798    3,047,219   LG
 6/2/16  $9,000   $848   $9,848   $0.002378    4,141,387   Cerberus
 5/23/16  $5,000   $460   $5,460   $0.002436    2,241,490   LG
 3/17/16  $9,000   $696   $9,696   $0.002436    2,668,309   LG
 3/17/16  $3,000   $138   $3,138   $0.000638    2,463,045   Service
 3/8/16  $7,425   $928   $8,353   $0.00174    1,869,187   GW
 3/7/16  $6,500   $489   $6,989   $0.00174    4,016,471   LG
     $77,500   $8,704   $86,204         45,168,720    
                               

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.

 

15
 

The Series B Preferred Stock has the right to vote in aggregate, on all shareholder matters equal to 51% of the total vote, no matter how many shares of common stock or other voting stock of the Company are issued or outstanding in the future. The Series B Preferred Stock has a right to vote on all matters presented or submitted to the Company’s stockholders for approval in pari passu with the common stockholders, and not as a separate class. The holders of Series B Preferred Stock have the right to cast votes for each share of Series B Preferred Stock held of record on all matters submitted to a vote of common stockholders, including the election of directors. There is no right to cumulative voting in the election of directors. The holders of Series B Preferred Stock vote together with all other classes and series of common stock of the Company as a single class on all actions to be taken by the common stockholders except to the extent that voting as a separate class or series is required by law. As of June 30, 2016 and December 31, 2015, there were 1,000 shares of Class B Preferred Stock outstanding.

 

Warrants and Options

 

On April 14, 2015, in connection with the appointment of Dr. Stephen Holt to the advisory board, the Company agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share and expiring April 14, 2018. Option Shares of 400,000 vested immediately and 50,000 Option Shares vest each month from April 2015 through March 2016. Accordingly, as of June 30, 2016, 1,000,000 Option Shares have vested and the Company recorded $2,317 as stock compensation expense for the six months ended June 30, 2016, 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 expired 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.  As of June 30, 2016, the Company estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of .08 to 2.0 years; (2) a computed volatility rate of 263%; (3) a discount rate of .18% to .73%; and (4) zero dividends. The valuation of this embedded derivative was recorded with an offsetting gain/loss on derivative liability.

 

Note 9 – 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.

 

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.

 

For the three and six months ended June 30, 2016, the Company recorded rent expense of $14,209 and $24,709, respectively, compared to $19,082 and $34,211, respectively, for the three and six months ended June 30, 2015.

 

16
 

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 has recorded $19,122 and $38,244 of expense (included in leased property expenses) for the three and six months ended June 30, 2016 and 2015, 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, and has not used the property and any water and has not paid for any water rights after June 30, 2015. The Company has recorded $32,850 and $45,350 and $65,700 and $90,700 of expense for the three and six months ended June 30, 2016 and 2015, respectively, (included in leased property expenses). The Company is currently in default of the lease agreement, as rents have not been paid since February 2015.

 

Legal & Other

 

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.

 

Note 10 – Going Concern

 

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of June 30, 2016 the Company had an accumulated deficit of $14,323,400 and working capital deficit of $1,561,989. 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 11 – Segment Reporting

 

During the six months ended June 30, 2016 and 2015, the Company operated in one reportable segment, wholesale sales. 

 

Note 12 – Subsequent Events

 

2016 Convertible Notes

 

LG Capital

 

On July 14, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $65,625, and delivered on April 15, 2016, gross proceeds of $62,500 excluding transaction costs, fees, and expenses.

 

Principal and interest on the above is due and payable one year from the funding date, 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.

 

17
 

The Company may prepay the LG Debenture, 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.

 

St. George Investments, LLC.

 

On October 31, 2016, the Company entered into a Convertible Promissory Note ("St. George 2016 Notes") for $555,000 to St. George Investments, LLC., (“St. George”) which includes a purchase price of $500,000 and transaction costs of $5,000 and OID interest of $50,000. On October 31, 2016, the Company received $100,000 and recorded $115,000 as convertible note payable, including $5,000 of transaction costs and $10,000 OID interest. St. George also issued to the Company eight secured promissory notes, each in the amount of $50,000. All or any portion of the outstanding balance of the St. George 2016 Notes may be prepaid, without penalty, along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay St. George any amounts on the unfunded portion of the St. George 2016 Notes. The St. George 2016 Note bears interest at 10% per annum (increases to 22% per annum upon an event of default) and is convertible into shares of the Company’s common stock at St. George’s option at a price of $0.05 per share.

 

Beginning on the date that is six (6) months after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid to the Company (the “Initial Installment Date”), and on each applicable Installment Date thereafter, the Company is to pay the Holder, the applicable Installment Amount due on such date. Five Installment Amounts of $111,000 plus the sum of any accrued and unpaid interest, fees, costs or charges may be made (a) in cash (a “Company Redemption”), (b) by converting such Installment Amount into shares of Common Stock (a “Company Conversion”), or (c) by any combination of a Company Conversion and a Company Redemption so long as the entire amount of such Installment Amount due shall be converted and/or redeemed by the Company on the applicable Installment Date. The St. George 2016 Note matures fifteen months after the Issuance Date.

 

 

18
 

Item 2. 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 following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and notes thereto for the six months ended June 30, 2016 and 2015.

 

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

 

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 auditor has raised substantial doubt about our ability to continue as a going concern.

 

Results of Operations

 

For the three and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015

 

Revenues

 

Revenues for the three and six months ended June 30, 2016 and 2015 were $-0- and $3,228 and $-0- and $7,221, respectively, and consisted of wholesale goods.

 

Operating Expenses

 

Operating expenses were $157,036 and $320,653 for the three and six months ended June 30, 2016 compared to $656,282 and $1,112,555 for the three and six months ended June 30, 2015. The expenses were comprised of:

 

   Three months ended June 30,  Six months ended June 30,
Description  2016  2015  2016  2015
Administration and management fees  $45,497   $57,496   $84,647   $138,705 
Stock compensation expense, management   —      93,256    —      109,740 
Stock compensation expense, other   —      344,994    2,371    344,994 
Impairment of goodwill   —      —      —      192,849 
Reserve for inventory loss   —      —      —      32,529 
Professional and consulting fees   37,528    19,175    71,498    39,763 
Commissions and license fees   —      —      —      —   
Advertising and promotional expenses   2,941    30,212    6,000    37,754 
Rent and occupancy costs   14,209    22,082    24,709    37,211 
Property and maintenance cost   42,411    57,911    84,822    109,822 
Travel and entertainment   2,626    9,729    14,761    24,774 
General and other administrative   11,824    24,427    31,845    44,414 
Total  $157,036   $656,282   $320,653   $1,112,555 

 

19
 

Stock compensation expense, management was $0 and $2,371, respectively, for the three and six months ended June 30, 2016, compared to $93,256 and $109,740 for the six months ended June 30, 2015, respectively. The 2015 amount is comprised of the amortization of restricted common stock issued to our CEO.

 

Stock compensation expense, other (included in professional and consulting fees) was $344,994 for the six months ended June 30, 2016 and was comprised of the issuance 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 for the three and six months ended June 30, 2016. 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. Accordingly, the Company recorded $8,694 as stock compensation expense for three and six months ended June 30, 2016. Also included in stock compensation expense, other was the issuance of 1,000 shares of Class B Preferred Stock to Mr. Friedman. The Company valued the shares at $276,300 and recorded $40,000 towards accrued and unpaid fees owed Mr. Friedman and $236,300 as stock compensation expense for the three and six months ended June 30, 2016.

 

Professional and consulting fees (excluding stock compensation, other) increased to $37,528 and $71,498, respectively, for the three and six months ended June 30, 2016, compared to $19,175 and $39,763 for the three and six months ended June 30, 2015, respectively, and is comprised of the following:

 

   Three months ended June 30,  Six months ended June 30,
   2016  2015  2016  2015
Legal fees  $2,723   $4,433   $8,948   $10,363 
Property management fees   —      —      —      10,000 
Accounting and audit fees   30,558    8,995    44,558    11,953 
Investor relation costs   4,247    5,747    17,992    7,447 
Total  $37,528   $19,175   $71,498   $39,763 

 

Advertising and promotional expenses increased to $2,941 and $6,000, respectively, for the three and six months ended June 30, 2016 compared to $30,212 and $37,754 for the three and six months ended June 30, 2015, respectively. The decrease compared to the prior year was primarily due the reduction of certain marketing initiatives from the prior year.

 

Rent and occupancy costs were $14,209 and $24,709 for the three and six months ended June 30, 2016, respectively, compared to $19,082 and $34,211 for the three and six months ended June 30, 2015, respectively. The decrease was due primarily to the Company terminating an office sharing arrangement in September 2015.

 

Leased property available for sub-lease and property maintenance costs were $42,411 and $84,822, respectively, for the three and six months ended June 30, 2016 compared to $54,911 and $109,822 for the three and six months ended June 30, 2015. These costs were comprised of $42,411 and $84,822 for the three and six months ending June 30, 2016 and 2015, respectively, for leased real estate and $12,500 and $25,000 for the three and six months ending June 30, (2015, respectively, for water rights that the Company plans to lease or sub-lease to licensed marijuana operators.

 

General and other administrative costs for the three and six months ended June 30, 2016, were $11,824 and $31,845, respectively, compared to $24,427 and $44,114, respectively, for the three and six months ended June 30, 2015 consisting of fees for public company, payroll, office and other taxes.

 

Other Income (Expense), Net

 

Other expense for the three and six months ended June 30, 2016 was $167,227 and $555,933, respectively compared to $188,826 and $496,684 for the three and six months ended June 30, 2015, respectively.

 

Other expense for the 2016 period was from the increase on the fair value of derivatives of $4,338 (3 months) and $335,884 (6 months) and interest expense of $152,057 (3 months) and $293,274 (6 months) partially offset by a gain in debt extinguishment of $84,057 (6 months).

 

20
 

Included in other expenses for the 2015 period was an expense from the increase on the fair value of derivatives of $6,992 (3 months) and $7,603 (6 months) interest expense of $188,169 and $503,062 for the three and six months ended June 30, 2015, respectively, offset by interest income of $6,335 (3 months) and $13,981 (6 months).

 

Interest expense for each of the periods is as follows:

 

   Three months ended June 30,  Six months ended June 30,
   2016  2015  2016  2015
Excess value of common stock issued  $—     $86,524   $—     $236,305 
Interest on face value   14,489    22,327    25,591    44,817 
Additional true up interest   —      25,371    —      143,297 
Amortization of note discount   143,549    44,264    267,683    50,655 
Amortization of OID   —      6,011    —      22,755 
Amortization of deferred financing fees   4,851    3,672    10,832    5,233 
Total  $162,889   $188,169   $304,106   $503,062 

 

Capital Resources and Liquidity

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As of June 30, 2016, we had cash and cash equivalents of $0, a decrease of $11,548, from $11,548 as of December 31, 2015. At June 30, 2016, we had current liabilities of $1,576,531 compared to current assets of $14,542 which resulted in working capital deficit of $1,561,989. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt and notes payable.

 

Operating Activities

 

For the six months ended June 30, 2016, net cash used in operating activities was $185,743 compared to $353,197 for the six months ended June 30, 2015. The Company had a net loss $876,519 for the six months ended June 30, 2016 compared to a net loss of $1,605,302 for the six months ended June 30, 2015.

 

The net loss for the six months ended June 30, 2016 of $876,519 and a gain on debt settlements of $84,057 were impacted by non-cash expenses for the fair value of the derivative liability of $335,884, amortization of discounts on convertible notes of $250,033, warrants previously issued (now vested) for services of $2,371 and depreciation expense of $1,452. Changes in operating assets and liabilities that reduced cash used in operating activities included an increase in accounts payable and accrued expenses of $109,708, interest payable of $37,938, deferred compensation of $3,233 and tenant deposits of $2,400.

 

The net loss for the six months ended June 30, 2015 of $1,605,302 was impacted by the impairment of goodwill of $192,849, noncash interest expense of $236,305 for excess value of common stock issued for convertible notes payable, the amortization of discounts on convertible notes of $73,410, amortization of deferred stock compensation of $118,434, stock based compensation of $336,300, reserve for inventory loss of $32,529, change in fair values of derivative liabilities of $7,603 and the amortization of deferred financing fees of $5,232 related to the convertible promissory notes. Changes in operating assets and liabilities that reduced cash used in operating activities included an increase in accounts payable and accrued expenses of $284,098, an increase in deferred compensation of $4,434, a decrease in prepaid assets and other of $44,935 and a decrease in inventory of $4,422. Changes in operating assets and liabilities utilizing cash was the result of the return of $90,000 on tenant deposits.

 

Investing Activities

 

During the six months ended June 30, 2016, net cash used in investing activities was $1,665 compared to $34,610 for the six months ended June 30, 2015. The 2016 period was the result of a fixed asset purchase. The 2015 period was the result of advances to a related party of $34,610.

 

21
 

Financing Activities

 

Net cash provided by financing activities was $175,860 and $270,954 for the six months ended June 30, 2016 and 2015, respectively. During the six months ended June 30, 2016, the Company received proceeds of $170,000 from the issuance of convertible notes, bank overdraft of $462 and proceeds from related party notes of $5,398.

 

The 2015 activity was comprised of proceeds received related to the Tonaquint notes receivable of $82,391, proceeds from the issuance of convertible promissory notes of $200,000 and the payments made on notes payable of $11,437. 

 

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 lender.

 

Off Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

 

As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had an accumulated deficit at June 30, 2016, a net loss and net cash used in operating activities for the reporting period then ended. These conditions raise substantial doubt about its ability to continue as a going concern.

 

The Company is attempting to produce sufficient revenue; however, the Company’s cash position may not be sufficient to support its daily operations. While the Company believes in the viability of its strategy to produce sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenues and in its ability to raise additional funds.

 

The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Critical Accounting Policies

 

We have identified the following policies below as critical to our business and results of operations. Our reported results are impacted by the application of the following accounting policies, certain of which require management to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations. For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Specific risks associated with these critical accounting policies are described in the following paragraphs.

 

22
 

Basis of Presentation and Principles of Consolidation

 

The accompanying condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present the financial position, results of operations and cash flows for the stated periods have been made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated unaudited financial statements should be read in conjunction with a reading of the Company’s consolidated financial statements and notes thereto. Interim results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of future results for the full year. Certain amounts from the 2015 period have been reclassified to conform to the presentation used in the current period.

 

The condensed consolidated unaudited financial statements of the Company include the consolidated accounts of Agritek and its wholly owned subsidiaries AVHI and Prohibition Products, Inc. (“PPI”). PPI, a Florida corporation, was originally formed on July 1, 2013 as The American Hemp Trading Company, Inc. (“AHTC”) and on August 27, 2014, AHTC changed its name to PPI. All intercompany accounts and transactions have been eliminated in consolidation.

 

Cash and Cash Equivalents

 

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

 

Accounts Receivable

 

The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectability is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term. As of June 30, 2016, based on the above criteria, the Company has an allowance for doubtful accounts of $44,068.

 

Revenue Recognition

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

23
 

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.

 

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 June 30, 2016 there were warrants and options to purchase 1,000,000 shares of common stock and the Company’s outstanding convertible debt is convertible into approximately 536,836,311 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 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4. Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow our management to make timely decisions regarding required disclosure. Our President, who serves as our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and he determined that our disclosure controls and procedures were not effective as of June 30, 2016 due to a control deficiency. During the period we did not have additional personnel to allow segregation of duties to ensure the completeness or accuracy of our information. Due to the size and operations of the Company, we are unable to remediate this deficiency until we acquire or merge with another company.

 

24
 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

We are not a party to any material litigation, nor, to the knowledge of management, is any litigation threatened against us that may materially affect us.

 

Item 1A. Risk Factors

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934 and are not required to provide the information under this item.

 

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

 

During the three months ended June 30, 2016, the Company issued the following shares of common stock upon the conversions of portions of the 2015 Convertible Notes:

 

Date  Principal Conversion  Interest Conversion  Total
Conversion
  Conversion
Price
  Shares
Issued
  Issued to
 6/22/16  $5,000   $973   $5,973   $0.001450    4,119,414   GW
 6/20/16  $10,500   $1,003   $11,503   $0.001450    7,933,377   Cerberus
 6/20/16  $5,000   $967   $5,967   $0.001450    4,114,879   GW
 6/20/16  $6,000   $589   $6,589   $0.001450    4,544,241   LG
 6/10/16  $6,075   $1,134   $7,209   $0.001798    4,009,701   GW
 6/9/16  $5,000   $479   $5,479   $0.001798    3,047,219   LG
 6 2/16  $9,000   $848   $9,848   $0.002378    4,141,387   Cerberus
 5/23/16  $5,000   $460   $5,460   $0.002436    2,241,490   LG

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Convertible Debenture Proceeds

 

On July 14, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $65,625, and delivered on April 15, 2016, gross proceeds of $62,500 excluding transaction costs, fees, and expenses.

 

Principal and interest on the above is due and payable one year from the funding date, 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.

 

25
 

The Company may prepay the LG Debenture, 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.

 

On October 31, 2016, the Company entered into a Convertible Promissory Note ("St. George 2016 Notes") for $555,000 to St. George Investments, LLC., (“St. George”) which includes a purchase price of $500,000 and transaction costs of $5,000 and OID interest of $50,000. On October 31, 2016, the Company received $100,000 and recorded $115,000 as convertible note payable, including $5,000 of transaction costs and $10,000 OID interest. St. George also issued to the Company eight secured promissory notes, each in the amount of $50,000. All or any portion of the outstanding balance of the St. George 2016 Notes may be prepaid, without penalty, along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay St. George any amounts on the unfunded portion of the St. George 2016 Notes. The St. George 2016 Note bears interest at 10% per annum (increases to 22% per annum upon an event of default) and is convertible into shares of the Company’s common stock at St. George’s option at a price of $0.05 per share.

 

Beginning on the date that is six (6) months after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid to the Company (the “Initial Installment Date”), and on each applicable Installment Date thereafter, the Company is to pay the Holder, the applicable Installment Amount due on such date. Five Installment Amounts of $111,000 plus the sum of any accrued and unpaid interest, fees, costs or charges may be made (a) in cash (a “Company Redemption”), (b) by converting such Installment Amount into shares of Common Stock (a “Company Conversion”), or (c) by any combination of a Company Conversion and a Company Redemption so long as the entire amount of such Installment Amount due shall be converted and/or redeemed by the Company on the applicable Installment Date. The St. George 2016 Note matures fifteen months after the Issuance Date.

 

26
 

Item 6. Exhibits

 

Exhibit No. Description
10.1 Form of Convertible Promissory Note by and between Agritek Holdings, Inc. and Vis Vires Group, Inc. dated February 23, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015).
10.2 Form of 8% Convertible Redeemable Note by and between Agritek Holdings, Inc. and LG Capital Funding, LLC dated March 27, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015).
10.3 Form of 8% Convertible Redeemable Note by and between Agritek Holdings, Inc. and GW Holding Group, LLC dated March 30, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015).

10.4+

 

Employment and Board of Directors Agreement effective March 20, 2015 by and between Agritek Holdings, Inc. and Justin Braune (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on March 20, 2015).
10.5 Deed in Lieu of Foreclosure Agreement dated December 16, 2015, by and among Agritek Holdings, Inc. and Tonaquint, Inc. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on February 12, 2016).
10.6 Replacement Note dated January 5, 2016, issued to LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.2 as filed on Form 8-K with the SEC on February 12, 2016).
10.7 Replacement Note dated January 5, 2016, issued to LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.3 as filed on Form 8-K with the SEC on February 12, 2016).
10.8 Replacement Note dated January 5, 2016, issued to Cerebrus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.4 as filed on Form 8-K with the SEC on February 12, 2016).
10.9 Securities Purchase Agreement dated January 19, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.5 as filed on Form 8-K with the SEC on February 12, 2016).
10.10 Convertible Redeemable Note dated January 19, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.6 as filed on Form 8-K with the SEC on February 12, 2016).
10.11 Securities Purchase Agreement dated January 19, 2016, by and between Agritek Holdings, Inc. and Cerebrus Finance Group, LTD. (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on February 12, 2016).
10.12 Convertible Redeemable Note dated January 19, 2016, by and between Agritek Holdings, Inc. and Cerebrus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.8 as filed on Form 8-K with the SEC on February 12, 2016).
10.13* Securities Purchase Agreement dated March 23, 2016, by and between Agritek Holdings, Inc. and Cerebrus Finance Group, LTD.
10.14* Convertible Redeemable Note dated March 23, 2016, by and between Agritek Holdings, Inc. and Cerebrus Finance Group, LTD
31.1* Rule 13a-14(a)/15d-14(a) Certification of Principal Executive and Financial Officer
32.1* Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.INS* XBRL Instance
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
101.LAB* XBRL Taxonomy Extension Labels Linkbase
101.PRE* XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith.

+ Management contract or compensatory plan or arrangement.

 

27
 

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.

 

Dated: December 2, 2016

 

AGRITEK HOLDINGS, INC.

 

 

By:   /s/ B. Michael Friedman          

B. Michael Friedman

Chief Executive Officer (principal executive, principal financial and accounting officer)

EX-31.1

 

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-Q 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: December 2, 2016
 
/s/ B. Michael Friedman
B. Michael Friedman, Principal Executive Officer (principal executive, principal financial and accounting officer)

EX-32.1 

 

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-Q of Agritek Holdings, Inc., for the quarter ended June 30, 2016, 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: December 2, 2016
 
/s/ B. Michael Friedman

B. Michael Friedman

Principal Executive Officer and Principal Financial Officer

Agritek Holdings, Inc.