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

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

For the quarterly period ended September 30, 2014.

 

OR

 

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

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)   (Zip Code)

 

 
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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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 large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer   ☐ Accelerated filer   ☐
Non-accelerated filer   ☐   (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 registrant’s $0.0001 par value Common Stock, as of November 13, 2014, was 70,917,989 shares.

 
 

 

TABLE OF CONTENTS

 

  Page
Part I.  Financial Information  
   
Item 1.  Financial Statements  
   
Condensed Consolidated Balance Sheets at September 30, 2014 (Unaudited) and December 31, 2013 2
   
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (Unaudited) 3
   
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (Unaudited)   4
   
Notes to Condensed Financial Statements (Unaudited) 6
   
Item 2.  Management’s Discussion and Analysis                                                                                                     18
   
Item 3.  Quantitative and Qualitative Disclosures about Market Risks 21
   
Item 4.  Controls and Procedures 21
   
Part II.  Other Information  
   
Item 1. Legal Proceedings 22
   
Item 1A. Risk Factors 22
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
   
Item 3. Defaults Upon Senior Securities 22
   
Item 4. Mine Safety Disclosures 22
   
Item 5. Other Information 22
   
Item 6.  Exhibits 23
   

Signatures

 

 
 

AGRITEK HOLDINGS, INC. 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,  December 31,
   2014  2013
   (Unaudited)   
       
ASSETS  
       
Current Assets:          
Cash and cash equivalents  $242,373   $108,766 
Accounts receivable, net   804    14,747 
Inventory   53,973    41,333 
Notes receivable   800,000    200,000 
Interest receivable   42,674    —   
Deferred financing costs   2,668    18,896 
Due from related party   157,174    67,186 
Prepaid assets and other   74,402    —   
Total current assets   1,374,068    450,928 
Licensing rights   —      15,000 
Other   15,525    825 
Goodwill   192,849    —   
Property and equipment, net of accumulated depreciation of $1,529 (2014) and $187 (2013)   152,103    3,873 
Investments   50,000    —   
Total assets  $1,784,545   $470,626 
           
Liabilities and Stockholders' Deficit          
           
Current Liabilities:          
Accounts payable and accrued expenses  $234,535   $207,313 
Deferred compensation   92,266    32,437 
Note payable, current portion   12,250    —   
Tenant deposits   75,000    —   
Convertible debt, net of discount of $81,537 (2013)   —      53,463 
Convertible note payable, net of discounts of $40,000   1,420,000    557,500 
Derivative liabilities   —      486,160 
Total current liabilities   1,834,051    1,336,873 
           
Note payable, net of current portion   73,500    —   
           
Total liabilities   1,907,551    1,336,873 
           
Commitments and Contingencies          
           
Stockholders' Deficit:          
Series B convertible preferred stock, $0.0001 par value; 1,000,000 shares authorized, 750,000 (2014) and 1,000,000 (2013) shares issued and outstanding   75    100 
Common stock, $.0001 par value; 250,000,000 shares authorized; 67,758,223 (2014) shares and 45,655,245 (2013) shares issued and outstanding   6,776    4,566 
Additional paid-in capital   10,364,953    8,448,035 
Accumulated deficit   (10,494,810)   (9,318,948)
           
Total stockholders' deficit   (123,006)   (866,247)
           
     Total liabilities and stockholders' deficit  $1,784,545   $470,626 
           
See notes to condensed consolidated financial statements.
2
 

 AGRITEK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) 

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2014  2013  2014  2013
             
Fee revenue, net  $—     $14,946   $—     $72,678 
Product revenue   2,397    32,385    25,934    62,738 
Total revenue   2,397    47,331    25,934    135,416 
Cost of revenue   19,375    45,511    39,977    69,880 
Gross profit (loss)   (16,978)   1,820    (14,043)   65,536 
                     
Operating Expenses:                    
Administrative and management fees (including $9,975 and $3,126,655 of stock based compensation for the three and nine months ended September 30, 2013, respectively)   75,000    76,424    222,181    3,328,285 
Professional and consulting fees (including stock compensation expense of $214,000 and $264,000 for the three and nine months ended September 30, 2014, respectively, and $22,208 and $126,542 for the three and nine months ended September 30, 2013, respectively)   234,400    32,158    348,732    185,363 
Bad debt expense   16,654    —      16,654    —   
Commissions and license fees   —      —      8,162    31,200 
Rent and other occupancy costs   24,816    5,341    51,886    24,124 
Leased property expense   53,252    —      53,252    —   
Advertising and promotion   22,032    9,043    50,735    17,914 
Property maintenance costs   8,925    —      17,925    —   
Travel and entertainment   12,091    —      50,316    —   
Other general and administrative expenses   13,407    33,412    74,888    80,492 
                     
Total operating expenses   460,578    156,378    894,731    3,667,378 
                     
Operating loss   (477,555)   (154,559)   (908,774)   (3,601,842)
                     
Other Income (Expense):                    
Interest income   4,798    3,375    68,362    3,375 
Interest expense   (71,180)   (53,268)   (365,802)   (175,828)
Derivative liability (expense) income   —      22,043    30,347    (8,250)
Total other expense, net   (66,382)   (27,850)   (267,093)   (180,703)
                     
                     
Net loss  $(543,937)  $(182,409)  $(1,175,867)  $(3,782,545)
                     
Basic and diluted loss per share  $(0.01)  $(0.00)  $(0.02)  $(0.08)
                     
Weighted average number of common shares outstanding - Basic and diluted   64,242,466    44,770,005    61,439,927    46,252,805 
                     
See notes to condensed consolidated financial statements.
3
 

  AGRITEK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(Unaudited) 

 

   2014  2013
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(1,175,867)  $(3,782,545)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock issued for consulting services   264,000    115,250 
Amortization of deferred stock compensation   —      192,472 
Preferred stock issued for services   —      2,821,275 
Fair value of stock options issued   —      124,200 
Amortization of deferred financing costs   34,229    26,396 
Depreciation   1,341    40 
Amortization of discounts on convertible notes   231,535    103,517 
Write off of licensing costs   15,000    —   
Change in fair values of derivative liabilities   (30,347)   (17,038)
Beneficial conversion feature   —      29,561 
Bad debt expense   16,654      
Initial derivative liability expense on convertible notes   —      25,288 
Changes in operating assets and liabilities:          
Increase in :          
Accounts receivable   (2,711)   (29,822)
Inventory   (5,489)   (18,545)
Prepaid assets and other   (117,076)   (3,872)
Increase in:          
Accounts payable and accrued expenses   54,019    74,495 
Deferred compensation   119,829    72,692 
Tenant deposits   75,000    —   
Net cash used in operating activities   (519,883)   (266,636)
           
Cash flows from investing activities:          
Land acqusition costs   (54,053)   —   
Purchase of equipment and furniture   (9,769)   (2,509)
Advances to related party   (89,988)   —   
Investments   (50,000)   —   
Cash payment portion of acquisition   (20,000)     
Security deposits paid   (14,700)   —   
Net cash used in investing activities   (238,510)   (2,509)
           
Cash flows from financing activities:          
Payments received on notes receivable issued for convertible debt   400,000    —   
Proceeds from issuance of convertible debt   500,000    157,500 
Proceeds from issuance of convertible notes   —      300,000 
Payment of deferred financing costs   (8,000)   (37,000)
Net cash provided by financing activities   892,000    420,500 
           
Net increase in cash and cash equivalents   133,607    151,355 
Cash and cash equivalents, beginning   108,766    1,892 
           
Cash and cash equivalents, ending  $242,373   $153,247 
           
Supplemental disclosure of cash flow information:          
           
Cash paid for interest  $—     $—   
           
Cash paid for income taxes  $—     $—   
4
 

  AGRITEK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (continued)

(Unaudited) 

 

    2014     2013  
Schedule of non-cash financing activities:          
Conversion of notes payable and interest into common stock  $984,291   $133,816 
           
Conversion of litigation contingency liability into common stock  $—     $46,449 
           
Conversion of deferred compensation into common stock  $60,000   $100,022 
           
Conversion of accounts payabe and accrued expenses into common stock  $50,000   $—   
           
Issuance of note payable for land acquisition  $85,750   $—   
           
Common stock issued for acquistion  $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 condensed consolidated financial statements.

 

 

5
 

AGRITEK HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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., acquires and leases real estate to licensed marijuana operators, including providing complete turnkey growing space and related facilities to licensed marijuana growers and dispensary owners. Additionally, the Company offers a variety of services and product lines to the medicinal marijuana sector including the distribution of hemp based nutritional products, a line of innovative solutions for electronically processing merchant transactions and recently, the Company began importing and distributing vaporizers and e-cigarettes under the Company's Mont Blunt brand.

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

On March 18, 2014, the Company completed the purchase of 80 acres zoned for agricultural use in Pueblo County, Colorado. The Company plans to lease individual parcels of the 80 acre parcel to fully-licensed and compliant growers and dispensaries within the regulated medicinal and recreational market of Colorado. The Company will receive rents and management fees for providing infrastructure, water, electricity, equipment leasing and security services.

 

On April 28, 2014, the Company executed and closed a lease agreement for 20 acres of an agricultural farming facility located in South Florida following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing low grade marijuana specifically for the use of treating epilepsy and cancer patients.  Pursuant to the lease agreement, through November 1, 2014, the Company had an option to purchase the land for $1,100,000, which it did not exercise, and maintains a first right of refusal to purchase the property for three years.

 

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

 

On July 26, 2014, the Company executed a Real Property Purchase Agreement to acquire approximately 3.2 acres for $224,000, in the Apex Industrial Park Complex, otherwise known as Nevada “Green Zone”. The closing of the property is expected to occur no later than November 30, 2014. The Company has also entered into a 99 year lease agreement with My Life Organics, Inc. (“My Life”). Pursuant to the terms and conditions of the lease, My Life will begin paying rent, six months after the Company receives a Certificate of Occupancy and has met all other occupancy conditions, equal to 20% of the gross receipts from the prior month. My Life has been issued a provisional license for cultivation of marijuana to be grown on the Company’s property.

 

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 morph the entire DV line of products into 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 its’ wholly owned subsidiary Prohibition Products, Inc. (“PPI”). See Note 2.

The Company is continuing its focus to acquire real property through purchase or lease, and subsequently lease the real estate to licensed marijuana and/or dispensary owners.

 

6
 

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 and include the consolidated accounts of Agritek Holdings, Inc. 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 significant intercompany accounts and transactions have been eliminated in consolidation. 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 financial statements should be read in conjunction with a reading of the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report filed with the Securities and Exchange Commission (SEC) on April 1, 2014. Interim results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of future results for the full year. Certain amounts from the 2013 period have been reclassified to conform to the presentation used in the current period.

 

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, 2014, based on the above criteria, the Company has an allowance for doubtful accounts of $43,408 and has recognized $16,654 in bad expense for the three and nine months ended September 30, 2014.

 

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 effective interest method through the maturities of the related debt.  

 

 

PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost, and except for land, depreciation is provided by use of accelerated and straight-line methods 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. The estimated useful lives of property and equipment are as follows:

 

   Office equipment, furniture and vehicles 5 years
   Computer hardware and software 3 years

 

7
 

LONG-LIVED ASSETS

 

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

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.

 

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.

 

8
 

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 2010 remain subject to examination by federal and state tax jurisdictions.

 

EARNINGS (LOSS) PER SHARE

 

Earnings (loss) per share are computed in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. As of September 30, 2014 there were warrants to purchase 300,000 shares of common stock, the Company’s outstanding convertible debt is convertible into 16,207,455 shares of common stock and 750,000 shares of Class B convertible preferred stock is convertible into 28,004,788 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, 2014, the Company recorded stock and warrant based compensation of $214,000 and $264,000, respectively. For the three and nine months ended September 30, 2013, the Company recorded $32,183 and $3,253,197, respectively of stock and warrant based compensation (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, 2014, advertising expense was $22,032 and $50,735, respectively, and $9,043 and $17,914 for the three and nine months ended September 30, 2013, respectively.

9
 

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 - Acquisition

 

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 morph the entire DV line of products into 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 Company determined the fair value of the inventory acquired on a cost basis.

 

The fair value of the acquired assets and liabilities, and the resulting amount of goodwill was determined as follows:

 

Common stock 1,500,000 shares at $0.12 per share  $180,000 
Cash   20,000 
Total consideration   200,000 
Fair value of inventory acquired   7,151 
Goodwill  $192,849 

 

NOTE 5 – SALES CONCENTRATION AND CONCENTRATION OF CREDIT RISK

 

CASH

 

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

 

SALES

 

For the nine months ended September 30, 2014, two (2) customers each accounted for more than 10% of our business, respectively, as follows:

 

Customer  Sales % Nine Months Ended September 30, 2014  Accounts
Receivable Balance as of September 30, 2014
 A    17.5%  $—   
 B    17.0%   —   

 

Sales of $4,458 to customer A were during the first quarter of 2014. The Company has not received payment and during the three and nine months ended September 30, 2014, recorded an allowance for doubtful accounts for this amount.

 

PURCHASES

 

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

 

10
 

For the three and nine months ended September 30, 2013, 100% of the Company’s purchases were from one vendor related to the purchase of Chillo and C+Swiss drinks.

 

NOTE 6 – CONVERTIBLE DEBT AND NOTE PAYABLE

 

Convertible Debt

 

On January 2, 2013, February 11, 2013, April 10, 2013, July 29, 2013 and October 16, 2013, the Company entered convertible note agreements (the “2013 Notes”) with Asher Enterprises, Inc. (“Asher”) for $37,500, $27,500, $27,500, $65,000 and $70,000, respectively. We received net proceeds of $214,000 from the 2013 Notes after debt issuance costs of $13,500 paid for lender legal fees. These debt issuance costs have been amortized over the earlier of the terms of the Note or any redemptions and accordingly $4,511 has been expensed as debt issuance costs (included in interest expense) for the nine months ended September 30, 2014. There are no remaining debt issuance costs to be amortized.

 

Among other terms the 2013 Notes were due nine 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 50% 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 trading days immediately preceding the date of conversion. Upon the occurrence of an event of default, as defined in the 2013 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 2013 Notes provided 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 2013 Notes represented an embedded derivative since the Notes were convertible into a variable number of shares upon conversion. Accordingly, the 2013 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 was 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 were 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 2013 Notes resulted in an initial debt discount of $227,500 and an initial loss on the valuation of derivative liabilities of $35,029 for a derivative liability initial balance of $262,529.

 

During the nine months ended September 30, 2014, the Company issued 760,375 shares of common stock in satisfaction of $135,000 of the 2013 Notes and $5,400 of accrued and unpaid interest. The shares were issued at approximately $0.18 per share. The fair value of the derivative liability on the dates of conversion totaling $175,575 was reclassified to paid-in-capital during the nine months ended September 30, 2014. As of September 30, 2014, the 2013 Asher Notes have been fully satisfied.

 

On May 20, 2013, the Company entered into a Securities Purchase Agreement with Typenex Co-Investment, LLC ("Typenex"), for the sale of an 8% convertible note in the principal amount of up to $667,500 (which includes Typenex legal expenses in the amount of $7,500 and a $60,000 original issue discount) (the “2013 Company Note”) for a purchase price of $600,000, consisting of $100,000 paid in cash at closing on May 21, 2013 (the “Initial Cash Purchase Price”) and five secured promissory notes, aggregating $500,000 (the “Investor Notes”), bearing interest at the rate of 8% per annum. Three of the Investor Notes aggregating $300,000 were funded in 2013 and the two remaining Investor Notes of $100,000 each were funded in January 2014.

  

The 2013 Company Note included interest at the rate of 8% per annum, due in four equal monthly installments (the “Redemption Price”) beginning on the nine month anniversary of the initial funding. All interest and principal was to be repaid on February 21, 2014. The 2013 Company Note was convertible into common stock, at Typenex’s option, at a price of $0.055 per share. In the event the Company elected to prepay all or any portion of the 2013 Company Note, the Company was required to pay to Typenex an amount in cash equal to 125% multiplied by the sum of all principal, interest and any other amounts owing. Beginning on the date that is nine (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 was to pay the Holder of this Note the applicable Installment Amount due on such date. Payments of the Installment Amount 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.

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At any time prior to the payment of the applicable Redemption Price by the Company, the Holder had the option, in lieu of redemption, to cancel the Event of Default Redemption Notice by written notice to the Company (the “Redemption Cancellation Notice”). Upon the Company’s receipt of a Redemption Cancellation Notice, the Outstanding Balance of the Note as of the date of the Redemption Notice shall thereafter be due and payable upon demand, with payment of the Outstanding Balance being due ten (10) Trading Days after written demand therefor from the Holder; (y) the Conversion Price of this Note shall be automatically adjusted with respect to each conversion under this Note effected thereafter by the Holder to the lowest of (A) 75% of the lowest Closing Bid Price of the Common Stock during the period beginning on and including the date on which the applicable Redemption Notice is delivered to the Company and ending on and including the date of the Redemption Cancellation Notice, (B) the Market Price as of the date of the Redemption Cancellation Notice, (C) the then current Market Price, and (D) the then current Conversion Price. 

 

The Company determined that the conversion feature of the 2013 Company Note represented an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly, the 2013 Company Note is not considered to be conventional debt under EITF 00-19 and the embedded conversion feature was be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the consolidated balance sheet with since the corresponding amount recorded as an expense

 

During the year ended December 31, 2013, the Company issued 570,090 shares of common stock in satisfaction of $70,000 of the 2013 Company Note. As of December 31, 2013, the outstanding principal balance of the 2013 Company Note was $597,500.

 

During the nine months ended September 30, 2014, the Company issued 9,311,042 shares of common stock in satisfaction of $597,500 of the 2013 Company Note and $46,391 of accrued and unpaid interest. The shares were issued at approximately $0.069 per share. As of September 30, 2014, the 2013 Company Note was fully satisfied.

 

A summary of the derivative liability balance as of December 31, 2013 and September 30, 2014 is as follows:

 

Fair Value  Derivative
Liability Balance
12/31/13
  Initial Derivative Liability  Notes Converted  Fair value change – nine months ended 9/30/14  Derivative Liability Balance 930/14
2013 Notes  $205,920    —     $(175,573)  $(30,347)   —   
2013 Company Note  $280,240    —      (280,240)   —      —   
Total  $486,160    —     $(455,813)  $(30,347)   —   

 

In January 2014, the Company entered into a Secured Promissory Note for $1,660,000 (the “2014 Company Note”) to Tonaquint, Inc. (“Tonaquint”) (the same principals as Typenex) 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 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 nine additional tranches of $220,000 each, plus any interest, costs, fees or charges.

 

Beginning on the date that is nine (9) 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 matures fifteen months after the Issuance Date.

 

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During the nine months ended September 30, 2014, the Company issued 1,497,438 shares of common stock in satisfaction of $200,000 of the 2014 Company Note. The shares were issued at approximately $0.133 per share. As of September 30, 2014, $1,460,000 of principal and accrued interest of $85,213 is outstanding on the 2014 Company Note, and is carried at $1,420,000, net of a remaining note discount of $40,000. During the nine months ended September 30, 2014, the Company received an additional $400,000 of the purchase price, and as of September 30, 2014, the balance of the purchase price of $800,000 is included in Notes receivable on the condensed consolidated financial statements included herein, as well as $42,674 of interest receivable.

 

Note Payable

 

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 seven (7) years, with principal payments of $12,250 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.

 

Future principle payments due on the Company’s convertible debt and note payable as of September 30, 2014, are as follows

 

Twelve months ending September 30,  Amount
 2015   $1,472,250 
 2016    12,250 
 2017    12,250 
 2018    12,250 
 2019 and after    36,750 
     $1,545,750 

 

NOTE 7 – RELATED PARTY TRANSACTIONS

 

Management fees and stock compensation expense

 

Effective January 1, 2013, the Company has agreed to annual compensation of $150,000 for its CEO and $96,000 for the CFO. The Company and the CFO have agreed that $3,000 per month will be paid in cash and $5,000 per month will be paid in restricted shares of common stock. For the three and nine months ended September 30, 2014, the Company expensed $61,500 and $184,500, respectively, included in Administrative and Management Fees in the Unaudited Condensed Consolidated Statements of Operations, included herein. As of September 30, 2014, the Company owed the CEO $47,431 and the CFO $44,835, included in deferred compensation on the Company’s condensed consolidated balance sheet.

 

On January 13, 2014, the Company issued 545,454 shares of common stock to Venture Equity, LLC, (“Venture Equity”) a Florida limited liability Company, controlled by the Company’s CFO, upon the conversion of $60,000 of accrued management fees. The shares were issued at $0.11 per share, the market price of the common stock on December 31, 2013.

 

In June 2013, Mr. Friedman agreed to exchange 3,033,500 shares of common stock in partial consideration for the issuance of 450,000 shares of Class B preferred stock (see note 8).

 

Amounts due FROM 800 COMMERCE, Inc.

 

800 Commerce, Inc. owed Agritek $157,174 and $67,186 as of September 30, 2014 and December 31, 2013, 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.

 

13
 

NOTE 8 – COMMON AND PREFERRED STOCK

 

Common Stock

 

Previously the Company appointed Mr. James Canton to be an advisor to the Company’s Board of Directors. In April 2013, the Company agreed to issue to Mr. Canton 200,000 shares of common stock, a warrant to purchase 300,000 shares of common stock at an exercise price of $0.50 per share with an expiration date on the third year anniversary of the grant, and $25,000 to be paid in shares of common stock to be issued at the end of each calendar quarter beginning on June 30, 2013 and ending on the earlier of March 31, 2015 (the term of Canton’s advisor role) or the date Canton is no longer serving as an advisor to the board of directors. During the nine months ended September 30, 2014, the Company issued 265,281 shares of common stock, valued at $50,000 based on the market price of the common stock when issued. The Company included $25,000 and $75,000 in stock based compensation expense for the three and nine months ended September 30 2014. As of September 30, 2014, the Company owed Mr. Canton $25,000, which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet herein.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

On July 22, 2014, the Company issued 150,000 shares of Company common stock to Mr. Bartoletta as an advisor to the Board of the Directors of the Company. The Company recorded an expense of $33,000 (based on the market price of the Company’s common stock of $0.22 per share) and is included in professional and consulting fees in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014, respectively.

 

On August 6, 2014, the Company issued 625,978 shares of common stock upon the conversion of $100,000 of the 2014 Company Note. The shares were issued at approximately $0.16 per share.

 

On September 5, 2014, the Company issued 871,460 shares of common stock upon the conversion of $100,000 of the 2014 Company Note. The shares were issued at approximately $0.115 per share.

 

14
 

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

 

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

 

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

 

Preferred Stock

 

On June 20, 2012 the Company cancelled and returned to authorized but unissued one million shares of Preferred A Stock, and authorized 1,000,000 shares of Class B Convertible Preferred Stock (the “Class B Preferred Stock”), par value $0.01. The rights, preferences and restrictions of the Class B Preferred Stock as amended, state; i) each share of the Class B Convertible Preferred Stock shall automatically convert (the “Conversion”) into shares of the Corporation’s common stock at the moment there are sufficient authorized and unissued shares of common stock to allow for the Conversion. The Class B Convertible Preferred Stock will convert in their entirety, simultaneously to equal one half (1/2) the amount of shares of common stock outstanding on a fully diluted basis immediately prior to the Conversion. The Conversion shares will be issued pro rata so that each holder of the Class B Convertible Preferred Stock will receive the appropriate number of shares of common stock equal to their percentage ownership of their Class B Convertible Preferred Stock and ii) all of the outstanding shares of the Class B Preferred Stock in their entirety will have voting rights equal to the amount of shares of common stock outstanding on a fully diluted basis immediately prior to any vote. The shares eligible to vote will be calculated pro rata so that each holder of the Class B Convertible Preferred Stock will be able to vote the appropriate number of shares of common stock equal to their percentage ownership of their Class B Convertible Preferred Stock. The Class B Convertible Preferred Stock shall have a right to vote on all matters presented or submitted to the Corporation’s stockholders for approval in pari passu with holders of the Corporation’s common stock, and not as a separate class.

 

As of September 30, 2014 and December 31, 2013, the Company had 750,000 and 1,000,000 shares of Series B Preferred Stock (the “Class B Preferred Stock”), par value $0.01 outstanding, respectively.

 

Warrants

 

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.

 

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, 2014 and 2013.

 

As of September 30, 2014, the Company had a tax net operating loss carry forward of approximately $1,356,000. 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.

 

15
 

NOTE 10 – CONTINGENCIES AND COMMITMENTS

 

Office and warehouse space

 

Effective on April 1, 2013, the Company entered into a three year agreement to rent approximately 2,500 square feet of office space (the “Office Lease”) in Detroit, Michigan. The monthly rent under this lease was $2,200 per month.

 

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

 

Effective May 15, 2013 through September 15, 2013, the Company leased warehouse space on a month to month basis for the shipping and logistics of the Company’s Chillo drink products for $250 per month. Subsequent to September 15, 2013, the Company compensates the landlord on a per pallet fee. As of September 30, 2014, the Company is no longer distributing the Chillo product and is not utilizing the warehouse space.

 

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 has agreed to pay $3,500 per month for the space, and it will be utilized to market, sell and distribute products to Colorado dispensaries, including managing the banking and credit card services described below.

 

Also in April 2014, the Company entered into a lease for an apartment located in Denver, Colorado for the use of Company personnel when traveling to Colorado on behalf of the Company. The Company has agreed to pay $2,700 per month for the apartment. The lease expired October 31, 2014 and the Company has not renewed the lease.

 

Rent expense for the three and nine months ended September 30, 2014 was $24,816 and $51,886, respectively, compared to $5,341 and $24,124 for the three and nine months ended September 30, 2013.

 

Leased properties

 

On April 28, 2014, the Company executed and closed a 10 year lease agreement for 20 acres of an agricultural farming facility located in South Florida following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing low grade marijuana specifically for the use of treating epilepsy and cancer patients.  Pursuant to the lease agreement, through November 1, 2014, the Company had an option to purchase the land for $1,100,000 (the option has expired) and 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 $15,935, respectively, of expense (included in leased property expenses) for the three and nine months ended September 30, 2014.

 

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 $37,317 of expense for the three and nine months ended September 30, 2014 (included in leased property expenses) related to the land and water rights.

 

Other

 

On July 1, 2014, the Company, along with its officers and directors and a company controlled by the Company’s CEO, was named in a Summons and Complaint. On July 18, 2014, the parties settled the complaint and paid $16,750 and the Summons and Complaint has been dismissed with prejudice. The Company applied the payment to amounts owed related parties.

 

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NOTE 11 – GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of September 30, 2014 the Company had an accumulated deficit of $10,494,810 and working capital deficit of $459,984. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 12 – SEGMENT REPORTING

 

Description of segments

 

During the nine months ended September 30, 2014, the Company operated in one reportable segment, wholesale sales.

 

During the nine months ended September 30, 2013, the Company operated in two reportable segments: accounts receivable financing and wholesale sales. Prior to April 1, 2013, the Company was receiving fees as the agent of record for fees pursuant to the ACS agreement. Beginning April 1, 2013, the Company began wholesaling products (Chillo drinks). The accounting policies of the segments are the same as those described in the Note 1.  The Company’s reportable segments are strategic business units that offer products.

 

NOTE 13 – SUBSEQUENT EVENTS

 

On October 13, 2014, the Company issued 562,272 shares of common stock upon the conversion of $50,000 of the 2014 Company Note. The shares were issued at approximately $0.089 per share.

 

On October 21, 2014, the Company issued 2,011,142 shares of common stock upon the conversion of $100,000 of the 2014 Company Note. The shares were issued at approximately $0.05 per share.

 

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

 

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

 

The Company’s Management performed an evaluation of the Company’s activity through the date these financials were issued to determine if they must be reported. The Management of the Company determined that there were no other reportable subsequent events to be disclosed.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

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 audited consolidated financial statements and notes thereto for the years ended December 31, 2013 and 2012, included in our annual report on Form 10-K filed with the SEC on April 1, 2014.

 

The independent auditors reports on our financial statements for the years ended December 31, 2013 and 2012 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 11 to the condensed consolidated financial statements filed herein.

 

(a) Liquidity and Capital Resources.

 

For the nine months ended September 30, 2014, net cash used in operating activities was $519,883 compared to $266,636 for the nine months ended September 30, 2013. The company had a net loss $1,175,867 for the nine months ended September 30, 2014 compared to a net loss of $3,782,545 for the nine months ended September 30, 2013. The net loss for the nine months ended September 30, 2014 was impacted by stock compensation expense of $264,000 comprised of $108,000 to advisories to the board of directors and $156,000 for the issuance of 1,300,000 shares of common stock for services provided. Non cash interest expense included the amortization of discounts on convertible notes of $231,535 and the amortization of deferred financing fees of $34,229 related to the convertible promissory notes. Changes in operating assets and liabilities included 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 increases in prepaid expenses of $117,076 and an increase in inventory of $5,489.

 

The net loss for the nine months ended September 30, 2013 was impacted by stock and warrant compensation expense of $3,253,197 comprised of $2,821,275 of preferred stock compensation, the amortization of deferred stock compensation of $192,472 from the previous issuance of Series B preferred stock, $124,200 warrant based compensation for the issuance of a warrant to purchase 3,000,000 shares of common stock to our advisor to the board of directors, $80,000 for the one time issuance of 2,000,000 shares of common stock to the same advisor, 500,000 shares of common stock valued at $19,750 and $15,500 for the issuance of 250,000 shares for services provided to the Company. Additional non-cash expenses for the nine months ended September 30, 2013 were the amortization of the initial discounts of $103,517 on the convertible notes, the initial derivative liability expense and the change in the fair value of the derivatives of $25,288, amortization of deferred financing fees of $26,396 also related to the convertible promissory notes and a beneficial conversion feature related to the conversion of the contingent liability to common stock of $29,561.

 

During the nine months ended September 30, 2014, net cash used in investing activities was $238,510 compared to $2,509 for the nine months ended September 30, 2013. The 2014 period was the 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, security deposits paid of $14,700 and the purchase of office furniture of $9,769 and the cash payment portion of $20,000 for the acquisition of Dry Vapes, Holdings, Inc. The net cash used in investing activity for the nine months ended September 30, 2013 was the result of the purchase of office furniture.

 

During the nine months ended September 30, 2014, net cash provided by financing activities was $892,000 compared to $420,500 for the nine months ended September 30, 2013. The 2014 activity was comprised of proceeds received related to the Typenex notes receivable of $400,000, the issuance of convertible promissory notes of $500,000 and the payment of deferred financing fees of $8,000. The 2013 amount was comprised of issuance of convertible promissory notes of $157,500, proceeds of $300,000 related to the Typenex convertible note (see Note 6 to the condensed consolidated financial statements contained herein) and the payment of deferred financing fees of $37,000.

18
 

For the nine months ended September 30, 2014, cash and cash equivalents increased by $133,607 compared to $151,355 for the nine months ended September 30, 2013. Ending cash and cash equivalents at September 30, 2014 was $242,373 compared to $153,247 at September 30, 2013.

 

We have cash and cash equivalents on hand to meet our obligations. We presently maintain our daily operations and capital needs through the sale of our products and financings available to us from our lender.

 

(b) Results of Operations

 

Results of operations for the three and nine months ended September 30, 2014 vs. September 30, 2013

 

REVENUES

 

Revenues during the three and nine months ended September 30, 2014 and 2013 were comprised of the following:

 

   Three  months ended September 30,  Nine months ended September 30,
   2014  2013  2014  2013
ACS  $—     $—     $—     $49,818 
Chillo products   —      32,385    17,008    62,738 
Cloud-based products   —      14,946    —      22,860 
Wellness products   2,397    —      8,926    —   
Total  $2,397   $47,331   $25,934   $135,416 

 

In April 2013, Alternative Capital Solutions (“ACS”) and the Company terminated their agreements and accordingly, the Company no longer receives fees related to the ACS agreement. During 2013, the Company entered into an exclusive distributorship agreement with Chill Drinks, LLC for sales of Chill Drink’s products to dispensaries. Sales began in April 2013. The decrease in the sale of the Chillo products is primarily due to the Company focusing more on its’ real estate business plan at this time.

OPERATING EXPENSES

 

Operating expenses were $460,578 and $894,731 for the three and nine months ended September 30, 2014 compared to $156,378 and $3,667,378 for the three and nine months ended September 30, 2013. The expenses were comprised of:

 

   Three months ended September 30,  Nine months ended September 30,
  Description  2014  2013  2014  2013
Administration and management fees  $75,000   $66,449   $222,181   $201,630 
Stock compensation expense, management   —      9,975    —      3,126,655 
Stock compensation expense, other   214,000    22,208    264,000    126,542 
Professional and consulting fees   20,400    9,950    84,732    58,821 
Bad debt expense   16,654    —      16,654    —   
Commissions and license fees   —      —      8,162    31,200 
Advertising and promotional expenses   22,032    9,043    50,735    17,914 
Rent and occupancy costs   24,816    5,341    51,886    24,124 
Leased property for sub-lease   53,252    —      53,252    —   
Property and maintenance cost   8,925    —      17,925    —   
Travel and entertainment   12,091    —      50,316    —   
General and other administrative   13,407    33,412    74,888    80,492 
Total  $460,578   $156,378   $894,731   $3,667,378 

 

19
 

There was no stock compensation expense, management for the three and nine months ended September 30, 2014 compared to $9,975 and $3,126,655 for the three and nine months ended September 30, 2013, respectively. The 2013 amount was comprised of $2,821,275 of preferred stock compensation, $124,200 warrant based compensation for the issuance of a warrant to purchase 3,000,000 shares of common stock to our advisor to the board of directors, $80,000 for the one time issuance of 2,000,000 shares of common stock to the same advisor, 500,000 shares of common stock valued at $19,750. Stock compensation expense, other for 2013 includes the amortization of deferred stock compensation of $22,208 (three months) and $111,042 (nine months) from the previous issuance of Series B preferred stock and $15,500 (for the nine months ended September 30, 2013) for the issuance of 250,000 shares for services provided to the Company.

 

Stock compensation expense, other was $214,000 and $264,000, respectively, for the three and nine months ended September 30, 2014, respectively, compared to $22,208 and $126,542 for the three and nine months ended September 30, 2013, respectively. The 2014 period is comprised of $58,000 (three months) and $108,000 (nine months) to advisories 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 provided.

 

Professional and consulting fees increased for the three and nine months periods in 2014 and included legal expenses of $28,882 (nine months), property management fees of $15,000 (three months) and $32,500 (nine months), accounting fees of $3,000 (three months) and $11,650 (nine months) and investor relation costs of $2,400 (three months) and $11,700 (nine months). The increase in the 2014 period is primarily due to costs associated with the Company’s land acquisition and property management fees. Commission and licensing fees of $8,162 were also incurred for nine months ended September 30, 2014. The 2013 periods include investor relation costs $7,150 (three months) and $29,546 (nine months), consulting fees of $19,200 (nine months) of which $16,700 was pursuant to the ACS agreement and accounting fees of $2,500 (three months) and $9,775 (nine months). Commissions of $31,200 were also incurred for the nine months ended September 30, 2013 pursuant to the ACS Agreement.

 

General and other administrative costs for the three and nine months ended September 30, 2014, were $13,407 and $74,888, respectively, compared to $33,412 and $80,492, respectively for the three and nine months ended September 30, 2013. Expenses for the nine months ended September 30, 2014, include a settlement expense of $15,000 related to licensing fees, public company filing and transfer agent fees of $9,474, telephone, internet and web based service costs of $12,451, office and employee moving costs of $8,754, payroll taxes and fees of $4,841, office supply purchases of $10,763 and $13,605 of other general and administrative costs. Expenses for the nine months ended September 30, 2013, include public company filing fees and transfer agent fees of $19,976, travel and entertainment costs of $24,140, telephone, internet and web based service costs of $19,096, payroll taxes and fees of $2,174, certification station set up costs of $2,904 and $12,202 of other general and administrative costs.

 

OTHER INCOME (EXPENSE), NET

 

Other expense for the three and nine months ended September 30, 2014 was $66,382 and $267,093 compared to $27,850 and $180,703 for the three and nine months ended September 30, 2013, respectively. Included in other expenses for the 2014 period was income from the decrease on the fair value of derivatives of $30,347 (nine months), interest income of $4,798 (three months) and $68,362 (nine months), offset by interest expense of $71,180 (three months) and $365,802 (nine months), related to the 2013 and 2014 Company Notes.

 

Other expense for the 2013 period included $103,517 (nine months) related to the amortization of the initial discount on convertible promissory notes, $10,311 (three months) and $26,396 (nine months) for the amortization of the deferred financing costs and $2,158 (three months) and $16,354 (nine months) for the interest expense on the face value of the notes. Also included in other expenses for the nine months ended September 30, 2013 was $25,288 for the initial derivative liability expense for the embedded derivative in newly issued convertible notes and a (decrease) of $17,038 for the fair value change on the derivative liability associated with the convertible promissory notes.

 

20
 

Interest expense was $71,180 and $365,802 for the three and nine months ended September 30, 2014, respectively, compared to $53,268 and $175,828 for the three and nine months ended September 30, 2013, respectively. The increase was due to the issuance of various debt instruments from May 2013 through January 2014. Interest expense for each of the periods is as follows:

 

   Three  months ended September 30,  Nine months ended September 30,
   2014  2013  2014  2013
Interest on face value  $30,038   $2,158   $100,038   $16,354 
Amortization of note discount   —      41,519    81,535    103,517 
Amortization of OID   38,571    —      150,000    —   
Beneficial conversion feature   —      —      —      29,561 
Amortization other   2,571    9,591    34,229    26,396 
Total  $71,180   $53,268   $365,802   $175,828 

OFF BALANCE SHEET ARRANGEMENTS

 

None

 

Critical Accounting Policies

 

See Note 2 to the condensed consolidated financial statements included herein.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

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 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


Evaluation of Disclosure Controls and Procedures.  As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation our Chief Executive Officer and Chief Financial Officer concluded that, at September 30, 2014, our disclosure controls and procedures are not effective.

 

21
 

PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

None.

 

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 22, 2014, the Company issued 150,000 shares of Company common stock to Mr. Bartoletta as an advisor to the Board of the Directors of the Company. The Company recorded an expense of $33,000 (based on the market price of the Company’s common stock of $0.22 per share) and is included in professional and consulting fees in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014, respectively.

 

On August 6, 2014, the Company issued 625,978 shares of common stock upon the conversion of $100,000 of the 2014 Company Note. The shares were issued at approximately $0.16 per share.

 

On September 5, 2014, the Company issued 871,460 shares of common stock upon the conversion of $100,000 of the 2014 Company Note. The shares were issued at approximately $0.115 per share.

 

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

 

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

 

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

 

 

ITEM 3. Defaults upon Senior Securities

 

None.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. Other Information

 

None

 

22
 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibit index

 

31.1 Certification of Chief Executive Officer, and Director Pursuant to Section 302 of the Sarbanes-Oxley Act.

 

31.2 Certification of Chief Financial Officer, and Director Pursuant to Section 906 of the Sarbanes-Oxley Act.

 

32.1 Certification of Chief Executive Officer, and Director Pursuant to Section 302 of the Sarbanes-Oxley Act.

 

32.2 Certification of Chief Financial Officer, and Director Pursuant to Section 906 of the Sarbanes-Oxley Act.

23
 

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: November 14, 2014

AGRITEK HOLDINGS, INC.

 

By:   /s/ B. Michael Friedman

B. Michael Friedman

Chief Executive Officer and Director

(Principal Executive Officer)

 

EXHIBIT 31.1

 

CERTIFICATION

 

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 15d-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(s) 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: November 14, 2014

/s/ B. Michael Friedman                        

B. Michael Friedman

Interim Chief Executive Officer

(Principal Executive Officer)

EXHIBIT 31.2

 

CERTIFICATION

 

I, Barry S. Hollander, 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 15d-15(f)) for the registrant and have:

 

(e)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;

 

(f)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;

 

(g)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

 

(h)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(s) 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):

 

(c)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

 

(d)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: November 14, 2014

/s/ Barry S. Hollander                       

Barry S. Hollander

Chief Financial Officer

(Principal Accounting Officer)

 

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Agritek Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, B. Michael Friedman, Principal Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

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

 

  1. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, as of, and for the periods presented in the Report.

 

  /s/ B. Michael Friedman              
  B. Michael Friedman
  Principal Executive Officer
  November 14, 2014

 

A signed original of this written statement required by Section 906 has been provided to Agritek Holdings, Inc. and will be retained by Agritek Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Agritek Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Barry S. Hollander, Principal Accounting Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

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

 

  1. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, as of, and for the periods presented in the Report.

 

  /s/ Barry S. Hollander                    
  Barry S. Hollander
  Principal Accounting Officer
  November 14, 2014

 

A signed original of this written statement required by Section 906 has been provided to Agritek Holdings, Inc. and will be retained by Agritek Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.