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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: September 30, 2015

 

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.)

 

319 Clematis Street, Suite 1008, West Palm Beach, FL 33401

(Address of principal executive offices)

 

(561) 249-6511

(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 March 3, 2016, was 300,290,232 shares.

 
 

 

AGRITEK HOLDINGS, INC.

FORM 10-Q

Quarterly Period Ended September 30, 2015

 

INDEX

 

 

FORWARD-LOOKING STATEMENTS Page
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets at September 30, 2015 (Unaudited) and December 31, 2014 (Audited) 2
  Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (Unaudited) 3
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (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 27
Item 4. Controls and Procedures 27
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 28
Item 4. Mine Safety Disclosures 28
Item 5. Other Information 28
Item 6. Exhibits 28
     
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, 2014, 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
 
   September  December 31,
   2015  2014
   (Unaudited)  (Audited)
ASSETS          
Current Assets:          
Cash and cash equivalents  $179   $118,429 
Accounts receivable, net   —      173 
Inventory, net   5,110    42,061 
Notes receivable   221,188    400,000 
Interest receivable   25,775    28,954 
Deferred financing costs   4,369    1,518 
Due from related party   277,973    236,759 
Prepaid assets and other   6,583    44,586 
Total current assets   541,177    872,480 
           
Other   1,525    15,525 
Goodwill   —      192,849 
Property and equipment, net of accumulated depreciation of $4,051 (2015) and $1,976 (2014)   234,244    366,122 
Investments in non-marketable securities   50,000    50,000 
           
Total assets  $826,946   $1,496,976 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current Liabilities:          
Accounts payable and accrued expenses  $645,111   $242,857 
Deferred compensation   32,382    81,661 
Note payable, current portion   —      34,300 
Tenant deposits   —      90,000 
Note payable, shareholder   1,150    —   
Convertible notes payable, net of discount of $76,069 (2015) and $22,755 (2014)   802,168    1,233,903 
Derivative liabilities   200,044    —   
Total current liabilities   1,680,855    1,682,721 
           
Note payable, long term   —      51,450 
           
Total liabilities   1,680,855    1,734,171 
           
Commitments and Contingencies          
           
Stockholders' Deficit:          
Series B convertible preferred stock, $0.01 par value; 1,000,000 shares authorized, and 1,000 shares issued and outstanding (2015)   10    —   
Common stock, $.0001 par value; 500,000,000 shares authorized; 195,019,250 (2015) and 93,500,420 (2014) shares issued and outstanding   19,502    9,351 
Additional paid-in capital   12,745,761    11,084,504 
Deferred stock compensation   (95,890)   —   
Accumulated deficit   (13,523,292)   (11,331,050)
Total stockholders' deficit   (853,909)   (237,195)
           
Total liabilities and stockholders' deficit  $826,946   $1,496,976 
           
           
See notes to unaudited condensed consolidated financial statements.
2
 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
             
   Three Months Ended
September 30,
  Nine Months Ended
September 30,
   2015  2014  2015  2014
Product revenue  $—     $2,397   $7,221   $25,934 
Cost of revenue   —      19,375    3,284    39,977 
Gross profit (loss)   —      (16,978)   3,937    (14,043)
                     
Operating Expenses:                    
Administrative and management fees (including $94,370 and $204,110 of stock based compensation for the three and nine months ended September 30, 2015, respectively)   139,040    75,000    387,485    222,181 
Professional and consulting fees (including $2,371 and $347,365 of stock based compensation for the three and nine months ended September 30, 2015, respectively, and $214,000 and $264,000 for the three and nine months ended September 30, 2014, respectively)   15,276    234,400    404,033    348,732 
Impairment of goodwill   —      —      192,849    —   
Reserve for inventory loss   —      —      32,529    —   
Reserve for land loss   55,490    —      55,490    —   
Bad debt expense        16,654         16,654 
Commissions and license fees   —      —      —      8,162 
Rent and other occupancy costs   18,029    24,816    52,240    51,886 
Leased property expense   44,494    53,252    154,316    53,252 
Advertising and promotion   25,756    22,032    63,510    50,735 
Property maintenance costs   —      8,925    3,000    17,925 
Travel and entertainment   1,822    12,091    26,596    50,316 
Other general and administrative expenses   19,569    13,407    59,983    74,888 
                     
Total operating expenses   319,476    460,578    1,432,031    894,731 
                     
Operating loss   (319,476)   (477,555)   (1,428,095)   (908,774)
                     
Other Income (Expense):                    
Interest income   4,028    4,798    18,009    68,362 
Interest expense   (254,352)   (71,180)   (757,414)   (365,802)
Derivative liability (expense) income   (17,139)   —      (24,742)   30,347 
                     
Total other expense, net   (267,463)   (66,382)   (764,147)   (267,093)
                     
Net loss  $(586,939)  $(543,937)  $(2,192,242)  $(1,175,867)
                     
Basic and diluted loss per share  $(0.00)  $(0.01)  $(0.02)  $(0.02)
                     
Weighted average number of common shares outstanding Basic and diluted   171,823,183    64,242,466    135,726,857    61,439,927 
                     
                     
See notes to unaudited condensed consolidated financial statements.

 

3
 

 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
       
   Nine months ended September 30,
   2015  2014
Cash flow from operating activities:          
Net loss  $(2,192,242)  $(1,175,867)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock issued for consulting services   100,000    264,000 
Stock compensation expense   247,365    —   
Amortization of deferred stock compensation   204,110    —   
Amortization of deferred financing costs   8,899    34,229 
Impairment of goodwill   192,849    —   
Reserve for inventory loss   32,529    —   
Reserve for land loss   55,490    —   
Depreciation   2,075    1,341 
Non cash interest expense for excess fair value of common stock issued for convertible notes payable   291,203    —   
Initial expense for fair value of derivative liabilities   71,761    —   
Amortization of discounts on convertible notes   158,436    231,535 
Write off of licensing costs   —      15,000 
Change in fair values of derivative liabilities   (47,019)   (30,347)
Bad debt expense   —      16,654 
Changes in operating assets and liabilities:          
Decrease (increase) in :          
Accounts receivable   173    (2,711)
Inventory   4,422    (5,489)
Prepaid assets and other   55,182    (117,076)
Increase (decrease) in:          
Accounts payable and accrued expenses   468,486    54,019 
Deferred compensation   (9,279)   119,829 
Tenant deposits   (90,000)   75,000 
Net cash used in operating activities   (445,561)   (519,883)
           
Cash flows from investing activities:          
Land acquisition costs   —      (54,053)
Purchase of equipment and furniture   —      (9,769)
Advances to related party   (41,214)   (89,988)
Investments   —      (50,000)
Cash payment portion of acquisition   —      (20,000)
Security deposits paid   —      (14,700)
Net cash used in investing activities   (41,214)   (238,510)
           
Cash flows from financing activities:          
Payments received on notes receivable issued for convertible debt   178,812    400,000 
Proceeds from issuance of convertible debt   200,000    500,000 
Proceeds from issuance of note payable, shareholder   1,150    —   
Payments made on note payable   (11,437)   —   
Payment of deferred financing costs   —      (8,000)
Net cash provided by financing activities   368,525    892,000 
           
Net (decrease) increase in cash and cash equivalents   (118,250)   133,607 
           
Cash and cash equivalents, Beginning   118,429    108,766 
           
Cash and cash equivalents, Ending  $179   $242,373 
           
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  $656,403   $984,291 
Conversion of deferred compensation into preferred stock (2015) and common stock (2014)  $40,000   $60,000 
Conversion of accounts payable and accrued expenses into common stock  $—     $50,000 
Issuance  (cancellation) of note payable for land acquisition  $(74,313)  $85,750 
           
Common stock issued for acquisition  $—     $180,000 
Cash paid for acquisition   —      20,000 
Total consideration for acquisition   —      200,000 
Allocation of purchase price to inventory   —      (7,151)
Allocation of purchase price to goodwill   —      (192,849)
   $—     $—   
           
           
See notes to unaudited condensed consolidated financial statements.

 

4
 

 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

Note 1 - Organization

 

Business

 

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

 

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

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

 

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

 

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

 

On July 1, 2015, the Company’s board of directors authorized an amendment of the Company’s certificate of incorporation, as amended (the “Certificate of Incorporation”), to (i) effect a reverse stock split, at the discretion of Company’s board, to be effected, if at all, prior to September 15, 2015, at a ratio of not less than 1-for-20 and not more than 1-for-100, with the exact ratio, if any, to be determined in the sole discretion of the board, and (ii) increase the Company’s authorized common stock from 250,000,000 shares to 500,000,000 shares. On July 1, 2015, stockholders holding a majority of the Company’s voting power approved these actions. On July 17, 2015, the Company’s board took action by written consent to approve the following actions:

 

1.Approve an amendment to Certificate of Incorporation, to increase our authorized common stock from 250,000,000 shares, $0.0001 par value, to 500,000,000 shares, $0.0001 par value (the “Authorized Share Increase Amendment”), and
2.Approve an amendment to our Certificate of Incorporation to effect a 1-for 50 reverse stock split of our issued and outstanding common stock (the “Reverse Stock Split Amendment” and together with the Authorized Share Increase Amendment, the “Amendments”).

 

On July 29, 2015, the Company filed a preliminary Schedule 14C Information Statement relating to approval of the above actions. However, since that filing, the Company has abandoned the Reverse Stock Split Amendment.

 

The Authorized Share Increase Amendment became effective on October 5, 2015.

 

5
 

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, 2015 are not necessarily indicative of future results for the full year. Certain amounts from the 2014 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 September 30, 2015, based on the above criteria, the Company has an allowance for doubtful accounts of $44,068.

 

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.

 

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.

 

6
 

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. These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

 

Original Issue Discount

 

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

 

Investment of Non-Marketable Securities

 

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

 

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 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 $74,313 held by the original owner. Accordingly, until the deed is properly recorded, the Company reduced the remaining balance of the note payable for the acquisition of the land of $74,313 and recorded a reserve allowance for the remaining balance of the asset of $54,490. The estimated useful lives of property and equipment are as follows:

 

Furniture and equipment 5 years

 

The Company's property and equipment consisted of the following at September 30, 2015 and December 31, 2014:

 

   September 30,
2015
  December 31, 2014
Land  $354,269   $354,269 
Allowance for land loss, including note elimination of $74,313   (129,803)   —   
Furniture and equipment   13,829    13,829 
Accumulated depreciation   (4,051)   (1,976)
Balance  $234,244   $366,122 

 

Depreciation expense of $692 and $2,075 was recorded for the three and nine months ended September 30, 2015, respectively, compared to $491 and $1,341 for the three and nine months ended September 30, 2014, respectively.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with the Financial Standards Accounting Board’s (the “FASB”) Accounting Standards Codification (“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.

 

7
 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

The three hierarchy levels are defined as follows:

 

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

 

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

 

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

 

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

 

The Company's financial instruments consist primarily of cash, accounts 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.

 

8
 

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 September 30, 2015 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 575,415,654 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 nine months ended September 30, 2015, the Company recorded stock and warrant based compensation of $96,741 and $551,475, respectively compared to $214,000 and $264,000 for the three and nine months ended September 30, 2014, respectively. (See Notes 7 and 8).

 

Use of Estimates

 

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

 

Advertising

 

The Company records advertising costs as incurred. For the three and nine months ending September 30, 2015, advertising expense was $25,756 and $63,510, respectively, compared to $22,032 and $50,835 for the three and nine months ended September 30, 2014, 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. (“Dry Vapes”). Dry Vapes is an importer, marketer and distributor of innovative vaporizers and accessories with over 11,000 social network followers. Dry Vapes has historically sold its product under the logo DV on eBay and other websites. The Company plans to develop a full line of products under the "Mont Blunt" brand name and market it to Brick and Mortar smoke shops nationally in the upcoming months. The company will operate the business under PPI.

 

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 nine months ended September 30, 2015. The Company also recorded a reserve for inventory loss of $32,529 for the nine months ended September 30, 2015.

 

9
 

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 three and nine months ended September 30, 2015 and 2014 and the accounts receivable balance as of September 30, 2015:

 

   2014  2015   
Customer 

Sales % Three

Months Ended

September 30,

 

Sales % Nine

Months Ended

September 30,

 

Sales % Three

Months Ended

September 30,

 

Sales % Nine

Months Ended

September 30,

 

Accounts

Receivable

Balance as of

September 30,

2015

 A    46%   40%   —      —     $—   
 B    25%   18%   —      —     $—   
 C    19%   —      —      —     $—   
 D    —      17%   —      —     $—   
 E    —      —      —      70%  $—   
 F    —      —      —      22%  $—   

 

Purchases

 

For the three and nine months ended September 30, 2014, 100% of the Company’s purchases were from one vendor related to the purchase of our tobacco product line.

 

Note 6 – Convertible Debt and Note Payable

 

2014 Convertible Note

 

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

 

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

 

10
 

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 nine months ended September 30, 2015. As of September 30, 2015, the balance of the purchase price of $221,188 is included in Notes receivable on the unaudited condensed consolidated financial statements included herein, as well as $25,775 of interest receivable. During the three and nine months ended September 30, 2015, the Company recorded interest expense of $106,773 and $290,125, respectively, and increased accrued interest expense by $290,125 for amounts due Tonaquint, pursuant to the 2014 Company Note. As of September 30, 2015, $696,287 of principal and accrued interest of $345,957 is outstanding on the 2014 Company Note.

 

During the nine months ended September 30, 2015, the Company issued the following shares of common stock upon the conversions of portions of the 2014 Company Note:

 

Date 

Principal

Conversion

 

Interest

Conversion

 

Total

Conversion

 

Conversion

Price

 

Shares

Issued

 1/3/15  $65,460   $9,540   $75,000   $.045    1,665,445 
 1/28/15  $54,123   $8,377   $62,500   $.0334    1,869,187 
 2/20/15  $55,901   $9,099   $65,000   $.0244    2,668,309 
 3/13/15  $60,000   $—     $60,000   $.0244    2,463,045 
 3/31/15  $66,555   $8,445   $75,000   $.0125    5,985,634 
 5/5/15  $66,731   $8,269   $75,000   $.0125    6,008,171 
 6/2/15  $67,277   $7,723   $75,000   $.0095    7,917,238 
 6/29/15  $67,483   $7,517   $75,000   $.0055    13,678,643 
 7/29/15  $29,368   $7,262   $36,630   $.003663    10,000,000 
 8/13/15  $27,473   $—     $27,473   $.003663    7,500,000 
     $560,371   $66,232   $626,603         59,255,672 

 

2015 Convertible Notes

 

On March 2, 2015, the Company issued a Convertible Promissory Note for $79,000 to Vis Vires Group (“Vis Vires”). The Company received net proceeds of $75,000 after debt issuance costs of $4,000 paid for lender legal fees. The Note matured on November 25, 2015 and can be converted at a 39% discount to the market price as defined in the Note. On September 3, 2015, Vis Vires converted $10,000 of principal at a conversion price of $0.0019 and the Company issued 5,263,158 shares of common stock. On September 10, 2015, Vis Vires converted $19,800 of principal at a conversion price of $0.0012 and the Company issued 16,500,000 shares of common stock. As of September 30, 2015, the principal balance of the Vis Vires note is $49,200.

 

On March 27, 2015, the Company issued a Convertible Promissory Note for $27,000 to GW Holding Group, LLC (“GW”). On March 31, 2015, the Company received net proceeds of $25,000 after debt issuance costs of $2,000 paid for lender legal fees. The Note matures March 27, 2016 and converts at a 42% discount to the market price as defined in the Note.

 

March 27, 2015, the Company issued a Convertible Promissory Note for $78,750 to LG Capital Funding, LLC (“LG”). The Company received net proceeds of $75,000 after debt issuance costs of $3,750 paid for lender legal fees. The Note matures March 27, 2016 and converts at a 42% discount to the market price as defined in the Note.

 

On March 30, 2015, the Company issued a Convertible Promissory Note for $27,000 to Service Trading Company, LLC (“Service Trading”). 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.

 

The debt issuance costs of $11,750 in the aggregate included in the 2015 Convertible Notes, will be amortized over the earlier of the terms of the Note or any redemptions and accordingly, $3,667 and $8,899, respectively, has been expensed as debt issuance costs (included in interest expense) for the three and nine months ended September 30, 2015. As of September 30, 2015, $181,950 of principal and accrued interest of $8,750 is outstanding on the 2015 Convertible Notes, and the principal amount is carried at $105,881, net of a remaining note discount of $76,069.

 

11
 

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

 

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

 

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

 

A summary of the derivative liability balance as of September 30, 2015 is as follows:

 

   2015
Beginning Balance  $—   
Initial Derivative Liability   283,511 
Fair Value Change   (47,019)
Reduction for conversions   (36,448)
Ending Balance  $200,044 

 

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of September 30, 2015:

 

   Commitment date  Remeasurement date
Expected dividends   -0-    -0- 
Expected volatility   121%-127%    190%-215%  
Expected term   9-12 months    2-6 months  
Risk free interest   0.15%-0.27%    0.00%-0.08%  

 

A summary of the convertible notes payable balance as of September 30, 2015 is as follows:

 

   2015
Beginning Balance  $1,256,658 
Convertible notes-newly issued   211,750 
Conversion of convertible notes   (590,171)
Discount   (76,069)
Ending Balance  $802,168 

 

12
 

Note Payable Land

 

On March 18, 2014, in conjunction with the land purchase of 80 acres in Pueblo County, Colorado, the Company paid $36,000 cash and entered into a promissory note in the amount of $85,750. The promissory note is being amortized on the basis of five (5) years, with principal payments of $17,150 plus interest at 3.5% due annually on December 1 of each year. Payments begin December 1, 2014, and shall be due on the first day of each succeeding December, with any balance of principal and accrued interest due December 1, 2020. On March 4, 2015, and May 4, 2015, the Company paid $9,000 and $2,437, respectively, of the December 1, 2014 amount. As of September 30, 2015, the balance of note is $74,313, including a past due amount of $5,713 of the December 2014 amount due.

 

In November 2015, the Company was made aware that the land transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company was a party to the land purchase, however, it was recently discovered the second party to the land contract never filed the original quit claim deed on behalf of the Company, even though a copy of the notarized quit claim deed was sent to the Company. To date, the Company has paid a total of $47,438 ($36,000 at closing) and is on the deed of trust of the property with a remaining note balance of $74,313 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.

 

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), and $96,000 (resigned September 15, 2015) for the CFO, Mr. Barry Hollander. For 2014, the Company and the CFO agreed that up to $5,000 per month can be paid in cash and the balance in restricted shares of common stock.

 

For the three and nine months ended September 30, 2015 and 2014, 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 September 30,  Nine months ended September 30,
   2015  2014  2015  2014
CEO  $16,539   $—     $46,154   $—   
Former CEO   —      37,500    37,500    112,500 
CFO   20,000    24,000    68,000    72,000 
Total  $36,539   $61,500   $151,654   $184,500 

 

As of September 30, 2015 and December 31, 2014, the Company owed to its officers the following amounts, included in deferred compensation on the Company’s condensed consolidated balance sheet:

 

   September 30,  December 31,
   2015  2014
Former CEO  $16,420   $80,082 
CFO   15,962    1,579 
Total  $32,382   $81,661 

 

Effective March 20, 2015, Mr. Justin Braune was named CEO and President. Mr. Braune also was appointed to the Board of Directors. B. Michael Friedman resigned his role as CEO and also from the Board of Directors, and was named to the Advisory Board to the Company’s 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. For the three and nine months ended September 30, 2015, the Company has included $16,538 and $46,153, respectively, for Mr. Braune’s salary in Administrative and Management Fees in the condensed consolidated statements of operations. Mr. Braune resigned from the board of directors and as CEO on November 4, 2015.

 

13
 

The shares of common stock will vest as follows: 5,000,000, shares on the six month anniversary of the Agreement and 10,000,000 shares on the one year anniversary of the Agreement. The Company valued the 15,000,000 shares of common stock at $300,000 ($0.02 per share, the market price of the common stock) and recorded the $300,000 as deferred stock compensation in the equity section of the balance sheet, and will amortize the deferred stock compensation as the shares of common stock vest. Accordingly, the Company has included $94,370 and $204,110, respectively, for the three and nine months ended September 30, 2015 in stock compensation expense. The remaining $95,890 of deferred stock compensation will be expensed over the vesting period.

 

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 nine months ended September 30, 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 and $11,065 for the three and nine months ended September 30, 2015 in stock compensation expense.

 

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

 

Amounts Due from 800 Commerce, Inc.

 

800 Commerce, Inc., a commonly controlled entity, owed Agritek $277,973 and $236,759 as of September 30, 2015 and December 31, 2014, respectively, as a result of advances received from or payments made by Agritek on behalf of 800 Commerce. These advances are non-interest bearing and are due on demand and are included in Due from Related Party on the balance sheet herein.

 

Note 8 – Common and Preferred Stock

 

Common Stock

 

During the nine months ended September 30, 2015, the Company issued 59,755,672 shares of common stock in satisfaction of $626,603 of principal and accrued and unpaid interest against the 2014 Company Note (see Note 6).

 

During the nine months ended September 30, 2015, the Company issued 21,763,158 shares of common stock in satisfaction of $29,800 of principal against the 2015 Convertible Note issued to Vis Vires (see Note 6).

 

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

 

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.

 

Warrants and Options

 

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

 

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. The options remain outstanding and expire April 14, 2018.

 

14
 

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.

 

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. The Series B Preferred Stock has no conversion rights.

 

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

 

As of September 30, 2015, the Company had 1,000 shares of Class B Preferred Stock, par value $0.01 outstanding.

 

Note 9 – Income Taxes

 

Deferred income taxes reflect the net tax effects of operating loss and tax credit carry forwards and temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of the Company’s ability to realize the benefit of the deferred tax assets, the deferred tax assets are fully offset by a valuation allowance at September 30, 2015 and 2014.

 

As of September 30, 2015, the Company had a tax net operating loss carry forward of approximately $2,681,000. Any unused portion of this carry forward expires in 2030. Utilization of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.

 

Note 10 – Commitments and Contingencies

 

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.

 

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

 

For the three and nine months ended September 30, 2015, the Company recorded rent expense of $18,029 and $34,211, respectively, compared to $24,816 and $51,886, respectively, for the three and nine months ended September 30, 2014.

 

15
 

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

 

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

 

Leased Properties for Sub-lease

 

On April 28, 2014, the Company executed and closed a 10 year lease agreement for 20 acres of an agricultural farming facility located in South Florida following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing low grade marijuana specifically for the use of treating epilepsy and cancer patients.  Pursuant to the lease agreement, the Company maintains a first right of refusal to purchase the property for three years. The Company prepaid the first year lease amount of $24,000 and has recorded $9,561 and $28,683, respectively, of expense (included in leased property expenses) for the three and nine months ended September 30, 2015. For the three and nine months ended September 30, 2014, the Company recorded $9,561 and $15,935 of expense’ 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. The water rights ensure the Company’s non-interruption of operations on behalf of new tenants qualified as fully registered and licensed grow and manufacturing operations. The Company has recorded $34,933 and $125,633 of expense for the three and nine months ended September 30, 2015 (included in leased property expenses) related to the land and water rights. The Company is currently in default of the lease agreement, as rents have not been paid since February 2015.

 

Other

 

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

 

Note 11 – Going Concern

 

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of September 30, 2015 the Company had an accumulated deficit of $13,523,292 and working capital deficit of $1,139,678. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Note 12 – Subsequent Events

 

On October 1, 2015, the Company issued 3,524,027 shares of common stock upon the conversion of $2,862 of principal and accrued and unpaid interest on the 2015 LG Note. The shares were issued at approximately $0.000812 per share.

 

On October 9, 2015, the Company issued 7,340,834 shares of common stock upon the conversion of $4,684 of principal and accrued and unpaid interest on the 2015 Service Trading Note. The shares were issued at approximately $0.000638 per share.

 

On October 12, 2015, the Company issued 4,494,567 shares of common stock upon the conversion of $3,650 of principal and accrued and unpaid interest on the 2015 GW Note. The shares were issued at approximately $0.000812 per share.

 

16
 

On October 13, 2015, the Company issued 5,995,275 shares of common stock upon the conversion of $5,216 of principal and accrued and unpaid interest on the 2015 LG Note. The shares were issued at approximately $0.00087 per share.

 

On October 14, 2015, the Company issued 24,400,000 shares of common stock upon the conversion of $24,473 of principal and accrued and unpaid interest on the 2014 Company Note. The shares were issued at approximately $0.0014 per share.

 

On October 26, 2015, Heather Bush notified the Company that she is resigning as the Company’s Chief Financial Officer.

 

On November 5, 2015, the Company issued 9,036,379 shares of common stock upon the conversion of $5,765 of principal and accrued and unpaid interest on the 2015 LG Note. The shares were issued at approximately $0.000638 per share.

 

On November 4, 2015, Justin Braune resigned as the CEO and as the sole member of the Board of Directors of the Company. Prior to his resignation Braune appointed B. Michael Friedman to the Board of Directors of the Company and Mr. Friedman also agreed to act as Interim CEO.

 

On November 17, 2015, the Company issued 21,730,000 shares of common stock upon the conversion of $20,796 of principal and accrued and unpaid interest on the 2014 Company Note. The shares were issued at approximately $0.001 per share.

 

On December 16, 2015, the Company and AVHI, the Company’s wholly owned subsidiary entered into a Deed in Lieu of Foreclosure Agreement (the “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 (see Note 6). Additionally, the Company received $25,000 and a reduction of the Note balance of $500,000. AVHI previously paid approximately $225,000 for the Property. After the transaction the balance of the 2014 Convertible Note was approximately $311,000.

 

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

 

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

 

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

 

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

 

On January 19, 2016, the Company completed the closing of a private placement financing transaction (the “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 $76,080.67, and delivered on January 31, 2016, gross proceeds of $62,500.00 excluding transaction costs, fees, and expenses.

 

17
 

Principal and interest is due and payable January 18, 2017, and the LG Debenture is convertible into shares of the Company’s common stock at any time at the discretion of LG at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.

 

The Company may prepay the LG Debenture, subject to prior notice to LG 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 LG Debenture, the Company is not permitted to prepay the LG Debenture, so long as the LG Debenture is still outstanding, unless the Company and LG agree otherwise in writing.

   

On January 19, 2016, the Company completed the closing of a private placement financing transaction (the “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.

 

Principal and interest is due and payable January 19, 2017, and the Cerebrus Debenture is convertible into shares of the Company’s common stock at any time at the discretion of Cerebrus 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 Cerebrus Debenture, subject to prior notice to Cerebrus 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 Cerebrus Debenture, the Company is not permitted to prepay the Cerebrus Debenture, so long as the Cerebrus Debenture is still outstanding, unless the Company and Cerebrus agree otherwise in writing.

 

In November 2015, the Company was made aware that the land transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company was a party to the land purchase, however, it was recently discovered the second party to the land contract never filed the original quit claim deed on behalf of the Company, even though a copy of the notarized quit claim deed was sent to the Company. To date, the Company has paid a total of $47,438 ($36,000 at closing) and is on the deed of trust of the property. Accordingly, until the deed is properly recorded, the Company reduced the remaining balance of the note payable for the acquisition of the land of $74,313 and recorded a reserve allowance for the remaining balance of the asset of $54,490.

   

 

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 nine months ended September 30, 2015 and 2014.

 

The independent auditor’s report on our financial statements for the years ended December 31, 2014 and 2013 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 nine months ended September 30, 2015 compared to the three and nine months ended September 30, 2014

 

Revenues

 

Revenues for the three and nine months ended September 30, 2015 were $-0- and $7,221 compared to $2,397 and $25,934, respectively, for the three and nine months ended September 30, 2014 and were comprised of the following:

 

   Three months ended
September 30,
 

Nine months ended
September 30,

   2015  2014  2015  2014
Chillo products  $—     $—     $—     $17,009 
Wellness products   —      2,397    7,221    8,926 
Total  $—     $2,397   $7,221   $25,934 

 

Operating Expenses

 

Operating expenses were $319,476 and $1,432,031 for the three and nine months ended September 30, 2015 compared to $460,578 and $894,731 for the three and nine months ended September 30, 2014. The expenses were comprised of:

 

19
 

   Three months ended
September 30,
 

Nine months ended
September 30,

Description  2015  2014  2015  2014
Administration and management fees  $44,670   $75,000   $183,375   $222,181 
Stock compensation expense, management   94,370    —      204,110    —   
Stock compensation expense, other   2,371    214,000    347,365    264,000 
Impairment of goodwill   —      —      192,849    —   
Reserve for inventory loss   —      —      32,529    —   
Reserve for land loss   55,490    —      55,490    —   
Bad debt expense   —      16,654    —      16,654 
Professional and consulting fees   12,905    20,400    56,668    84,732 
Commissions and license fees   —      —      —      8,162 
Leased property expense   44,494    53,252    154,316    53,252 
Advertising and promotional expenses   25,756    22,032    63,510    50,735 
Rent and occupancy costs   18,029    24,816    52,240    51,886 
Property and maintenance cost   —      8,925    3,000    17,925 
Travel and entertainment   1,822    12,091    26,596    50,316 
General and other administrative   19,569    13,407    59,983    74,888 
Total  $319,476   $460,578   $1,432,031   $894,731 

 

Stock compensation expense, management was $94,370 and $204,110, respectively, for the three and nine months ended September 30, 2015, compared to $-0- for the three and nine months ended September 30, 2014. The 2015 amount is comprised of the amortization of restricted common stock issued to the Company’s CEO Mr. Braune (resigned November 2015).

 

Stock compensation expense, other (included in professional and consulting fees) was $2,371 and $347,365 for the three and nine months ended September 30, 2015 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 nine months ended September 30, 2015. 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 $2,371 and $11,065 as stock compensation expense for three and nine months ended September 30, 2015. 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 nine months ended September 30, 2015.

 

Stock compensation expense, other for the three and nine months ended September 30, 2014 was $214,000 and $264,000, respectively. The 2014 period is comprised of $58,000 (three months) and $108,000 (nine months) to advisors to the board of directors and $156,000 (three and nine months) for the issuance of 1,300,000 shares of common stock for services.

 

Professional and consulting fees (excluding stock compensation, other) decreased to $12,905 and $56,668, respectively, for the three and nine months ended September 30, 2015, compared to $20,400 and $84,732 for the three and nine months ended September 30, 2014, respectively, and is comprised of the following:

 

   Three months ended
September 30,
 

Nine months ended
September 30,

   2015  2014  2015  2014
Legal fees  $3,585   $—     $13,948   $28,882 
Property management fees   —      15,000    10,000    32,500 
Accounting fees   3,000    3,000    14,953    11,650 
Investor relation costs   6,320    2,400    13,767    11,700 
Total  $12,905   $20,400   $52,668   $84,732 

 

20
 

Commission and licensing fees of $0 were incurred for three and nine months ended September 30, 2015 compared to commissions of $8,162 for the nine months ended September 30, 2014. The 2015 period did not include any commissionable sales.

 

Advertising and promotional expenses increased to $25,756 and $63,510, respectively, for the three and nine months ended September 30, 2015 compared to $22,032 and $50,735 for the three and nine months ended September 30, 2014, respectively. The increases were primarily due to the engagement of 2 consultants for web site development and marketing research related to the Company’s new vaporizer it was planning to launch in the quarter ending September 30, 2015. The product has not been finalized and there have been no sales.

 

Rent and occupancy costs were $18,029 and $52,240 for the three and nine months ended September 30, 2015, respectively, compared to $24,816 and $51,886 for the three and nine months ended September 30, 2014, respectively. The decrease for the three months ended September 2015 compared to 2014 was as a result of the Company not renewing a Colorado apartment lease.

 

Leased property available for sub-lease and property maintenance costs were $44,494 and $157,316, respectively, for the three and nine months ended September 30, 2015 compared to $62,177 and $71,177, respectively, for the three and nine months ended September 30, 2014. The 2015 costs were primarily comprised of $42,411 (three months) and $127,233 (nine months) for leased real estate and $2,083 (three months) and $27,083 (nine months) for water rights that the Company plans to lease or sub-lease to licensed marijuana operators. The Company has not sub-leased either of these properties and is delinquent in rent payments on both properties.

 

General and other administrative costs for the three and nine months ended September 30, 2015, were $19,569 and $59,983, respectively, compared to $13,407 and $74,888, respectively, for the three and nine months ended September 30, 2014. The significant expenses is comprised of the following:

 

   Three months ended
September 30,
 

Nine months ended
September 30,

Description  2015  2014  2015  2014
Settlement expense  $—     $—     $—     $15,000 
Payroll taxes and fees   2,628    1,056    7,465    4,841 
Filing fees and transfer agent fees   7,398    1,983    14,683    9,474 
Office and moving expense   —      —      —      8,754 
Other taxes   2,180    —      11,763    —   
Insurance   1,566    —      4,697    —   
Telephone, internet and website expenses   1,468    4,618    10,286    12,451 
Office supplies   —      3,240    1,941    10,763 
Other general and other administrative   4,329    2,510    9,148    13,605 
Total  $19,569   $13,407   $59,983   $74,888 

 

Other Income (Expense), Net

 

Other expense for the three and nine months ended September 30, 2015 was $267,463 and $764,147, respectively compared to $66,382 and $267,903 for the three and nine months ended September 30, 2014, respectively. Included in other expenses for the 2015 period interest expense of $254,352 and $757,414 for the three and nine months ended September 30, 2015, respectively, offset by credits from the decrease on the fair value of derivatives of $17,139 (three months) and $24,742 (nine months) and interest income of $4,028 (three months) and $18,009 (nine months).

 

For the three months ended September 30, 2014 interest expense of $71,180 was offset by interest income of $4,798. Other expenses for the 2014 nine month period was interest expense of $365,802 offset by income from the decrease on the fair value of derivatives of $30,347 and interest income of $68,362.

 

21
 

Interest expense for each of the periods is as follows:

 

  

Three months ended
September 30,

  Nine months ended
September 30,
   2015  2014  2015  2014
Excess value of common stock issued  $54,898   $—     $291,203   $—   
Interest on face value   18,495    30,038    63,312    100,038 
Additional true up interest   92,267    —      235,564    —   
Amortization of note discount   85,026    —      135,681    81,535 
Amortization of OID   —      38,571    22,755    150,000 
Initial expense on fair value of derivatives   —      —      —      —   
Amortization of deferred financing fees   3,666    2,571    8,899    34,229 
Total  $254,352   $71,180   $757,414   $365,802 

 

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 September 30, 2015, we had cash and cash equivalents of $179, a decrease of $118,250, from $118,429 as of December 31, 2014. At September 30, 2015, we had current liabilities of $1,680,855 compared to current assets of $541,177 which resulted in working capital deficit of $1,139,678. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt and notes payable.

 

Operating Activities

 

For the nine months ended September 30, 2015, net cash used in operating activities was $445,561 compared to $519,883 for the nine months ended September 30, 2014. The Company had a net loss $2,192,242 for the nine months ended September 30, 2015 compared to a net loss of $1,175,867 for the nine months ended September 30, 2014. The net loss for the nine months ended September 30, 2015, was impacted by the impairment of goodwill of $192,849, noncash interest expense of $291,203 for excess value of common stock issued for convertible notes payable, the amortization of discounts on convertible notes of $158,436, amortization of deferred stock compensation of $204,110, stock based compensation of $347,365, reserve for land loss of $55,490, inventory loss of $32,529, $71,761 for the initial fair value of derivative liabilities and the amortization of deferred financing fees of $8,503 related to the convertible promissory notes offset by the change in fair values of derivative liabilities of $47,019. Changes in operating assets and liabilities that reduced cash used in operating activities included an increase in accounts payable and accrued expenses of $468,486, a decrease in prepaid assets and other of $55,182 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 and decrease in deferred compensation of $9,279.

 

The net loss for the nine months ended September 30, 2014 was impacted by stock compensation expense of $264,000 to our advisor to the board of directors, the amortization of discounts on convertible notes of $231,535, the amortization of deferred financing fees of $34,229 related to the convertible promissory notes, an increase in accounts payable and accrued expenses of $54,019, an increase in deferred compensation of $119,829, the receipt of tenant deposits of $75,000 and depreciation expense $1,341. These amounts were offset by the change fair value of the derivatives of $30,347, increases in prepaid expenses of $117,076 and an increase in inventory of $5,489.

 

Investing Activities

 

During the nine months ended September 30, 2015, net cash used in investing activities was $41,214 compared to $238,510 for the nine months ended September 30, 2014. The 2015 period was the result of advances to a related party. Net cash used in investing activity for the nine months ended September 30, 2014 was a result of land acquisition costs of $54,053, and investments of $50,000 in non-marketable securities, advances to a related party of $89,988, cash portion of acquisition of $20,000, security deposits paid of $14,700 and the purchase of office furniture of $9,769.

 

22
 

Financing Activities

 

During the nine months ended September 30, 2015, net cash provided by financing activities was $368,525 compared to $892,000 for the nine months ended September 30, 2014. The 2015 activity was comprised of proceeds received related to the Tonaquint notes receivable of $178,812, proceeds from the issuance of convertible promissory notes of $200,000, proceeds from an advance from shareholder and the payments made on notes payable of $11,437. The 2014 activity was comprised of proceeds received related to the Tonaquint notes receivable of $400,000, the issuance of convertible promissory notes of $500,000 and the payment of deferred financing fees of $8,000.

 

For the nine months ended September 30, 2015, cash and cash equivalents decreased by $118,250 compared to an increase $133,607 for the nine months ended September 30, 2014. Ending cash and cash equivalents at September 30, 2015 was $179 compared to $242,373 at September 30, 2014.

 

We do not have cash and cash equivalents on hand to meet our obligations. 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.

 

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 September 30, 2015, 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.

 

23
 

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, 2015 are not necessarily indicative of future results for the full year. Certain amounts from the 2014 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.

 

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. 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.

 

24
 

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 September 30, 2015, based on the above criteria, the Company has an allowance for doubtful accounts of $44,068.

 

Property and Equipment

 

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

 

Furniture and equipment                  5 years

 

The Company's property and equipment consisted of the following at September 30, 2015 and December 31, 2014:

 

   September 30,
2015
  December 31, 2014
Land  $354,269   $354,269 
Allowance for land loss, including note elimination of $74,313   (129,803)   —   
Furniture and equipment   13,829    13,829 
Accumulated depreciation   (4,051)   (1,976)
Balance  $234,244   $366,122 

 

Depreciation expense of $692 and $2,075 was recorded for the three and nine months ended September 30, 2015, respectively, compared to $491 and $1,341 for the three and nine months ended September 30, 2014, respectively.

 

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”).

 

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

 

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

 

The three hierarchy levels are defined as follows:

 

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

 

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

 

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

 

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

 

The Company's financial instruments consist primarily of cash, accounts 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 September 30, 2015 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 575,415,654 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 nine months ended September 30, 2015, the Company recorded stock and warrant based compensation of $96,741 and $551,475, respectively compared to $214,000 and $264,000 for the three and nine months ended September 30, 2014, respectively. (See Notes 7 and 8).

 

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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 September 30, 2015 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.

 

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 September 30, 2015 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

 

On July 29, 2015, the Company issued 10,000,000 shares of common stock upon the conversion of $36,630 of principal and accrued and unpaid interest on the 2014 Company Note. The shares were issued at approximately $0.003663 per share.

 

On August 13, 2015, the Company issued 7,500,000 shares of common stock upon the conversion of $27,473 of principal and accrued and unpaid interest on the 2014 Company Note. The shares were issued at approximately $0.003663 per share.

 

On September 3, 2015, the Company issued 5,263,158 shares of common stock upon the conversion of $10,000 of principal and accrued and unpaid interest on the 2015 Vis Vires Convertible Note. The shares were issued at approximately $0.0019 per share.

 

On September 10, 2015, the Company issued 16,500,000 shares of common stock upon the conversion of $19,800 of principal and accrued and unpaid interest on the 2015 Vis Vires Convertible Note. The shares were issued at approximately $0.0012 per share.

 

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Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Common Stock Issuances for Debt Conversions

 

On July 29, 2015, the Company issued 10,000,000 shares of common stock upon the conversion of $36,630 of principal and accrued and unpaid interest on the 2014 Company Note. The shares were issued at approximately $0.003663 per share.

 

On August 13, 2015, the Company issued 7,500,000 shares of common stock upon the conversion of $27,473 of principal and accrued and unpaid interest on the 2014 Company Note. The shares were issued at approximately $0.003663 per share.

 

On September 3, 2015, the Company issued 5,263,158 shares of common stock upon the conversion of $10,000 of principal and accrued and unpaid interest on the 2015 Vis Vires Convertible Note. The shares were issued at approximately $0.0019 per share.

 

On September 10, 2015, the Company issued 16,500,000 shares of common stock upon the conversion of $19,800 of principal and accrued and unpaid interest on the 2015 Vis Vires Convertible Note. The shares were issued at approximately $0.0012 per share.

 

Item 6. Exhibits

 

Exhibit No. Description
3.1 Amended and Restated Designation Preferences and Rights of Class B Preferred Stock (Incorporated herein by reference to Exhibit 3.1 as filed on Form 8-K with the SEC on July 1, 2015).
10.1* Form of 8% Convertible Redeemable Note by and between Agritek Holdings, Inc. and Service Trading Company, LLC dated March 30, 2015.
10.2 Termination Letter of the Master Consulting Financing and Licensing Agreement by and between the Company and Green Leaf Farm Holdings, Inc. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on June 4, 2015).
31.1* Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2* Rule 13a-14(a)/15d-14(a) Certification of Principal 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.

 

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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: March 7, 2016

AGRITEK HOLDINGS, INC.

 

By: /s/ B. Michael Friedman               
B. Michael Friedman
  Chief Executive Officer (principal executive officer and principal financial officer)

 

 

 

 

 

 

Exhibit 31.1

 

Certifications

 

I, B. Michael Friedman, certify that:

 

1. I have reviewed this Quarterly Report on 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 registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the registrant and have:

 

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c. Evaluated the effectiveness of the registrant’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

 

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 reasonably likely to adversely affect the registrant’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 registrant’s internal control over financial reporting.

 

Date:  March 7, 2016 /s/ B. Michael Friedman
  B. Michal Friedman
  Interim Chief Executive Officer (principal executive officer and principal accounting officer)

 

Exhibit 32.1

 

Section 1350 Certification

 

In connection with the Quarterly Report on Form 10-Q of Agritek Holdings, Inc. (the "Company") for the nine months ended September 30, 2015 as filed with the Securities and Exchange Commission (the "Report"), I, B. Michael Friedman, Interim Chief Executive Officer and principal accounting officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

 

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:  March 7, 2016 /s/ B. Michael Friedman
  B. Michael Friedman, Interim Chief Executive Officer (principal executive officer and principal accounting officer)
   
   

 

This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.