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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, 2017

 

OR

 

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

 

For the transition period from ________________ to __________________

 

Commission File Number 000-1321002

 

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

 

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

 

 

777 Brickell Avenue, Suite 500, Miami, FL 33131

(Address of principal executive offices)

 

(305) 721-2727

(Registrant's telephone number, including area code)

 

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

 

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

 

Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one)

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Sectionn13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesNo

 

The number of shares outstanding of the Registrant's $0.0001 par value Common Stock as of November 14, 2017, was 637,394,281 shares.

 
 

 

AGRITEK HOLDINGS, INC.

FORM 10-Q

Quarterly Period Ended September 30, 2017

 

INDEX

 

FORWARD-LOOKING STATEMENTS Page
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets at September 30, 2017 (Unaudited) and December 31, 2016 2
  Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 (Unaudited) 3
  Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2017 and 2016 (Unaudited)   4
  Notes to Condensed Financial Statements (Unaudited) 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                                                     24
Item 3. Quantitative and Qualitative Disclosures about Market Risks 30
Item 4. Controls and Procedures 30
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 31
Item 1A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 32
Item 4. Mine Safety Disclosures 32
Item 5. Other Information 32
Item 6. Exhibits 33
     
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, 2016, 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 30,    December 31, 
    2017    2016 
    (Unaudited)    (Audited) 
           
ASSETS          
Current Assets:          
Cash and cash equivalents  $311,173   $67,260 
Marketable Securities   45,277    39,769 
Inventory, net   40,000    —   
Prepaid assets and other   11,000    10,000 
Total current assets   407,449    117,029 
           
Property and equipment, net of accumulated depreciation of $14,572 (2017) and $8,308 (2016)   171,306    26,280 
Investments in non-marketable securities   285,000    50,000 
Security deposit and other   13,825    825 
Total assets  $877,580   $194,134 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current Liabilities:          
Accounts payable and accrued expenses  $619,340   $550,886 
Due to related party   35,479    54,246 
Customer deposits   2,400    2,400 
Deferred rent   24,916    —   
Convertible notes payable, net of discount of $511,985 (2017) and $257,034 (2016)   468,839    569,446 
Derivative liabilities   2,925,236    1,613,770 
Note payable, current portion   17,500    —   
Total current liabilities   4,093,710    2,790,747 
           
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   10    10 
Common stock, $.0001 par value; 500,000,000 shares authorized; 594,699,511 (2017) and 400,867,449 (2016) shares issued and outstanding   59,471    40,087 
Common stock to be issued   3,722    —   
Additional paid-in capital   17,217,774    13,764,813 
Deferred expenses   (61,500)   —   
Accumulated comprehensive gain   28,752    23,244 
Accumulated deficit   (20,464,359)   (16,424,767)
Total stockholders' (deficit)   (3,216,131)   (2,596,613)
           
Total liabilities and stockholders' (deficit)  $877,580   $194,134 
           
           
See notes to 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,

 
   2017   2016   2017   2016 
                     
Rental income  $24,000   $—     $48,000   $—   
Product revenue   —      —      —      3,228 
Total revenue   24,000    —      48,000    3,228 
Cost of revenue   —      —      —      3,161 
Gross profit   24,000    —      48,000    67 
                     
                     
Operating Expenses:                    
Management fees including $300,000 of stock based compensation for the nine months ended September 30, 2017   37,500    37,500    412,500    112,500 
Administrative fees   43,000    1,917    50,400    11,564 
Professional and consulting fees (including stock based compensation of $24,600 and $191,431 for the three and nine months ended September 30, 2017, respectively and $42,371 for the nine months ended September 30, 2016)   148,040    11,217    530,175    85,086 
Gain on recapture of reserve for land   —      —      (47,502)   —   
Rent and other occupancy costs   34,873    24,400    92,940    49,109 
Leased property expense   9,561    42,411    28,683    127,233 
Other general and administrative expenses   122,004    23,031    218,834    75,637 
                     
Total operating expenses   394,979    140,476    1,286,030    461,129 
                     
Operating loss   (370,979)   (140,476)   (1,238,030)   (461,062)
                     
Other Income (Expense):                    
Gain on debt settlement   —      —      —      84,057 
Interest expense   (438,553)   (188,932)   (1,110,560)   (493,038)
Derivative liability expense   (1,187,676)   (1,989,756)   (1,691,003)   (2,325,640)
                     
Total other expense, net   (1,626,229)   (2,178,688)   (2,801,563)   (2,734,621)
                     
Net loss  $(1,997,208)  $(2,319,164)  $(4,039,592)  $(3,195,683)
                     
Unrealized gain on marketable securities  $19,940   $12,999   $5,508    11,016 
Net comprehensive loss  $(1,977,268)  $(2,306,165)  $(4,034,084)  $(3,184,667)
                     
Basic and diluted loss per share  $***   $***   $***   $*** 
                     
Weighted average number of common shares outstanding Basic and diluted   543,605,667    374,229,821    479,525,626    318,842,039 
                     
** Less than $0.01                    
See notes to condensed consolidated financial statements.

 

 3 

 

 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
       
    

Nine Months Ended

September 30,

 
    2017    2016 
           
Cash flow from operating activities:          
Net loss  $(4,039,592)  $(3,195,683)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock and warrants issued for consulting services including $300,000 (2017) related party   491,431    2,371 
Common stock issued for true up on conversions of convertible debt   16,094    —   
Amortization of deferred financing costs   64,120    —   
Recapture of reserve for land   (47,502)   —   
Depreciation   6,265    2,625 
Initial expense for fair value of derivative liabilities   962,317    496,694 
Amortization of discounts on convertible notes   904,638    421,125 
Change in fair values of derivative liabilities   728,687    1,828,946 
Gain on debt settlement   —      (84,057)
Financing costs   —      33,606 
Changes in operating assets and liabilities:          
Decrease (increase) in :          
Inventory   (40,000)   —   
Prepaid assets and other   (1,000)   3,333 
Security deposit   (13,000)   —   
Increase (decrease) in:          
Accounts payable and accrued expenses   178,403    161,217 
Due to related party   (18,767)   5,398 
Accrued interest payable        50,653 
Deferred rent   24,916    —   
Deferred compensation        21,233 
Tenant deposits   —      2,400 
Net cash used in operating activities   (782,991)   (250,139)
           
Cash flows from investing activities:          
Purchase of property, equipment and furniture   (68,788)   (6,369)
Investments   (235,000)   —   
Net cash used in investing activities   (303,788)   (6,369)
           
Cash flows from financing activities:          
Proceeds from issuance of convertible debt   1,013,193    252,500 
Payments made on note payable   (17,500)   —   
Proceeds from sale of common stock to be issued   335,000    —   
Net cash provided by financing activities   1,330,693    252,500 
           
Net increase (decrease) in cash and cash equivalents   243,913    (4,008)
           
Cash and cash equivalents, Beginning   67,260    11,548 
           
Cash and cash equivalents, Ending  $311,173   $7,540 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $1,275   $—   
Cash paid for income taxes  $—     $—   
           
Schedule of non-cash financing activities:          
Conversion of notes payable and interest into common stock  $995,133   $132,974 
Fair value of marketable securities issued in exchange for debt  $16,525   $16,525 
Change in fair value for available for sale marketable securities  $5,508   $11,016 
Issuance of note payable as part of land acquisition  $35,000   $—   
           
           
See notes to condensed consolidated financial statements.

 

 4 

 

 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(Unaudited)

 

Note 1 - Organization

 

Business

 

Agritek Holdings, Inc. (the “Company” or “Agritek”) and its wholly-owned subsidiaries, MediSwipe, Inc., Prohibition Products Inc., and Agritek Venture Holdings, Inc. (“AVHI”) provide turnkey support solutions to the legal cannabis industry. We provide key business services to the legal cannabis sector including:

 

  •  Funding and Financing Solutions for Agricultural Land and Properties zoned for the regulated Cannabis Industry.
  •  Compliance Consulting and Certification Solutions
  •  Dispensary and Retail Solutions
  •  Commercial Production and Equipment Build Out Solutions
  •  Multichannel Supply Chain Solutions
  •  Branding, Marketing and Sales Solutions of proprietary product lines
  •  Consumer Product Solutions 

 

The Company is expanding throughout California, Colorado and Puerto Rico and presently intends to bring its’ array of services to each new state that legalizes the use of cannabis according to appropriate state and federal laws. Our primary objective is acquiring commercial properties to be utilized in the commercial marijuana industry as cultivation facilities in compliance with Colorado and additional jurisdictions including California, Nevada and Puerto Rico in accordance with state law. This is an essential aspect of our overall growth strategy because once acquired and re-zoned, the value of such real property is substantially higher than under the previous zoning and use.

Once properties are identified and acquired to be used for purposes related to the commercial marijuana industry as provided for by state law, and we plan to create vertical channels within that legal jurisdiction including equipment financing, payment processing and marketing of exclusive brands and services to retail dispensaries

Agritek’s business focus is primarily to hold, develop and manage real property. The Company shall also provide oversight on every property that is part of its portfolio. This can include complete architectural design and subsequent build-outs, general support, landscaping, general up-keep, and state of the art security systems. At this time, Agritek does not grow, process, own, handle, transport, or sell marijuana as the Company is organized and directed to operate strictly in accordance with all applicable state and federal laws. As the legal environment changes in Colorado, California and other states, the Company’s management may explore business opportunities that involve ownership interests in dispensaries and growing operations if and when such business opportunities become legally permissible under applicable state and federal laws.

 

Recent Events

 

On August 7, 2017, the Company signed a Letter of Intent (“LOI)” with Green Acres Pharms, LLC (“Green Acres”), whereby in exchange for consulting fees, licensing fees and equipment financing fees, the Company will provide up to $250,000 of working capital and potentially, up to $3,500,000 for the buyout of Green Acres existing mortgage on their 10,000- sq. ft. licensed cultivation and manufacturing facility located in Washington State.

 

On August 22, 2017, the Company signed a LOI with Ponix Pods, LLC (“Ponix”), whereby, the Company has exclusive distribution rights within the Cannabis industry, and the Company and Ponix will share revenues on all pods that are placed on the Company’s property. Additionally, the Company plans to acquire 51% of Ponix.

 

 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 nine months ended September 30, 2017 are not necessarily indicative of future results for the full year. Certain amounts from the 2015 period have been reclassified to conform to the presentation used in the current period.

 

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

 

Cash and Cash Equivalents

 

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

 

Accounts Receivable

 

The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectability is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term. As of September 30, 2017, based on the above criteria, the Company has a full allowance for doubtful accounts of $43,408.

 

Inventory

 

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

 

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, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

 

Original Issue Discount

 

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

 

Marketable Securities

 

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

 

Investment of Non-Marketable Securities

 

The Company’s investment in non-marketable securities consist of cash investments in a less than 10% interest in two privately held companies of $25,000 each, that provide merchant processing services. During the nine months ended September 30, 2017, the Company has invested in the following:

 

$110,000 pursuant to a five (5) year operational and exclusive licensing agreement with a third party who leases a 25,000-sq. ft. approved cultivation facility located in San Juan, Puerto Rico (see Note 10).
$100,000 pursuant to a five (5) year operational and exclusive licensing agreement with a third party who leases a 10,000-sq. ft. approved cultivation facility located in Washington State (see Note 10).
$25,000 pursuant to LOI with a third party, whereby, the Company will have exclusive distribution rights of pods in the cannabis industry, and will receive 50% of revenues from pod rentals located on any of the Company’s properties.

 

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, 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. In February, 2017, the original owner of the 80 acres foreclosed on the property from the second party and the Company entered into a new land purchase contract directly with the landowner on February 7, 2017.To date, the Company has paid a total of $106,557 and is on the deed of trust of the property with a remaining note balance of approximately $17,500 held by the original owner. The estimated useful lives of property and equipment are as follows:

 

Furniture and equipment 5 years
Manufacturing equipment 7 years

 

 7 

 

The Company's property and equipment consisted of the following at September 30, 2017 and December 31, 2016:

 

   September 30,
2017
  December 31,
2016
Furniture and equipment  $61,821   $34,587 
Land   124,057    —   
Accumulated depreciation   (14,572)   (8,307)
Balance  $171,306   $26,280 

 

Depreciation expense of $2,310 and $6,265 was recorded for the three and nine months ended September 30, 2017, respectively, and $1,173 and $2,625 for the three and nine months ended September 30, 2016, respectively.

 

Long-Lived Assets

 

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

 

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 fees are earned. Consulting revenue of $24,000 and $48,000 has been recognized for the three and nine months ended September 30, 2017.

 

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.

 

 8 

 

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

 

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

 

Income Taxes

 

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

 

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

 

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

 

Earnings (Loss) Per Share

 

Earnings (loss) per share are computed in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. As of September 30, 2017, there were warrants and options to purchase 53,324,086 shares of common stock and the Company’s outstanding convertible debt is convertible into approximately 141,132,791 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 nine months ended September 30, 2017, the Company recorded stock based compensation of $491,431 (See Note 7).

 

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.

 

 9 

 

Advertising

 

The Company records advertising costs as incurred. For the three and nine months ending September 30, 2017 advertising expenses was $6,179 and $8,179, respectively and for the three and nine months ended September 30, 2016, advertising expense was $321 and $6,321, 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 – 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.

 

Note 5 – Note Payable

 

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. On March 4, 2015, and May 4, 2015, the Company paid $9,000 and $2,437, respectively, of the December 1, 2014 amount. 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, 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. In February, 2017, the original owner of the 80 acres foreclosed on the property from the second party and the Company entered into a new land purchase contract directly with the landowner on February 7, 2017.To date, the Company has paid a total of $106,557 and is on the deed of trust of the property with a remaining note balance of approximately $17,500 held by the original owner.

 

Note 6 – Convertible Debt

 

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

 

As of the date of the DLF Agreement, the Company and Tonaquint agreed to offset the remaining unpaid principal balance of the Investor Notes of $176,642 to the Note. The parties further agreed that accrued and unpaid interest of $316,723 would be added to the Note and each party confirmed that the Note balance as of the DLF Agreement was $311,815. As of December 31, 2015, $311,815 of principal and accrued interest of $1,041 is outstanding on the 2014 Company Note.

 

On January 19, 2016, the Company accepted and agreed to a Debt Purchase Agreement (the “DPA”), whereby LG Capital Funding, LLC (“LG”) acquired $157,500 of the Tonaquint 2014 Convertible Note in exchange for $75,000. The Company issued an 8% Replacement Note to LG for $157,500 (the “Second Replacement Note”). The Second Replacement Note is due January 19, 2017 and is convertible into shares of the Company’s common stock at any time at the discretion of LG at a variable conversion price (“VCP”). The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. For the nine months ended September 30, 2017, the Company issued 12,268,244 shares of common stock upon the conversion of $157,500 of principal and $13,242 accrued and unpaid interest on the note. The shares were issued at approximately $0.014 per share. The principal balance of the note as of September 30, 2017 and December 31, 2016 was $-0- and $157,500, respectively.

 

On January 19, 2016, the Company accepted and agreed to a DPA, whereby Cerberus Finance Group, LTD (“Cerberus”) acquired $154,315 of principal and $2,434 of accrued and unpaid interest of the Tonaquint 2014 Convertible Note in exchange for $75,000. The Company issued an 8% Replacement Note to Cerberus for $156,749 (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. For the nine months ended September 30, 2017, the Company issued 11,059,977 shares of common stock upon the conversion of $147,249 of principal and $11,749 accrued and unpaid interest on the note. The shares were issued at approximately $0.0144 per share. The principal balance of the note as of September 30, 2017 and December 31, 2016 was $-0- and $147,249, respectively.

 

2016 Convertible Notes

 

On January 19, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $76,080, and delivered on January 31, 2016, gross proceeds of $62,500 excluding transaction costs, fees, and expenses. For the nine months ended September 30, 2017, the Company issued 28,295,680 shares of common stock upon the conversion of $76,080 of principal and $4,752 accrued and unpaid interest on the note. The shares were issued at approximately $0.0097 per share. The principal balance of the note as of September 30, 2017 and December 31, 2016 was $-0- and $76,080, respectively.

 

On January 19, 2016, the Company also issued a back end note to LG, under the same terms and conditions, in the amount of $65,625. The back-end note was funded July 14, 2016, upon the receipt of $ 62,500, excluding transaction costs, fees and expenses. For the nine months ended September 30, 2017, the Company issued 5,432,726 shares of common stock upon the conversion of $65,625 of principal and $3,698 accrued and unpaid interest on the note. The shares were issued at approximately $0.01276 per share. The principal balance of the back end-note as of September 30, 2017 and December 31, 2016 was $-0- and $65,625, respectively.

 

On January 19, 2016, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus 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. For the nine months ended September 30, 2017, the Company issued 2,953,523 shares of common stock upon the conversion of $34,775 of principal and $3,255 accrued and unpaid interest on the note. The shares were issued at approximately $0.01287 per share. The principal balance of the note as of September 30, 2017 and December 31, 2016 was $-0- and $34,775, respectively.

 11 

 

 

On January 19, 2016, the Company also issued a back-end note to Cerberus, under the same terms and conditions, in the amount of $22,000. The back-end note was funded August 1 upon receipt of $20,000, excluding transaction costs, fees and expenses. For the nine months ended September 30, 2017, the Company issued 4,264,903 shares of common stock upon the conversion of $22,000 of principal and $1,500 accrued and unpaid interest on the note. The shares were issued at approximately $0.00551 per share. The principal balance of the back-end note as of September 30, 2017 and December 31, 2016 was $-0- and $22,000, respectively.

 

On March 23, 2016, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $22,000, and delivered on March 31, 2016, gross proceeds of $20,000 excluding transaction costs, fees, and expenses. For the nine months ended September 30, 2017, the Company issued 3,023,338 shares of common stock upon the conversion of $22,000 of principal and $2,199 accrued and unpaid interest on the note. The shares were issued at approximately $0.008 per share. The principal balance of the note as of September 30, 2017 and December 31, 2016 was $-0- and $22,000, respectively.

 

On April 15, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $65,625, and delivered on April 15, 2016, gross proceeds of $62,500 excluding transaction costs, fees, and expenses. For the nine months ended September 30, 2017, the Company issued 12,718,484 shares of common stock upon the conversion of $65,625 of principal and $6,535 accrued and unpaid interest on the note. The shares were issued at approximately $0.0057 per share. The principal balance of the note as of September 30, 2017 and December 31, 2016 was $-0- and $65,625, respectively.

 

On October 14, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $32,813, and delivered on October 14, 2016, gross proceeds of $30,813 excluding transaction costs, fees, and expenses. For the nine months ended September 30, 2017, the Company issued 6,499,359 shares of common stock upon the conversion of $32,813 of principal and $2,999 accrued and unpaid interest on the note. The shares were issued at approximately $0.00551 per share. The principal balance of the note as of September 30, 2017 and December 31, 2016 was $-0- and $32,813, respectively.

 

On October 31, 2016, the Company entered into a Convertible Promissory Note ("St. George 2016 Notes") for $555,000 to St. George Investments, LLC. (“St. George”) which includes a purchase price of $500,000 and transaction costs of $5,000 and OID interest of $50,000. On October 31, 2016, the Company received $100,000 and recorded $115,000 as convertible note payable, including $5,000 of transaction costs and $10,000 OID interest. St. George also issued to the Company eight secured promissory notes, each in the amount of $50,000. All or any portion of the outstanding balance of the St. George 2016 Notes may be prepaid, without penalty, along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay St. George any amounts on the unfunded portion of the St. George 2016 Notes. The St. George 2016 Note bears interest at 10% per annum (increases to 22% per annum upon an event of default) and is convertible into shares of the Company’s common stock at St. George’s option at a price of $0.05 per share. On December 14, 2016, March 1, 2017, May 19, 2017, and July 28, 2017 respectively, St. George funded five of the secured promissory notes issued to the Company. During the nine months ended September 30, 2017, the Company issued 31,143,888 shares of common stock upon the conversion of $170,000 of principal and $14,900 accrued and unpaid interest on the note. The shares were issued at approximately $0.0059 per share. The principal balance of the note as of September 30, 2017 and December 31, 2016 was $220,000 and $170,000, respectively.

 

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

 

 12 

 

On December 15, 2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $32,813, and delivered on December 15, 2016, gross proceeds of $30,813 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017 and December 31, 2016 was $32,813, respectively. Also on December 15, 2016, the Company issued to LG, a back-end note under the same terms and conditions, in the amount of $32,813. On September 28, 2017, the back-end note was funded upon receipt of $30,813, excluding transaction costs, fees, and expenses.

 

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

 

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

 

The Company determined that the conversion feature of the 2016 Convertible Notes represent an embedded derivative since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the 2016 Convertible Notes were not considered to be conventional debt under ASC 815-40 (formerly EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock) and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The embedded feature included in the 2016 Convertible Notes resulted in an initial debt discount of $865,593, an initial derivative liability expense of $2,317,830 and an initial derivative liability of $3,183,423.

 

2017 Convertible Notes

 

On January 24, 2017, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”) in the aggregate principal amount of $94,500, and delivered on January 25, 2017, gross proceeds of $90,000 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017 was $94,500. Also on January 24, 2017, the Company issued to LG, a back-end note under the same terms and conditions, in the amount of $94,500. On June 26, 2017, the back-end note was funded upon receipt of $90,000, excluding transaction costs, fees, and expenses. For the nine months ended September 30, 2017, the Company issued 4,300,002 shares of common stock upon the conversion of $34,500 of principal and $665 accrued and unpaid interest on the back-end note. The shares were issued at approximately $0.00818 per share. The principal balance of the back-end note as of September 30, 2017 was $60,000.

 

On January 24, 2017, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $63,000, and delivered on January 25, 2017, gross proceeds of $60,000 excluding transaction costs, fees, and expenses. For the nine months ended September 30, 2017, the Company issued 5,229,334 shares of common stock upon the conversion of $28,000 of principal and $1,117 accrued and unpaid interest on the note. The shares were issued at approximately $0.00557 per share. The principal balance of the note as of September 30, 2017 was $35,000. Also on January 24, 2017, the Company issued to Cerberus, a back-end note under the same terms and conditions, in the amount of $63,000. On June 30, 2017, the back-end note was funded upon receipt of $60,000, excluding transaction costs, fees, and expenses. The principal balance of the back-end note as of September 30, 2017 was $63,000.

 

 13 

 

On February 1, 2017, the Company completed the closing of a private placement financing transaction with Power Up Lending Group, LTD (“Power Up”), pursuant to a Securities Purchase Agreement (the “Power Up Purchase Agreement”). Pursuant to the Power Up Purchase Agreement, Power Up purchased an 12% Convertible Debenture (the “Power Up Debenture”) in the aggregate principal amount of $140,000, and delivered on February 3, 2017 (the “Funding Date”), gross proceeds of $136,500 excluding transaction costs, fees, and expenses. Principal and interest on the Power Up Debentures is due and payable on November 5, 2017, and the Power Up Debenture is convertible into shares of the Company’s common stock beginning six months from the Funding Date, at a VCP. The VCP is calculated as the average of the three (3) lowest closing bid price during the ten (10) 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 Power Up Debenture, subject to prior notice to the holder within an initial 30-day period after issuance, by paying an amount equal to 120% multiplied by the amount that the Company is prepaying. For each additional 30-day period the amount being prepaid is multiplied by an additional 5%, up to a maximum of 140% on the 180th day from issuance. Beginning on the 180th day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing. On June 23, 2017, the Company accepted and agreed to Assignment Agreements (‘AA”), whereby, Power Up assigned $70,000 of their note to LG, and $70,000 of their note to Cerberus. As part of the AA, the Company agreed to pay Power Up $65,000. The Company issued an 8% Replacement Note to LG for $73,198 (the “First Power Up Replacement Note”), and an 8% Replacement Note to Cerberus for $73,198 (the “Second Power Up Replacement Note”) The First and Second Power Up Replacement Notes are due June 23, 2018 and are convertible into shares of the Company’s common stock at any time at the discretion of LG and Cerberus, respectively, at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.

 

On February 24, 2017, the Company completed the closing of a private placement financing transaction with LG. Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture in the aggregate principal amount of $26,000, and delivered on February 24, 2017, gross proceeds of $24,000 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017 was $26,000. Also on February 24, 2017, the Company issued to LG, a back-end note under the same terms and conditions, in the amount of $26,000 (not funded as of the date of this report).

 

On February 24, 2017, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $17,500, and delivered on February 27, 2017, gross proceeds of $16,000 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017 was $17,500. Also on February 24, 2017, the Company issued to Cerberus, a back-end note under the same terms and conditions, in the amount of $17,500 (not funded as of the date of this report).

 

On March 24, 2017, the Company completed the closing of a private placement financing transaction with LG. Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture in the aggregate principal amount of $52,000, and delivered on March 28, 2017, gross proceeds of $49,600 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017 was $52,000. Also on March 24, 2017, the Company issued to LG, a back-end note under the same terms and conditions, in the amount of $52,000 On September 28, 2017, the back-end note was funded upon receipt of $49,600, excluding transaction costs, fees, and expenses. The principal balance of the back-end note as of September 30, 2017 was $52,000.

 

On April 24, 2017, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $42,000, and delivered on May 3, 2017, gross proceeds of $40,000 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017 was $42,000. Also on April 24, 2017, the Company issued to Cerberus, a back-end note under the same terms and conditions, in the amount of $42,000 (not funded as of the date of this report).

 

On May 24, 2017, the Company completed the closing of a private placement financing transaction with LG. Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture in the aggregate principal amount of $52,000, and delivered on May 24, 2017, gross proceeds of $49,600 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017 was $52,000. Also on May 24, 2017, the Company issued to LG, a back-end note under the same terms and conditions, in the amount of $52,000 (not funded as of the date of this report).

 

 14 

 

On August 8, 2017, the Company completed the closing of a private placement financing transaction with Power Up, pursuant to a Securities Purchase Agreement (the “Power Up Purchase Agreement”). Pursuant to the Power Up Purchase Agreement, Power Up purchased an 12% Convertible Debenture (the “Power Up Debenture”) in the aggregate principal amount of $128,000, and delivered on August 9, 2017 (the “Funding Date”), gross proceeds of $125,000 excluding transaction costs, fees, and expenses. Principal and interest on the Power Up Debentures is due and payable on May 15, 2018, and the Power Up Debenture is convertible into shares of the Company’s common stock beginning six months from the Funding Date, at a VCP. The VCP is calculated as the average of the three (3) lowest closing bid price during the ten (10) 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 Power Up Debenture, subject to prior notice to the holder within an initial 30-day period after issuance, by paying an amount equal to 120% multiplied by the amount that the Company is prepaying. For each additional 30-day period the amount being prepaid is multiplied by an additional 5%, up to a maximum of 140% on the 180th day from issuance. Beginning on the 180th day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing. The principal balance of the note as of September 30, 2017 was $128,000.

 

Principal and interest on the 2017 LG and Cerberus Debentures above is due and payable one year from their respective funding date, and the LG and Cerberus Debentures are convertible into shares of the Company’s common stock at any time at the discretion of LG and Cerberus, respectively, at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.

 

The Company may prepay the 2017 LG and/or the Cerberus Debentures, subject to prior notice to the holder within an initial 30-day period after issuance, by paying an amount equal to 118% multiplied by the amount that the Company is prepaying. For each additional 30-day period the amount being prepaid is multiplied by an additional 6%, up to a maximum of 148% on the 180th day from issuance. Beginning on the 180th day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing.

 

The Company determined that the conversion feature of the 2017 Convertible Notes represent an embedded derivative since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the 2017 Convertible Notes were not considered to be conventional debt under ASC 815-40 (formerly EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock) and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The embedded feature included in the 2017 Convertible Notes resulted in an initial debt discount of $1,159,590, an initial derivative liability expense of $776,112 and an initial derivative liability of $1,935,702.

 

 15 

 

Convertible Note Conversions   

 

During the nine months ended September 30, 2017, the Company issued the following shares of common stock upon the conversions of portions of the Convertible Notes:

 

Date 

Principal

Conversion

 

Interest

Conversion

 

Total

Conversion

 

Conversion

Price

 

Shares

Issued

  Issued to
 1/10/17   $73,000   $5,664   $78,664   $0.01595    4,931,912   Cerberus
 1/17/17   $57,500   $4,562   $62,062   $0.01537    4,037,878   LG
 1/27/17   $48,129   $3,914   $52,043   $0.01276    4,078,598   Cerberus
 2/8/17   $60,000   $5,050   $65,050   $0.012934    5,029,369   LG
 2/27/17   $26,120   $2,171   $28,291   $0.013804    2,049,467   Cerberus
 3/10/17   $40,000   $3,630   $43,630   $0.01363    3,200,997   LG
 3/27/17   $34,775   $3,255   $38,030   $0.012876    2,953,523   Cerberus
 3/28/17   $65,625   $3,697   $69,322   $0.01276    5,432,725   LG
 4/25/17   $76,081   $4,752   $80,833   $0.009744    8,295,680   LG
 5/10/17   $22,000   $2,199   $24,199   $0.008    3,023,338   Cerberus
 5/10/17   $20,640   $9,360   $30,000   $0.0075    4,000,000   St Georges
 5/25/17   $29,052   $947   $30,000   $0.00564    5,319,149   St Georges
 6/6/17   $32,813   $2,999   $35,811   $.00551    6,499,359   LG
 6/8/17   $34,100   $900   $35,000   $0.00564    6,205,674   St Georges
 6/9/17   $22,000   $1,500   $23,500   $0.00551    4,264,903   Cerberus
 6/29/17   $48,849   $1,151   $50,000   $.00564    8,865,248   St Georges
 6/30/17   $30,625   $2,960   $33,585   $0.0058    5,790,541   LG
 7/17/17   $37,358   $733   $38,091   $0.00564    6,753,817   St Georges
 7/25/17   $35,000   $3,575   $38,575   $0.005568    6,927,943   LG
 7/26/17   $28,000   $1,117   $29,117   $0.005568    5,229,334   Cerberus
 8/15/17   $35,199   $409   $35,608   $0.0058    6,139,276   LG
 8/29/17   $38,000   $558   $38,558   $0.005858    6,582,115   LG
 9/19/17   $34,500   $665   $35,165   $0.008178    4,300,002   LG
     $929,366   $65,767   $995,133         119,910,850    

 

A summary of the convertible notes payable balance as of September 30, 2017 is as follows:

 

   2017
Beginning Principal Balance  $826,480 
Convertible notes-newly issued   1,083,710 
Conversion of convertible notes (principal)   (929,366)
Unamortized discount   (511,985)
Ending Principal Balance  $468,839 

 

 16 

 

Note 7 - Derivative liabilities

 

As of September 30, 2017, the Company revalued the embedded conversion feature of the 2016 and 2017 Convertible Notes, and warrants (see note 9). The fair value of the 2016 and 2017 Convertible Notes and warrants was calculated at September 30, 2017 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, 2017 is as follows:

 

    Notes    Warrants    Total 
Beginning Balance  $1,410,747   $203,023   $1,613,770 
Initial Derivative Liability   1,935,702    186,206    2,121,908 
Fair Value Change   238,522    490,166    728,688 
Reclassified to Additional paid- in capital   (1,332,421)   —      (1,332,421)
Reduction for debt assignment   (206,709)   —      (206,709)
Ending Balance  $2,045,841   $879,395   $2,925,236 

 

The embedded derivative within Warrant #’s 2 thru 5 (see Note 10) resulted in an initial derivative liability expense and an initial derivative liability of $186,205. The valuation of the embedded derivative within the effective warrants was recorded with an offsetting gain on derivative liability

 

The fair value at the commitment date for the 2017 Convertible Notes and the re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of September 30, 2017:

 

    Commitment date   Remeasurement date
Expected dividends     -0-       -0-  
Expected volatility     199%-361 %      357 %
Expected term     12 months       3-12 months  
Risk free interest     .65%-1.23 %     1.06%-1.26

 

The Company evaluated all outstanding warrants to determine whether these instruments may be tainted. All warrants outstanding were considered tainted. The Company valued the embedded derivatives within the warrants using the Black-Scholes valuation model.   The fair value at the funding date for Warrant #’s 2-5 and the re-measurement dates for Warrant #’s 1-5 were based upon the following management assumptions:

    Commitment date   Remeasurement date
Expected dividends     -0-       -0-  
Expected volatility     203% - 384 %     357 %
Expected term     4.26 - 4.64 years       4.09 years  
Risk free interest     1.72% - 1.82 %     1.81 %

 

Note 8 – Related Party Transactions

 

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

 

 17 

 

For the three and nine months ended September 30, 2017 and 2016, the Company recorded expenses of $37,500 and $112,500, respectively, to the CEO, included in Administrative and Management Fees in the consolidated statements of operations, included herein. As of September 30, 2017, and December 31, 2016, the Company owed the CEO $35,479 and $54,246, respectively, and is included in due to related party on the Company’s consolidated balance sheet. On January 30, 2017, the Company issued 10,000,000 shares of common stock to the Company’s CEO. The shares were issued for services performed as the sole Officer and director of the Company since November 2014.

 

On April 14, 2015, the Company appointed Dr. Stephen Holt to the Advisory Board of the Board of Directors of the Company. The Company issued 5,000,000 shares of restricted common stock to Dr. Holt for his appointment. The Company valued the 5,000,000 shares of common stock at $100,000 ($0.02 per share, the market price of the common stock on the grant date) as stock compensation expense for the year ended December 31, 2015. Additionally, the Company agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share. 400,000 Option Shares vested immediately and the remaining 600,000 Option Shares vested over 12 months. Accordingly, the Company has recorded $2,371 for the nine months ended September 30, 2016 in stock compensation expense and all of the options have vested. 

 

On October 5, 2017, the Company agreed to lease from the Company’s CEO, a "420 Style" resort and estate property approximately one hour outside of Quebec City, Canada. The fifteen-acre estate consists of nine (9) unique guest suites, horse stables, and is within walking distance to a public golf course. A separate structure will serve as a small grow facility run by patient employees and caretakers on the property which may be toured by guests of the facility. Pursuant to the agreement, the Company will pay $8,000 per month in exchange for the Company being entitled to all rents and income generated from the property. The Company will be responsible for all costs of the property, including, but not limited to, renovations, repairs and maintenance, insurance and utilities. Prior to the agreement, the Company issued 5,000,000 shares of common stock as a prepayment of future rents.

 

Amounts Due from 800 Commerce, Inc.

 

800 Commerce, Inc., a commonly controlled entity until February 29, 2016, owed Agritek $282,947 as of February 29, 2016, as a result of advances received from or payments made by Agritek on behalf of 800 Commerce. These advances were non-interest bearing and were due on demand. Effective February 29, 2016, the Company received 1,102,462 shares of common stock of Petrogress, Inc. (formerly known as 800 Commerce, Inc.) as settlement of the $282,947 owed to the Company.

 

 18 

 

Note 9 – Common and Preferred Stock  

 

Common Stock

 

During the nine months ended September 30, 2017, the Company issued the following shares of common stock upon the conversions of portions of the convertible notes:

 

Date 

Principal

Conversion

 

Interest

Conversion

 

Total

Conversion

 

Conversion

Price

 

Shares

Issued

  Issued to
 1/10/17   $73,000   $5,664   $78,664   $0.01595    4,931,912   Cerberus
 1/17/17   $57,500   $4,562   $62,062   $0.01537    4,037,878   LG
 1/27/17   $48,129   $3,914   $52,043   $0.01276    4,078,598   Cerberus
 2/8/17   $60,000   $5,050   $65,050   $0.012934    5,029,369   LG
 2/27/17   $26,120   $2,171   $28,291   $0.013804    2,049,467   Cerberus
 3/10/17   $40,000   $3,630   $43,630   $0.01363    3,200,997   LG
 3/27/17   $34,775   $3,255   $38,030   $0.012876    2,953,523   Cerberus
 3/28/17   $65,625   $3,697   $69,322   $0.01276    5,432,725   LG
 4/25/17   $76,081   $4,752   $80,833   $0.009744    8,295,680   LG
 5/10/17   $22,000   $2,199   $24,199   $0.008    3,023,338   Cerberus
 5/10/17   $20,640   $9,360   $30,000   $0.0075    4,000,000   St Georges
 5/25/17   $29,052   $947   $30,000   $0.00564    5,319,149   St Georges
 6/6/17   $32,813   $2,999   $35,811   $.00551    6,499,359   LG
 6/8/17   $34,100   $900   $35,000   $0.00564    6,205,674   St Georges
 6/9/17   $22,000   $1,500   $23,500   $0.00551    4,264,903   Cerberus
 6/29/17   $48,849   $1,151   $50,000   $.00564    8,865,248   St Georges
 6/30/17   $30,625   $2,960   $33,585   $0.0058    5,790,541   LG
 7/17/17   $37,358   $733   $38,091   $0.00564    6,753,817   St Georges
 7/25/17   $35,000   $3,575   $38,575   $0.005568    6,927,943   LG
 7/26/17   $28,000   $1,117   $29,117   $0.005568    5,229,334   Cerberus
 8/15/17   $35,199   $409   $35,608   $0.0058    6,139,276   LG
 8/29/17   $38,000   $558   $38,558   $0.005858    6,582,115   LG
 9/19/17   $34,500   $665   $35,165   $0.008178    4,300,002   LG
     $929,366   $65,767   $995,133         119,910,850    

 

In addition to the above, during the nine months ended September 30, 2017, the Company:

 

On January 16, 2017, the Company entered into a Business Consultant Agreement (the “BCA”). Pursuant to the BCA, the Company issued 5,000,000 shares of common stock for services to be provided to the Company related to business development, product marketing, helping identify mergers and acquisition candidates, and will consult with and advise the Company on matters pertaining to business modeling and strategic alliances. The Company valued the shares at $0.03 per share (the market price of the common stock) and recorded stock compensation expense for the nine months ended September 30, 2017, of $150,000.

 

On January 27, 2017, the Company issued 1,000,000 shares of restricted common stock to Kopelowitz Ostrow P.A. (“KO”) pursuant to a Debt Settlement and Release Agreement (the “Debt Settlement”) by and between the Company and KO. Among the terms of the Debt Settlement was the forgiveness of $24,614 of debt the Company owed KO for legal services provided.

 

On January 30, 2017, the Company issued 1,000,000 shares of common stock to Venture Equity. The Company valued the shares at $0.03 per share (the market price of the common stock) and cancelled of $13,169 of accrued and unpaid fees owed Venture Equity and recorded stock based compensation expense for the nine months ended September 30, 2017, of $16,831.

 

Also on January 30, 2017, the Company issued 10,000,000 shares of common stock to the Company’s CEO. The shares were issued for services performed as the sole Officer and director of the Company since November 2014. The Company valued the shares at $0.03 per share (the market price of the common stock) and for the nine months ended September 30, 2017, recorded stock compensation expense, management, of $300,000.

 

 19 

 

On June 19, 2017, the Company issued 1,319,149 shares of common stock to St. George pursuant to the “true-up” terms and conditions of the St. George note.

 

On August 8, 2017, the Company issued 2,000,000 shares of common stock for compensation for services of the Company’s chief operating officer. The Company valued the shares at $0.0123 per share (the market price of the common stock) and for the nine months ended September 30, 2017, recorded stock compensation expense, management, of $24,600.

 

On August 8, 2017, the Company issued 5,000,000 shares of common stock as a prepayment of rent for the property known as the "420 Style" resort and estate, located in Canada (see note 11). The Company valued the shares at $0.0123 per share (the market price of the common stock) and has included $61,500 deferred expenses in the equity section of the balance sheet presented herein.

 

During the nine months ended September 30, 2017, the company issued 48,602,064 shares of common stock to St. George pursuant to Notices of Exercise of Warrant received. The shares were issued based upon the cashless exercise provision of the warrant.

 

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. As of September 30, 2017, and December 31, 2016, there were 1,000 shares of Class B Preferred Stock outstanding.

 

Warrants and Options

 

On April 14, 2015, in connection with the appointment of Dr. Stephen Holt to the advisory board, the Company agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share and expiring April 14, 2018. Option Shares of 400,000 vested immediately and 50,000 Option Shares vested each month from April 2015 through March 2016. Accordingly, as of March 31, 2016, 1,000,000 Option Shares have vested and the Company recorded $2,317 as stock compensation expense for the nine months ended September 30, 2016, based on Black-Scholes.

 

On April 26, 2013 and in connection with the appointment of Mr. James Canton to the Company’s advisory board, the Company issued a warrant to Mr. Canton to purchase 300,000 shares of common stock. The warrant expired April 26, 2016.

 

 20 

 

On October 31, 2016, the Company granted (Warrant #1) to St. George the right to purchase at any time on or after November 10, 2016 (the “Issue Date”) until the date which is the last calendar day of the month in which the fifth anniversary of the Issue Date occurs (the “Expiration Date”), a number of fully paid and non-assessable shares (the “Warrant Shares”) of Company’s common stock, equal to $57,500 divided by the Market Price (defined below) as of the Issue Date, as such number may be adjusted from time to time pursuant to the terms and conditions of Warrant #1 to Purchase Shares of Common Stock. The Market Price is equal to the lowest intra-day trade price in the twenty (20) Trading Days immediately preceding the applicable date of exercise, multiplied by sixty percent (60%). The exercise price is the lower of $0.05 and is subject to price adjustments pursuant to the agreement and includes a cashless exercise provision. The Company also issued Warrant #’s 2-9, with each warrant only effective upon St. George funding of the secured notes they issued to the Company. Warrant #’s 2-9 give St. George the right to purchase Warrant Shares equal to $27,500 divided by the Market Price on the funded date. On December 14, 2016, the Company received a payment of $50,000, and accordingly, Warrant #2 became effective. On March 12, 2017, the Company received a payment of $50,000, and accordingly, Warrant #3 became effective. On May 19, 2017, the Company received a payment of $50,000, and accordingly, Warrant #4 became effective. On July 28, 2017, the Company received a payment of $100,000, and accordingly, Warrant #’s 5 and 6 became effective.

 

Note 10 – Commitments and Contingencies

 

Office Space

  

In April 2014, the Company entered into a two-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. The lease expired in April 2016, and the Company owes the landlord $48,750.

 

In December 2016, the Company signed a one-year lease for office space in San Juan, Puerto Rico. The lease requires monthly base rent of $800 for the months of December 2016 through February 2017, and $900 per month for the months of March 2017 through November 2017.

 

In January 2017, the Company signed a five (5) year lease, beginning February 1, 2107, for approximately 6,000 square feet of office space, comprised of two floors, in San Juan, Puerto Rico. Pursuant to the lease, the Company will pay $3,000 per month for the third floor of the building for the first year of the lease. The rent will increase 3% per year on February beginning in 2018 and an additional 3% per year on each successive February 1, during the term of the lease. The landlord has agreed that for the month of February 2017, the rent will be $1,500. The rent for second floor of the building will be $2,000 per month during the term of the lease and the Company does not have any rent payments for the first three months of the lease (February 2017 through April 2017).

 

On December 1, 2016, the Company signed a one (1) year lease for a corporate apartment in Puerto Rico for $5,500 per month.

 

For the three and nine months ended September 30, 2017 the Company recorded rent expense of $35,038 and $93,105, respectively, and for the three and nine months ended September 30 2016, the Company recorded rent expense of $24,400 and $49,109, respectively.

 

Leased Properties

 

On April 28, 2014, the Company executed and closed a ten-year lease agreement for 20 acres of an agricultural farming facility located in South Florida following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing low grade marijuana specifically for the use of treating epilepsy and cancer patients.  Pursuant to the lease agreement, the Company maintains a first right of refusal to purchase the property for three years. The Company has recorded $9,561 and $28,683 of expense (included in leased property expenses) for the three and nine months ended September 30, 2017, respectively, and $19,122 and $57,366 for the three and nine months ended September 30, 2016, 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.

 

 21 

 

On July 11, 2014, the Company signed a ten-year lease agreement for an additional 40 acres in Pueblo, Colorado. The lease requires monthly rent payments of $10,000 during the first year and is subject to a 2% annual increase over the life of the lease. The lease also provides rights to 50 acres of certain tenant water rights for $50,000 annually plus cost of approximately $2,400 annually. The Company paid the $50,000 in July 2014, and has not used the property and any water and has not paid for any water rights after September 30, 2015. The Company has recorded $-0- of expense for the three and nine months ended September 30, 2017, and $32,850 and $98,550 for the three and nine months ended September 30, 2016, respectively, (included in leased property expenses). The Company is currently in default of the lease agreement, as rents have not been paid since February 2015.

 

Agreements

 

On April 5, 2017, the Company executed a five (5) year operational and exclusive licensing agreement with a third party who leases a 25,000-sq. ft. approved cultivation facility located in San Juan, Puerto Rico. The Company will be the exclusive funding source, and supervise all infrastructure buildout, equipment lease/finance, security systems and personnel and provide access of seasoned Colorado and California cultivation crews to ensure the facility meets all standard operating procedures as set forth by the Department Of Health of Puerto Rico. Under the agreement, the Company receives $12,000 a month in consulting fees, licensing fees on all vaporizer and edible sales, equipment and lighting rental and financing fees along with equity interest in the property.

 

On August 7, 2017, the Company signed a LOI with Green Acres, whereby in consideration of consulting fees, licensing fees on all vaporizer and edible brands, equipment and lighting rental and financing fees, the Company will provide up to $250,000 of working capital and potentially, up to $3,500,000 for the buyout of Green Acres existing mortgage on their Washington State facility.

On August 22, 2017, the Company signed a LOI with Ponix, whereby, the Company has exclusive distribution rights within the Cannabis industry, and the Company and Ponix will share revenues on all pods that are placed on the Company’s property. Additionally, the Company plans to acquire 51% of Ponix (the “Acquisition”). As consideration for the Acquisition, the Company will issue 5,000,000 shares of common stock of the Company, and upon completion of the Acquisition, the Company will provide $100,000 within thirty (30) days and no less than $250,000 within six months of the Acquisition.

 

Legal & Other

 

On March 2, 2015, the Company, the Company’s CEO and the Company’s CFO at the time were named in a civil complaint filed by Erick Rodriguez in the District Court in Clark County, Nevada (the “DCCC”). 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, subject to the completion of a merger of a company controlled by Mr. Rodriguez. Since the merger was never completed, the shares were never certificated to Mr. Rodriguez. On March 21, 2017, the DCC agreed to Set Aside the Entry of Default against the Defendants. Mr. Rodriguez resigned in June 2013.

 

On May 6, 2016, the Company, B. Michael Freidman and Barry Hollander (former CFO) were named as defendants in a Summons/Complaint filed by Justin Braune (the “Plaintiff”) in Palm Beach County Civil Court, Florida (the “PBCCC”). The complaint alleges that Mr. Braune was entitled to shares of common stock of the Company. On December 5, 2016, the PBCCC set aside a court default that had been previously issued. The defendants have answered the complaint, including the defenses that Mr. Braune advised the Company’s transfer agent and the Company in his letter of resignation dated November 4, 2015, clearly stating that he has relinquished all shares of common stock. The Company has filed a counterclaim suit against the Plaintiff, as well as sanctions against the Plaintiff and their counsel.

 

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, 2017, the Company had an accumulated deficit of $20,464,359 and working capital deficit of $3,686,261, inclusive of a derivative liability of $2,925,236. 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.

 

 22 

 

Note 12 – Segment Reporting

 

During the three and nine months ended September 30, 2017 and 2016, the Company operated in one reportable segment, wholesale sales. 

 

Note 13 – Subsequent Events

 

On October 5, 2017, the Company agreed to lease from the Company’s CEO, a "420 Style" resort and estate property approximately one hour outside of Quebec City, Canada. The fifteen-acre estate consists of nine (9) unique guest suites, horse stables, and is within walking distance to a public golf course. A separate structure will serve as a small grow facility run by patient employees and caretakers on the property which may be toured by guests of the facility. Pursuant to the agreement, the Company will pay $8,000 per month in exchange for the Company being entitled to al rents and income generated from the property. The Company will be responsible for all costs of the property, including, but not limited to, renovations, repairs and maintenance, insurance and utilities. Prior to the agreement, the Company issued 5,000,000 shares of common stock as a prepayment of future rents.

 

On October 9, 2017, the Company issued 4,340,042 shares of common stock upon the conversion of $30,710 of principal and interest. The shares were issued at $0.007076 per share.

 

On October 11, 2017, the Company signed a LOI with MediK8 Mobile, Inc. (“MediK8”) and Anton Ansalmar, the sole officer of MediK8, whereby the Company and MediK8 will form a Joint Venture (the “JV”) and share revenue on a 50/50 basis on all clients paying a monthly hosting or transaction fee to the JV. The JV will develop a web based and mobile platform and social marketplace, consisting of a HIPPA compliant database of registered patients, consumers and licensed vendors

 

On October 12, 2017, the Company issued 7,512,057 shares of common stock upon the exercise of warrant #1 (see note 9).

 

On October 16, 2017, the company received $75,000 pursuant to a Stock Purchase Agreement by and between the Company and St George.

 

On October 23, 2017, the Company issued 5,057,830 shares of common stock upon the conversion of $30,802 of principal and interest. The shares were issued at $0.00609 per share.

 

On October 27, 2017, the Company entered into a LOI with Corix Bioscience, Inc (“Corix”), whereby Corix would acquire certain assets of the Company in exchange for 5,000,000 shares of Corix common stock.

 

On November 6, 2017, the Company issued 3,536,715 shares of common stock upon the conversion of $20,718 of principal and interest. The shares were issued at $0.005858 per share.

 

On November 6, 2017, the Company issued 6,205,674 shares of common stock upon the conversion of $35,000 of principal and interest. The shares were issued at $0.00564 per share.

 

On November 13, 2017, the company received $35,000 pursuant to a Stock Purchase Agreement by and between the Company and St George.

 

On November 13, 2017, the Company issued 7,121,885 shares of common stock upon the conversion of $41,720 of principal and interest. The shares were issued at $0.005858 per share.

 

 

 23 

 

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, 2017 and 2016.

 

The independent auditor’s report on our financial statements for the years ended December 31, 2016 and 2015 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 11 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, 2017 compared to the three and nine months ended September 30, 2016

 

Revenues

 

Revenues for the three and nine months ended September 30, 2017, were $24,000 and $48,000 and consisted of consulting fees. Revenues for the nine months ended September 30, 2016 were $3,228 and consisted of wholesale goods.

 

Operating Expenses

 

Operating expenses were $394,979 and $1,286,030 for the three and nine months ended September 30, 2017 compared to $140,476 and $461,129 for the three and nine months ended September 30, 2016. The expenses were comprised of:

 

  

Three months ended

September 30,

 

Nine months ended

September 30,

Description  2017  2016  2017  2016
Administration and management fees  $55,900   $39,417   $162,900   $124,064 
Stock compensation expense, management   —      —      300,000    —   
Stock compensation expense, other   24,600    —      191,431    2,371 
Gain on recapture of reserve on land   —      —      (47,502)   —   
Professional and consulting fees   148,040    11,217    338,744    82,715 
Rent and occupancy costs   34,873    24,400    92,940    49,109 
Leased property for sublease   9,561    42,411    28,683    127,233 
General and other administrative   122,005    23,031    218,834    75,637 
Total  $394,979   $140,476   $1,286,030   $461,129 

 

 24 

 

Administrative and management fees were comprised of:

 

  

Three months ended

September 30,

 

Nine months ended

September 30,

  Description  2017  2016  2017  2016
 CEO   $37,500   $37,500   $112,500   $112,500 
 Staff    18,400    1,917    50,400    11,564 
 Total   $55,900   $39,417   $162,900   $124,064 

 

For the three and nine months ended September 30, 2017 and 2016, the Company recorded expenses of $37,500 and $112,500, respectively, to the CEO. Staff expenses have increased for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016, as a result of the Company’s CEO having a full time assistant and having full time administrative help for the offices in Puerto Rico. The Company has agreed to compensation of $12,500 per month for the Company’s CEO and estimates that administration fees will be approximately $6,000 per month at this time.

 

There was no stock compensation expense, management, for the three months ended September 30, 2017 and 2016. Stock compensation expense, management, was $300,000 and $-0-, respectively, for the nine months ended September 30, 2017 and 2016. The 2017 amount is comprised of the Company issuing 10,000,000 shares of common stock to the Company’s CEO. The shares were issued for services performed as the sole Officer and director of the Company since November 2014. The Company valued the shares at $0.03 per share (the market price of the common stock) and recorded stock compensation expense, management, of $300,000.

 

Stock compensation expense, other, (included in professional and consulting fees) was $191,431 for the nine months ended September 30, 2017. The current period expenses were comprised of:

 

On January 16, 2017, the Company entered into a Business Consultant Agreement (the “BCA”). Pursuant to the BCA, the Company issued 5,000,000 shares of common stock for services to be provided to the Company related to business development, product marketing, helping identify mergers and acquisition candidates, and will consult with and advise the Company on matters pertaining to business modeling and strategic alliances. The Company valued the shares at $0.03 per share (the market price of the common stock) and recorded stock compensation expense of $150,000, and

 

On January 30, 2017, the Company issued 1,000,000 shares of common stock to Venture Equity. The Company valued the shares at $0.03 per share (the market price of the common stock) and cancelled $13,169 of accrued and unpaid fees owed Venture Equity and recorded stock based compensation expense of $16,831.

 

On August 8, 2017, the Company issued 2,000,000 shares of common stock for compensation for services of the Company’s chief operating officer. The Company valued the shares at $0.0123 per share (the market price of the common stock) and for the three and nine months ended September 30, 2017, recorded stock compensation expense, management, of $24,600.

 

Stock compensation expense, other, (included in professional and consulting fees) was $2,371 based on the Black Scholes option pricing model for the nine months ended September 30, 2016, related to the vesting of options to purchase 150,000 shares of the Company’s common stock at an exercise price equal to $0.05 per share.

 

 25 

 

Professional and consulting fees (excluding stock compensation expense, other) was $148,040 and $338,744 for the three and nine months ended September 30, 2017 compared to $11,217 and $82,715 for the three and nine months ended September 30, 2016 and is comprised of the following:

 

  

Three months ended

September 30,

 

Nine months ended

September 30,

   2017  2016  2017  2016
Legal fees  $97,590   $5,000   $169,594   $13,948 
Consulting   23,950    —      39,950    —   
Accounting and audit fees   14,500    219    59,500    44,777 
Investor relations   9,500    5,998    44,200    23,990 
Investor relations, related party   2,500    —      25,500    —   
Total  $148,040   $11,217   $338,744   $82,715 

 

Legal fees increased for the three and nine months ended September 30, 2017, compared to the three and nine months ended September 30, 2016, as a result of the Company’s costs incurred in defending the Braune and Rodriguez lawsuits. Investor relations costs increased in the 2017 periods compared to the 2016 periods as the Company engaged various consultants to increase public awareness of the Company as well as to expand the Company’s social media presence. Investor relations costs – related party are the costs the Company incurred in engaging an investor relations firm controlled by the Company’s CEO.

 

Rent and occupancy costs were $34,873 and $92,940 for the three and nine months ended September 30, 2017, respectively, compared to $24,400 and $49,109 for the three and nine months ended September 30, 2016, respectively. The increase was primarily due to

 

In January 2017, the Company signed a five (5) year lease, beginning February 1, 2107, for approximately 6,000 square feet of office space, comprised of two floors, in San Juan, Puerto Rico. Pursuant to the lease, the Company will pay $3,000 per month for one floor for the first year of the lease. The rent will increase 3% per year on February beginning in 2018 and an additional 3% per year on each successive February 1, during the term of the lease. The landlord has agreed that for the month of February 2017, the rent will be $1,500. The rent for the other floor will be $2,000 per month during the term of the lease and the Company did not have any rent payments for the first three months of the lease (February 2017 through April 2017). The Company is straight lining the total lease payments over the term of the lease and for the three and nine months ended September 30, 2017 has included $17,031 and $45,416, respectively, of rent expense.

 

In December 2016, the Company signed a one-year lease for office space in San Juan, Puerto Rico. The lease requires monthly base rent of $800 for the months of December 2016 through February 2017, and $900 per month for the months of March 2017 through November 2017. Effective May 15, 2017, the Company terminated this lease. For the nine months ended September 30, 2017 the Company has included $4,119, respectively, of rent expense related to this lease.

 

On December 1, 2016, the Company signed a one-year lease for a corporate apartment in Puerto Rico for $5,500 per month. For the three and nine months ended September 30, 2017, the Company has included $16,500 and $38,500, respectively, of rent expense related to this lease.

 

Leased property available for sub-lease and property maintenance costs were $9,561 and $28,683 for the three and nine months ended September 30, 2017, respectively, compared to $42,411 and $127,233 for the three and nine months ended September 30, 2016, respectively. These costs were comprised of leased real estate. 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. Pursuant to the lease agreement, the Company maintains a first right of refusal to purchase the property for three years. 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 Company has not recorded any expense for the three and nine months ended September 30, 2017 and recorded expense of $32,850 and $98,550 for the three and nine months ended September 30, 2016, respectively. The Company is currently in default of the lease agreement, as rents have not been paid since February 2015.

 

 26 

 

General and other administrative costs (“G & A”) for the three and nine months ended September 30, 2017, were $122,004 and $218,834, respectively, compared to $23,031 and $75,637 for the three and nine months ended September 30, 2016, respectively. G & A costs are comprised of travel (including meals and entertainment), public company expenses (including transfer agent fees, filing fees, press releases and other), advertising and product and website design and general office expenses.

Other Income (Expense), Net

 

Other expense for the three and nine months ended September 30, 2017 was $1,626,229 and $2,801,563, respectively, compared to $2,178,688 and $2,734,621 for the three and nine months ended September 30, 2016, respectively. Other expense for the three and nine months ended September 30, 2017, included the increase on the fair value of derivatives of $1,187,676 and $1,691,003, respectively and interest expense of $438,553 and $1,110,560, respectively. Other expense for the three and nine months ended September 30, 2016, included the increase on the fair value of derivatives of $1,989,756, and $2,325,640, respectively and interest expense of $188,932 and $493,038, respectively, partially offset by a gain in debt extinguishment of $84,057 for the nine months ended September 30, 2016.

 

A summary of interest expense for each of the periods is as follows:

 

  

Three months ended

September 30,

 

Nine months ended

September 30,

   2017  2016  2017  2016
Interest on face value of all notes  $24,561   $12,715   $60,707   $38,306 
Additional true up interest   —      —      16,094    —   
Amortization of note discount   396,392    164,612    904,639    432,295 
Prepayment fee   —      —      65,000    —   
Amortization of deferred financing fees   17,600    11,605    64,120    22,437 
Total  $438,553   $188,932   $1,110,560   $493,038 

 

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, 2017, we had cash and cash equivalents of $311,173, an increase of $243,913, from $67,260 as of December 31, 2016. At September 30, 2017, we had current liabilities of $4,093,710 (including $2,925,236 of non-cash derivative liabilities) compared to current assets of $407,449 which resulted in working capital deficit of $3,686,261. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative liabilities and notes payable.

 

Operating Activities

 

For the nine months ended September 30, 2017, net cash used in operating activities was $782,991 compared to $250,139 for the nine months ended September 30, 2016.

 

The Company had a net loss for the nine months ended September 30, 2017 of $4,039,592 which included non-cash expenses of stock based compensation of $491,431, the initial derivative liability expense of $962,317 on new convertible notes issued, the increase in fair value of derivative liabilities of $728,687 and the amortizations related to convertible notes of $904,638, other non- cash interest expense of $16,094, reduced by a gain on reversing a previous reserve on land acquired of $47,502. Changes in operating assets and liabilities reduced cash used in operating activities by $130,552.

 

The Company had a net loss for the nine months ended September 30, 2016 of $3,195,683 offset by a gain on debt settlements of $84,057 which were impacted by non-cash expenses for the fair value of the derivative liability of $2,325,640, amortization of discounts on convertible notes of $421,125, warrants previously issued (now vested) for services of $2,371 and depreciation expense of $2,625. Changes in operating assets and liabilities that reduced cash used in operating activities included an increase in accounts payable and accrued expenses of $161,271, interest payable of $50,653, related party accounts payable of $5,498 and deferred compensation of $21,233, and tenant deposits of $2,400.

 

 27 

 

Investing Activities

 

During the nine months ended September 30, 2017, net cash used in investing activities was $303,788 compared to $6,369 for the nine months ended September 30, 2016. The 2017 period was the result of the Company investing $235,000 pursuant to the operational and licensing agreement between the Company and a third party, paying $41,554 as part of the purchase price to acquire 80 acres in Pueblo Colorado, $17,375 of equipment and $9,859 in furniture and equipment for the Puerto Rico offices.

 

Financing Activities

 

Net cash provided by financing activities was $1,330,693 and $252,500, for the nine months ended September 30, 2017 and 2016, respectively. The 2017 activity was a result of proceeds from the issuance of convertible promissory notes and the sale of common stock pursuant to Common Stock Purchase Agreements, and payments of $17,500 made on a note payable. 

 

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, 2017, 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.

 

 28 

 

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 nine months ended September 30, 2017 are not necessarily indicative of future results for the full year. Certain amounts from the 2016 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, 2017, based on the above criteria, the Company has an allowance for doubtful accounts of $44,068.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured. The Company recognizes revenue during the month in which products are shipped or commissions are earned.

 

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.

 

 29 

 

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, 2017, there were warrants and options to purchase 23,222,222 shares of common stock and the Company’s outstanding convertible debt is convertible into approximately 146,917,835 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 nine months ended September 30, 2017, the Company recorded stock based compensation of $491,431 (See Note 7).

 

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, 2017 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.

 

 30 

 

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, 2017 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

 

On March 2, 2015, the Company, the Company’s CEO and the Company’s CFO at the time were named in a civil complaint filed by Erick Rodriguez in the District Court in Clark County, Nevada (the “DCCC”). 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, subject to the completion of a merger of a company controlled by Mr. Rodriguez. Since the merger was never completed, the shares were never certificated to Mr. Rodriguez. On March 21, 2017, the DCC agreed to Set Aside the Entry of Default against the Defendants. Mr. Rodriguez resigned in June 2013.

 

On May 6, 2016, the Company, B. Michael Freidman and Barry Hollander (former CFO) were named as defendants in a Summons/Complaint filed by Justin Braune (the “Plaintiff”) in Palm Beach County Civil Court, Florida (the “PBCCC”). The complaint alleges that Mr. Braune was entitled to shares of common stock of the Company. On December 5, 2016, the PBCCC set aside a court default that had been previously issued. The defendants have answered the complaint, including the defenses that Mr. Braune advised the Company’s transfer agent and the Company in his letter of resignation dated November 4, 2015, clearly stating that he has relinquished all shares of common stock. The Company has filed a counterclaim suit against the Plaintiff, as well as sanctions against the Plaintiff and their counsel.

 

Item 1A. Risk Factors

 

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

 

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

 

During the three months ended September 30, 2017, the Company issued the following shares of common stock upon the conversions of portions of the convertible notes:

 

Date 

Principal

Conversion

 

Interest

Conversion

 

Total

Conversion

 

Conversion

Price

 

Shares

Issued

  Issued to
 7/17/17   $37,358   $733   $38,091   $0.00564    6,753,817   St Georges
 7/25/17   $35,000   $3,575   $38,575   $0.005568    6,927,943   LG
 7/26/17   $28,000   $1,117   $29,117   $0.005568    5,229,334   Cerberus
 8/15/17   $35,199   $409   $35,608   $0.0058    6,139,276   LG
 8/29/17   $38,000   $558   $38,558   $0.005858    6,582,115   LG
 9/19/17   $34,500   $665   $35,165   $0.008178    4,300,002   LG
     $208,057   $7,057   $215,114         35,932,487    

 

In addition, for the three months ended September 30, 2017, the Company sold shares of common stock to be issued pursuant to Stock Purchase Agreements (the “Agreement”) by and between the Company and St. George Investments LLC (“St. George”). St. George agreed to purchase, on the dates below and the Company agreed to sell and issue to St. George, a number of shares of newly issued restricted Common Stock of the Company determined pursuant to the following formula for the purchase price paid below (the “Purchase Price”): the total number of shares being purchased shall equal the Purchase Price divided by the product of 90% multiplied by the closing price of the Common Stock for the trading day immediately preceding the date that is six (6) months from the Agreement date.

 

 31 

 

The issuances described above were made in reliance on the exemption from registration provided by Sections 3(a)(9) and 4(a)(2) of the Securities Act as the common stock was issued in exchange for debt securities of the Company held by each shareholder, there was no additional consideration for the exchange, there was no remuneration for the solicitation of the exchange, there was no general solicitation, and the transactions did not involve a public offering. The holders provided legal opinions pursuant to Rule 144 promulgated under Section 4(a)(1) of the Securities Act.

 

Agreement Date  Amount
8/8/17  $35,000 
8/17/17   50,000 
8/22/17   50,000 
8/24/17   50,000 
9/1/17   50,000 
9/15/17   50,000 
9/29/17   50,000 
Total  $335,000 

 

There have been no shares issued to date for the above purchases.

 

Item 3. Defaults upon Senior Securities

 

None. 

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Convertible Debenture Proceeds

  

On July 28, 2017, the Company received proceeds of $100,000 from St. George, St. George funded two of the secured promissory notes issued to the Company on October 31, 2016. The Company increased the amount owed to St. George by $110,000 including $10,000 OID interest.

 

On August 8, 2017, the Company completed the closing of a private placement financing transaction with Power Up Lending Group, LTD (“Power Up”), pursuant to a Securities Purchase Agreement (the “Power Up Purchase Agreement”). Pursuant to the Power Up Purchase Agreement, Power Up purchased an 12% Convertible Debenture (the “Power Up Debenture”) in the aggregate principal amount of $128,000, and delivered on August 9, 2017 (the “Funding Date”), gross proceeds of $125,000 excluding transaction costs, fees, and expenses. Principal and interest on the Power Up Debentures is due and payable on May 15, 2108.

 

On September 28, 2017, the Company received proceeds of $30,812 from LG, pursuant to a back-end convertible promissory note issued on December 12, 2016, in the amount of $32,812. The proceeds received were after disbursements of lender’s legal fees.

 

On September 28, 2017, the Company received proceeds of $49,400 from LG, pursuant to a back-end convertible promissory note issued on March 24, 2017, in the amount of $52,000. The proceeds received were after disbursements of lender’s legal fees.

 

 32 

 

Item 6. Exhibits

 

Exhibit    
Number    Description of Exhibit
     
10.1   Form of Convertible Promissory Note by and between Agritek Holdings, Inc. and Vis Vires Group, Inc. dated February 23, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015).
10.2   Form of 8% Convertible Redeemable Note by and between Agritek Holdings, Inc. and LG Capital Funding, LLC dated March 27, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015).
10.3   Form of 8% Convertible Redeemable Note by and between Agritek Holdings, Inc. and GW Holding Group, LLC dated March 30, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015).
10.4+   Employment and Board of Directors Agreement effective March 20, 2015 by and between Agritek Holdings, Inc. and Justin Braune (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on March 20, 2015).
10.5   Deed in Lieu of Foreclosure Agreement dated December 16, 2015, by and among Agritek Holdings, Inc. and Tonaquint, Inc. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on February 12, 2016).
10.6   Replacement Note dated January 5, 2016, issued to LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.2 as filed on Form 8-K with the SEC on February 12, 2016).
10.7   Replacement Note dated January 5, 2016, issued to LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.3 as filed on Form 8-K with the SEC on February 12, 2016).
10.8   Replacement Note dated January 5, 2016, issued to Cerberus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.4 as filed on Form 8-K with the SEC on February 12, 2016).
10.9   Securities Purchase Agreement dated January 19, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.5 as filed on Form 8-K with the SEC on February 12, 2016).
10.10   Convertible Redeemable Note dated January 19, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.6 as filed on Form 8-K with the SEC on February 12, 2016).
10.11   Securities Purchase Agreement dated January 19, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD. (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on February 12, 2016).
10.12   Convertible Redeemable Note dated January 19, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.8 as filed on Form 8-K with the SEC on February 12, 2016).
10.13   Securities Purchase Agreement dated March 23, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD. (Incorporated herein by reference to Exhibit 10.13 as filed on Form 10-Q with the SEC on May 23, 2016).
10.14   Convertible Redeemable Note dated March 23, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.14 as filed on Form 10-Q with the SEC on May 23, 2016).
10.15   Securities Purchase Agreement dated December 13, 2016 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on December 19, 2016).
10.16   Convertible Redeemable Note dated December 13, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.2 as filed on Form 8-K with the SEC on December 19, 2016).
10.17   Convertible Redeemable Note Back End dated December 13, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.3 as filed on Form 8-K with the SEC on December 19, 2016).
10.18   Collateralized Secured Promissory Note dated December 13, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.4 as filed on Form 8-K with the SEC on December 19, 2016).
 33 

 

10.19   Termination Agreement dated December 13, 2016 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.5 as filed on Form 8-K with the SEC on December 19, 2016).
10.20   Investor Note #1 dated October 31, 2016, by and between Agritek Holdings, Inc. and St. George Investments LLC. (Incorporated herein by reference to Exhibit 10.6 as filed on Form 8-K with the SEC on December 19, 2016).
10.21   Warrant #2 dated October 31, 2016, by and between Agritek Holdings, Inc. and St. George Investments LLC. (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on December 19, 2016).
10.22   Investments LLC. (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on December 19, 2016).
10.23   Securities Purchase Agreement dated January 24, 2017 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on January 31, 2017).
10.24   Convertible Redeemable Note dated January 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.2 as filed on Form 8-K with the SEC on January 31, 2017).
10.25   Convertible Redeemable Note Back End dated January 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.3 as filed on Form 8-K with the SEC on January 31, 2017).
10.26   Collateralized Secured Promissory Note dated January 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.4 as filed on Form 8-K with the SEC on January 31, 2017).
10.27   Securities Purchase Agreement dated January 24, 2017 by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.5 as filed on Form 8-K with the SEC on January 31, 2017).
10.28   Convertible Redeemable Note dated January 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.6 as filed on Form 8-K with the SEC on January 31, 2017).
10.29   Convertible Redeemable Note Back End dated January 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD.  (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on January 31, 2017).
10.30   Collateralized Secured Promissory Note dated January 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.8 as filed on Form 8-K with the SEC on January 31, 2017).
10.31   Securities Purchase Agreement dated February 1, 2017 by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD. (Incorporated herein by reference to Exhibit 10.31 as filed on Form 10-K with the SEC on March 31, 2017).
10.32   Convertible Promissory Note dated February 1, 2017, by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD. (Incorporated herein by reference to Exhibit 10.32 as filed on Form 10-K with the SEC on March 31, 2017).
10.33   Securities Purchase Agreement dated February 24, 2017 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.33 as filed on Form 10-K with the SEC on March 31, 2017).
10.34   Convertible Redeemable Note dated February 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.34 as filed on Form 10-K with the SEC on March 31, 2017).
10.35   Convertible Redeemable Note Back End dated February 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.35 as filed on Form 10-K with the SEC on March 31, 2017).
10.36   Collateralized Secured Promissory Note dated February 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.36 as filed on Form 10-K with the SEC on March 31, 2017).
10.37   Securities Purchase Agreement dated February 24, 2017 by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.37 as filed on Form 10-K with the SEC on March 31, 2017).
10.38   Convertible Redeemable Note dated February 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.38 as filed on Form 10-K with the SEC on March 31, 2017).
 34 

 

10.39   Convertible Redeemable Note Back End dated February 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD.  (Incorporated herein by reference to Exhibit 10.39 as filed on Form 10-K with the SEC on March 31, 2017).
10.40   Collateralized Secured Promissory Note dated February 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD.  (Incorporated herein by reference to Exhibit 10.40 as filed on Form 10-K with the SEC on March 31, 2017).
10.41   Securities Purchase Agreement dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC.  (Incorporated herein by reference to Exhibit 10.41 as filed on Form 10-K with the SEC on March 31, 2017).
10.42   Convertible Redeemable Note dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC.   (Incorporated herein by reference to Exhibit 10.42 as filed on Form 10-K with the SEC on March 31, 2017).
10.43   Convertible Redeemable Note Back-End dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.43 as filed on Form 10-K with the SEC on March 31, 2017).
10.44   Collateralized Secured Promissory Note dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.44 as filed on Form 10-K with the SEC on March 31, 2017).
10.45   Securities Purchase Agreement dated April 24, 2017 by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.45 as filed on Form 10-Q with the SEC on May 15, 2017).
10.46   Convertible Redeemable Note dated April 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.46 as filed on Form 10-Q with the SEC on May 15, 2017).

10.47

Convertible Redeemable Note Back-End dated April 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.47 as filed on Form 10-Q with the SEC on May 15, 2017).
10.48   Securities Purchase Agreement dated May 24, 2017 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC (Incorporated herein by reference to Exhibit 10.48 as filed on Form 10-Q with the SEC on August 14, 2017).
10.49   Convertible Redeemable Note dated May 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC (Incorporated herein by reference to Exhibit 10.49 as filed on Form 10-Q with the SEC on August 14, 2017).
  10.50   Convertible Redeemable Note Back-End dated May 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC (Incorporated herein by reference to Exhibit 10.50 as filed on Form 10-Q with the SEC on August 14, 2017).
10.51   Replacement Note dated June 23, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.51 as filed on Form 10-Q with the SEC on August 14, 2017).
10.52   Replacement Note dated June 23, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.52 as filed on Form 10-Q with the SEC on August 14, 2017).
10.53   Securities Purchase Agreement dated August 7, 2017 by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD. (Incorporated herein by reference to Exhibit 10.53 as filed on Form 10-Q with the SEC on August 14, 2017).
10.54   Convertible Promissory Note dated August 7, 2017, by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD. (Incorporated herein by reference to Exhibit 10.54 as filed on Form 10-Q with the SEC on August 14, 2017).
31.1*   Rule 13a-14(a)/15d-14(a) Certification of Principal Executive and Financial Officer
32.1*   Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.INS* XBRL Instance
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
101.LAB* XBRL Taxonomy Extension Labels Linkbase
101.PRE* XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith.

+ Management contract or compensatory plan or arrangement.

 

 35 

 

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, 2017

 

AGRITEK HOLDINGS, INC.

 

 

By:   /s/ B. Michael Friedman          

B. Michael Friedman

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

 

 

36

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, B. Michael Friedman, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Date: November 14, 2017
 
/s/ B. Michael Friedman          

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

Agritek Holdings, Inc.

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the accompanying Annual Report on Form 10-Q of Agritek Holdings, Inc., for the quarter ended September 30, 2017, I, B. Michael Friedman hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

 

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

 

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

 

 Date: November 14, 2017

 

/s/ B. Michael Friedman          

B. Michael Friedman

Principal Executive Officer and Principal Financial Officer

Agritek Holdings, Inc.