WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [X ] Yes [ ] No
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). [ ] Yes [X] No
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [X]
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of
“large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
[ ] Large accelerated filer [ ] Accelerated
filer [ ] Non-accelerated filer [X] Smaller reporting company
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $5,447,215 as of June 30, 2016, based on the closing price on such
date of $0.07 of the Company’s common stock on the OTCQB tier of the over-the-counter market operated by OTC Markets Group,
Inc. For purposes of the foregoing computation, all executive officers, directors and 10% beneficial owners of the Registrant
are deemed to be affiliates.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date. There were 128,310,773 shares of
common stock outstanding as of April 14, 2017.
DOCUMENTS INCORPORATED BY REFERENCE: No documents
are incorporated by reference into this Annual Report on Form 10-K except those Exhibits so incorporated as set forth in the list
of Exhibits set forth in Item 15 of this Annual Report on Form 10-K.
The forward-looking statements herein represent
our expectations, beliefs, plans, intentions or strategies concerning future events. Our forward-looking statements are based
on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any
forward-looking statements will come to pass. Moreover, our forward-looking statements are subject to various known and unknown
risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different
from future results, performance or achievements expressed or implied by any forward-looking statements.
Except as required by applicable laws, we
undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available
or other events occur in the future.
Background
Kaya Holdings, Inc., was incorporated in Delaware
in 1993 under the name Gourmet Market, Inc. and has engaged in a number of businesses. Its name was changed on May 11, 2007 to
Netspace International Holdings, Inc. (“
Netspace
”). Netspace acquired 100% of the capital stock of Alternative
Fuels Americas, Inc., a Florida corporation in January 2010 in a stock for stock transaction and issued 100,000 shares of Series
C convertible preferred stock to existing shareholders of the Florida corporation. The Company’s name was changed in October
2010 from Netspace International Holdings, Inc. to Alternative Fuels Americas, Inc.
From 2010 through 2014 the Company was engaged
in seeking to develop a biofuels business. In January 2015, the Company determined that it was in the best interests of its stockholders
to discontinue its biofuel development activities, and to instead leverage its agricultural and business development experience
and focus all its resources on the development of legal medical and recreational marijuana opportunities in the United States
and in select international markets.
In January of 2014 KAYS incorporated a subsidiary,
Marijuana Holdings Americas, Inc. a Florida corporation (“
MJAI
”). Through entities controlled by MJAI, KAYS
has focused on the development of opportunities within the legal recreational and medical marijuana sectors in the United States.
In March 2014, MJAI, subsidiary, applied for and was awarded its first license to operate a Medical Marijuana Dispensary (an “
MMD
”).
The Company developed the Kaya Shack™ brand for its retail operations and on July 3, 2014 opened its first Kaya Shack™
Medical Marijuana Dispensary in Portland, Oregon, thereby becoming the first publicly traded U.S. company to own and operate an
MMD. Initial customer acceptance and media coverage was very positive, including many references to KAYS as the “Starbucks
of Medical Marijuana” by television news stations, news print publications and online news sources. In March 2015, the Company
changed its name to Kaya Holdings, Inc. to better reflect its new plan of operations.
In April 2015 KAYS commenced its own medical
marijuana grow operations for the cultivation and harvesting of legal marijuana thereby becoming the first publicly traded U.S.
company to own a majority interest in a vertically integrated legal marijuana enterprise in the United States. In October
2015, concurrent with Oregon commencing legal sales of recreational marijuana through MMDs, KAYS opened its second retail operation
in Salem, Oregon, the Kaya Shack™ Marijuana Superstore. Oregon. During 2015, the Company also consolidated its grow operations
and manufacturing operations into a single facility in Portland, Oregon.
Recent Developments
OLCC Licensing
In 2016, Oregon began the process to transition
legal marijuana sales from Oregon Health Authority (“
OHA
”) licensed MMDs and grow operations to Oregon Liquor
Control Commission (“
OLCC
”) licensed recreational marijuana retailers and producer and processing facilities.
Effective January 1, 2017, all retailers of recreational marijuana were required to have a recreational marijuana sales license
issued by the OLLC for each retail outlet operated. The Company applied for OLLC licenses for its two initial Kaya Shack™
retail outlets and received an OLCC recreational license for its existing South Salem Kaya Shack™ Marijuana Superstore prior
to the January 1, 2017 deadline. However, issuance of the OLCC license for the Portland, Oregon outlet was delayed because of
the need to resolve various local issues with the City of Portland. Accordingly, from January 1, 2017 until the present, sales
at the Portland, Oregon location were limited to medical marijuana.
On January 20, 2017, we entered into an agreement
whereby the City of Portland agreed to license our Portland Kaya Shack™ retail outlet. Since that time, we completed all
OLCC Licensing requirements, on March 29, 2017 passed our retail license inspection and expect to receive our OLCC recreational
license for the Portland Kaya Shack™ outlet by not later than April 30, 2017, at which time, we will be able to commence
legal recreational marijuana sales at that location.
Additional Kaya
Shack™ Marijuana Superstores
During 2016, the Company focused a significant portion of its efforts on
developing two additional Kaya Shack
™
Marijuana Superstores, including identifying and leasing suitable
locations, completing necessary build out and applying for the requisite OLCC recreational marijuana retailer licenses. On
March 21, 2017, the Company announced that it had secured the OLCC recreational retailer marijuana license and had opened its
third retail outlet, a 2,600 square foot Kaya Shack™ Marijuana Superstore in North Salem, Oregon. We are completing
construction of and the OLCC licensing process for our fourth outlet, a third Kaya Shack™ Marijuana Superstore, which
will be located in Central Salem, Oregon and which we anticipate will open during the second quarter of 2017. In addition to
the four Kaya Shack™ retail marijuana stores described above, the Company plans to identify and lease locations for,
license and seek to open up to four additional Kaya Shack™ Marijuana Superstores in other Oregon markets over the next
eighteen to twenty-four months, as well as explore opportunities in other states to increase its retail footprint.
Additionally, the Company is exploring opportunities to further its operation in Oregon and elsewhere through the acquisition
of currently licensed and operating retail operations, which can be converted to the Kaya Shack™ model.
Expansion of Grow
and Manufacturing Operations
On March 21, 2017, KAYS announced that it
was in the process of expanding its grow and manufacturing operations and had retained a realtor to assist in identifying a suitable
30-60 acre tract of land in Oregon which would permit KAYS to expand its grow operations to the maximum space currently allowed
by law utilizing a mix of indoor and greenhouse cultivation. KAYS believes that the acquisition of a property will position the
Company for future development, including increased Marijuana Canopy production, development of marijuana processing facilities
and other cannabis related endeavors (subject to local zoning restrictions or liberalization of restrictions). As part of this
expansion, KAYS ceased operations of its Portland grow facility at the end of March 2017, arranged to maintain its genetics library
of over 30 strains of cannabis at an OHA-licensed medical grow site and contracted with farmers to meet demand until the new facility
is secured, built and fully operational.
$2.1 Million Financing
In March 2017, the Company completed
a $2.1 million financing with an institutional investor (the “
Investor
”) who had previously furnished KAYS
with $1.2 million in financing, pursuant to a financing agreement (the “
Financing Agreement
”) entered into
between the Company and the Investor in December 2016. Pursuant to the Financing Agreement, the Investor purchased $2.1 million
in principal amount of convertible notes (the “
Notes
”) from the Company as follows:
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$400,000
in principal amount of Notes which are convertible into shares of the Company’s
common stock at a conversion price of $0.04;
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$700,000
in principal amount of Notes which are convertible into shares of the Company’s
common stock at a conversion price of $0.07; and
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$1,000,000
in principal amount of Notes which are convertible into shares of the Company’s
common stock at a conversion price of $0.10.
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The purchase price for the Notes is equal
to the principal amount thereof. The Notes have a term of two years from issuance and bear interest at the rate of eight percent
(8%) annum, which accrues and is payable to together with interest at maturity. The Investor may convert the principal amount
of the Notes (as well as other notes it currently holds as referenced above), together with accrued but unpaid interest thereon,
into shares at the applicable conversion price, at any time or from time to time prior to maturity. The conversion price is subject
to adjustment for stock splits, stock dividends, recapitalizations and similar transactions. The Notes also provide that at no
time may they be convertible if the number of shares being issued upon conversion to and then held by the Investor would result
in the Investor beneficially owning in excess of 4.99% of the Company’s then outstanding shares of common stock, after giving
effect to the proposed conversion. As of the date of this Annual Report, the Investor has not converted any of the Notes into
shares of the Company’s common stock.
The Notes were issued pursuant
to the exemption from registration afforded by Section 4(a)(2) of the Securities Act and Regulation D thereunder. The proceeds
from the offer and sale of Notes are and will be used to fund the Company’s 2017 growth plan, including expansion of our
chain of Kaya Shack™ Marijuana Superstores in Oregon, expansion of our marijuana grow facility and manufacturing operations
and introducing new Kaya Shack™ branded cannabis products.
Corporate Information
Our corporate office is located at 305 South Andrews Avenue, Suite 209, Fort Lauderdale,
Florida, 33301. Our website is www.kayaholdings.com. Information contained on our website does not constitute part of this Annual
Report.
Market Overview
Twenty-nine states and the District of Columbia
have legalized marijuana in some capacity. Additionally, eight states (Alaska, California, Colorado, Maine, Massachusetts, Nevada,
Oregon and Washington State) and Washington, DC have approved the implementation of legal recreational marijuana use, with active
legal cannabis economies flourishing in Colorado, Oregon and Washington. As Melia Robinson of Business Insider stated, “After
a historic election cycle, which saw four states pass ballot initiatives legalizing nonmedical marijuana, one in five Americans
now live in a state where it's legal to smoke weed without a doctor's letter.”
According to cannabis research firm Arcview, sales of legal marijuana in North
America rose by 34% to $6.9 billion in 2016, and based on estimates from investment firm Cowen & Co., U.S. legal sales
could reach $50 billion by 2026. For added context, ArcView estimates that North American black market sales totaled $46.4
billion last year.
Arcview projects sales will grow at a compound
annual growth rate of 25% through 2021, when the North American market is expected to top $20.2 billion in sales. "The only
consumer industry categories I've seen reach $5 billion in annual spending and then post anything like 25% compound annual growth
in the next five years are cable television (19%) in the 1990s and the broadband internet (29%) in the 2000s," Tom Adams,
editor in chief of Arcview Market Research, said in a statement.
Estimates from various sources for the size
of the long term market range from up to an excess of $100 billion if Federal Prohibition is repealed and marijuana sales become
legal in all 50 states and Washington D.C. (for perspective beer is approximately a $100 billion market, with wine just under
$30 billion and coffee approximately $12 billion).
The Kaya Shack™ Brand
Kaya Holdings operates the Kaya Shack™
brand of medical marijuana dispensaries and recreational marijuana stores.
Kaya Holdings operates three
recreational marijuana retail outlets and medical marijuana dispensaries in Oregon under the Kaya Shack™ and
anticipates opening a fourth location during the second quarter of 2017. In addition to these four Kaya Shack™ retail
marijuana stores, the Company plans to identify and lease locations for, license and seek to open up to four additional Kaya
Shack™ Marijuana Superstores in other Oregon markets over the next eighteen to twenty-four months, as well as explore
opportunities in other states to increase its retail footprint. Additionally, the Company is exploring opportunities to
further its operation in Oregon and elsewhere through the acquisition of currently licensed and operating retail operations,
which can be converted to the Kaya Shack™ model.
Dubbed by the mainstream press as the “
Starbucks
of Marijuana
” after our first outlet opened in July, 2014, our operating concept is simple to deliver a consistent customer
experience (quality products, fair prices and superior customer service) to a broad and diverse base of customers. Kaya Shack™
meets the quality needs of the “
marijuana
enthusiast”, the comfort and atmosphere of all including “
soccer
moms
” and the price sensitivities of casual smokers.
The Kaya Shack™ brand communicates positive
thinking and joy, with signs adorning the walls that read “
It’s a Good Day to have a Good Day
,” “
Some
of our Happiest Days Haven’t Even Happened Yet
,” and our signature “
Be Kind
.”
Kaya Shack™ retail outlets are open
7 days a week from 8:00 am to 9:00 pm. Operations follow an operational manual that details procedures for 18 areas of operation
including safety, compliance, store opening, store closing, merchandising, handling of cash, inventory control, product intake,
store appearance and employee conduct.
In compliance with regulations, all marijuana
and marijuana infused products sold through our stores are quality tested by independent labs to assure adherence to strict quality
and purity standards.
Kaya Shack™ Retail Outlets
I. Kaya
Shack™
, 1719 SE Hawthorne Blvd., Portland, Oregon
Our flagship Hawthorne Boulevard Kaya Shack™
store opened July 3, 2014. The location is prime Portland real estate, located in an area that many term as “the Greenwich
Village of Portland”.
The Portland facility rotates through approximately
100 different strains throughout the year and in any given month features over 35 popular strains of marijuana including our proprietary,
high-grade “Kaya Kush” (independent testing performed on 3/10/2016 confirms a total THC/Cannabinoid content of approximately
28%). Our stores also feature various concentrates, including butane hash oil (B.H.O.) and CO2 oil extract (wax, shatter) which
range in potency from approximately 40% to over 80% THC, as well as high grade Oils and Tinctures, high CBD – low THC strains
and “Kaya Candies”, “Kaya Caramels” and an assortment of cookies and cakes for patients who do not smoke.
Our Portland store initially operated as an
MMD. In connection with the transition of recreational marijuana retailer licenses from the OHA to the OLCC, we applied for an
OLCC license for the facility. However, issuance of the OLCC license for the Portland, Oregon outlet was delayed because of the
need to resolve various local issues with the City of Portland. Accordingly, from January 1, 2017 until the present, sales at
the Portland, Oregon location were limited to medical marijuana.
On January 20, 2017, we entered into an agreement
whereby the City of Portland agreed to license our Portland Kaya Shack™ retail outlet. Since that time, we completed all
OLCC Licensing requirements, on March 29, 2017 passed our retail license inspection and expect to receive our OLCC recreational
license for the Portland Kaya Shack™ outlet by not later than April 30, 2017, at which time, we will be able to commence
legal recreational marijuana sales at that location.
II. Kaya Shack ™ Marijuana Superstore,
South Salem, Oregon
Our second retail outlet (and our first Kaya
Shack™ Marijuana Superstore) opened for business on October 17, 2015 in South Salem, Oregon in time to take advantage of
early recreational sales by MMDs.
The store is located in first class strip
mall space adjacent to “Little Caesars Pizza” and “Aaron Rents”, with a footprint roughly three times
the size of our first Kaya Shack™ outlet in Portland. The location and floor plan was carefully chosen with an eye towards
concept expansion to enhance revenues and broaden branding opportunities.
In addition to the recreational and medical
marijuana products as offered at our Hawthorne location, the space allows for additional products and concept innovations to be
introduced. These include the
Kaya Café Juice Bar
™ (featuring THC and CBD enhanced juices and beverages),
the
Kaya Clone Room
™ (supplying marijuana plants and home cultivation accessories) and additional unique on-site
concepts.
Our South Salem Kaya Shack™ Marijuana
superstore received its OLCC recreational marijuana retailer license prior to the January 1, 2017 deadline to do so.
III. Kaya Shack™ Marijuana Superstore,
North Salem, Oregon
On March 21, 2017, the Company announced that
it had secured the OLCC recreational retailer marijuana license and had opened its third retail outlet, a 2,600 square foot Kaya
Shack™ Marijuana Superstore in North Salem, Oregon.
As with the South Salem Store, the location
is first class space, adjacent to Starbucks Coffee. This is our largest location to date and is intended to be the model for future
Kaya Shack™ Marijuana Superstores. We selected this location with an eye towards completing market penetration of the Salem
Metropolitan Area, which hosts a population of approximately 400,000 people. We also intend to expand our product offerings here
as well as utilize the additional space to host community events we hope will help make the Kaya Shack™ a destination for
cannabis consumers.
IV. Kaya Shack™ Marijuana Superstore,
Central Salem, Oregon
We are completing construction of and the
OLCC licensing process for our fourth outlet, a third Kaya Shack™ Marijuana Superstore, which will be located in Central
Salem, Oregon and which we anticipate will open during the second quarter of 2017. As with the other Salem, Oregon outlet, the
store is located in first class space, adjacent to fast food restaurants stores and near popular national retail chain stores.
It also has a footprint of approximately 2,600 square feet and utilizes the Kaya Shack™ Marijuana Superstore model reflected
in our third outlet and substantially completes our geographic penetration of the Salem, Oregon market.
Kaya Shack™ Home Delivery
In early February of 2017, the Company began
the process of filing applications to add Home Delivery Service for three of its Kaya Shack™ retail marijuana stores at
the advice of one of their OLCC examiners. As of the date of this Annual Report, the Company has received approvals from the OLCC
to add Home Delivery to their two currently OLCC licensed locations, expects to receive approval for Home Delivery at its third
location in conjunction with the anticipated issuance of its OLCC location license and is also applying for Home Delivery licensing
at its fourth retail outlet, which is currently under construction.
In addition to providing added value and convenience
for our customers, extending visibility and building brand recognition for the Kaya Shack™ brand, we believe that Home Delivery
provides greater market penetration, by allowing sales throughout the geographic area that our stores are licensed in. There is
no limit to the number of delivery vehicles that can service an individual area using just one store as a home base, so in effect
we intend to use this service to construct additional “virtual” Kaya Shacks™ without the added costs of additional
brick and mortar locations.
On April 11, 2017 the Company took delivery
of its first four Fiat 500 cars to begin building their Kaya Car™ Home Delivery Service fleet. The cars are presently being
customized with distinctive Kaya Shack™ vehicle wrapping featuring the Company’s branding logos and colors, and the
Company is developing the Kaya Shack™ Delivery App for use by its customers to order “Fast, Free Delivery” of
the complete line of both medical and recreational grade Kaya Shack™ cannabis products.
The Company intends to initiate its Kaya Car™
Home Delivery Service within the next 30-60 days, contemporaneously with a grand opening celebration for all four then OLCC-Licensed
Kaya Shack™ retail marijuana stores and to commence the to move to the next stage of branding and retail development.
Kaya Farms™ Cannabis and Cannabis
Products
General
Since April 2015, Kaya Holdings has developed,
operated and expanded its Kaya Farms™ West Coast Base of Operations, housing marijuana grow operations and a manufacturing
facility. These operations enabled us to develop over 30 strains of cannabis and to provide ours Kaya Shack™ retail outlets
with top grade connoisseur quality marijuana products including flower, concentrates and extracts.
On March 21, 2017, KAYS announced
that it was in the process of expanding its grow and manufacturing operations and had retained a realtor to assist in identifying
a suitable 30-60 acre tract of land in Oregon which would permit KAYS to expand its grow operations to the maximum space currently
allowed by law utilizing a mix of indoor and greenhouse cultivation. KAYS believes that the acquisition of a property will position
the Company for future development, including increased Marijuana Canopy production, development of marijuana processing facilities
and other cannabis related endeavors (subject to local zoning restrictions or liberalization of restrictions). As part of this
expansion, KAYS ceased operations of its Portland grow facility at the end of March 2017, arranged to maintain its genetics library
of over 30 strains of cannabis at an OHA licensed medical grow site and contracted with farmers to meet demand until the new facility
is secured, built and fully operational.
Kaya Farms™
Cannabis Testing Results
The following pages contain testing results
of Kaya Farms™ flower produced throughout the year which make up part of our strain library of mother plants which we will use
to help populate our new and improved grow and marijuana manufacturing facility.
Kaya Buddie™ Strain Specific Cannabis Cigarettes
In 2016 the Company introduced a signature
line of strain-specific connoisseur-grade, pre-rolled cannabis cigarettes branded as “Kaya Buddies™”. The brand,
marketed under the tagline “Buds with Benefits”, features over 25 different strains of connoisseur-grade, high quality
cannabis and proprietary specialty blends. The Kaya Buddies™ cannabis cigarettes, made from 100% cannabis bud only, was
launched in mid-March in the Kaya Shack™ stores in Oregon and are targeted to service the exploding legal recreational marijuana
market.
Kaya Buddies™ cannabis cigarettes have
consistently been very well received by both older medical patients and recreational users new to cannabis. Although they are
first being marketed through our internal retail network they are also being targeted for potential distribution lines to other
dispensaries.
Other Potential Markets
We believe that revenues and profitability
will be enhanced through our planned opening of additional retail outlets utilizing the Kaya Shack™ brand and model in our
chain, as well as economies of scale achieved by being a multi-location retail chain and being vertically integrated with grow
and manufacturing operations. Ultimately, we believe that we can successfully enter other markets as they open up by applying
our “brand” retail chain and vertically integrated grow and manufacture model to other states that legalize recreational
marijuana use. Where applicable, we will seek to leverage our public company status to finance organic growth and enable acquisitions
of existing locations for the Kaya Shack brand, as well as look to acquire and grow additional brands.
On November 8, 2016, California, Maine, Massachusetts
and Nevada voted to legalize recreational marijuana, while Arkansas, Florida and North Dakota approved medical cannabis initiatives.
Montana, which legalized medical marijuana in 2004, also passed a measure to set up commercial cultivation operations and dispensaries.
The California recreational cannabis market
is by far the largest potential market in the country, and our operations in Oregon allow for a natural progression and expansion
down the I-5 corridor into California. Florida could be a potentially large market for us as well, because we believe that KAYS
would have a distinct advantage in the state, as it is one of the few Florida-based entities whose management has significant
experience in owning and operating MMDs and grow and manufacturing operations. These markets are substantial, and their development
could lead to $7-$8 billion in additional annual retail cannabis sales, according to Marijuana Business Daily’s
preliminary estimates.
Growth Strategy
The Company has established a well-defined
strategy for entering and maintaining a strong presence in the legal marijuana sector. The cornerstones of this strategy include:
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All operations are to be conducted in accordance with
state and local laws and regulations and guidance outlined in the U.S. Department of Justice “Cole Memo” dated August
29, 2013.
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The Company will seek to operate in a vertically integrated
manner (grow, process and sell) wherever permitted by law. In states where vertical integration is not permitted, the Company
plans to determine which of the permitted activities offers the most potential for growth and value creation.
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The Company will seek to engage, sponsor or lead local
advocacy and lobbying groups that have a significant impact on the evolution and character of laws and the regulations under which
legal marijuana operations are implemented in select markets.
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The Company shall work with law enforcement and government
officials to insure compliance with all regulations.
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Marketing and Sales
The Company will only market its legal marijuana
as in compliance with applicable state law.
The Company employs a marketing campaign consisting
of four cornerstones:
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Promoting and establishing the Kaya Shack™ brand.
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A positive and active online presence.
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Daily specials and promotions.
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Quirky and fun holiday specials.
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Our core strategic marketing objectives include:
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Establish the Kaya Shack™ Brand
– positioning the Company’s brand to have positive and value related associations with all prospective and existing
customers.
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Operate Cooperatively
- cooperation, as
a strategy, helps develop a network of suppliers and marketing channels able to promote Kaya Shack™.
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Deliver Value
- customer value is achieved
when the perceived value of what we sell along with the value of the experience we deliver exceeds the price we charge.
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Drive Customer Traffic
- the only two
ways to increase store income is to sell more to our existing customers and attract new customers. Programs are in place to accomplish
both tasks.
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Government Regulation
We are subject to general business regulations
and laws, as well as regulations and laws directly applicable to our operations. As we continue to expand the scope of our operations,
the application of existing laws and regulations could include matters such as pricing, advertising, consumer protection, quality
of products, and intellectual property ownership. In addition, we will also be subject to new laws and regulations directly applicable
to our activities.
Any existing or new legislation applicable
to us could expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations,
which could hinder or prevent the growth of our business.
Federal, state and local laws and regulations
governing legal recreational and medical marijuana use are broad in scope and are subject to evolving interpretations, which could
require us to incur substantial costs associated with compliance. In addition, violations of these laws or allegations of such
violations could disrupt our planned business and adversely affect our financial condition and results of operations. In addition,
it is possible that additional or revised federal, state and local laws and regulations may be enacted in the future governing
the legal marijuana industry. There can be no assurance that we will be able to comply with any such laws and regulations and
its failure to do so could significantly harm our business, financial condition and results of operations.
Competition
The legal marijuana sector is rapidly growing
and the Company faces significant competition in the operation of retail outlets, MMDs and grow facilities. Many of these competitors
will have far greater experience, more extensive industry contacts and greater financial resources than the Company. There can
be no assurance that we can adequately compete to succeed in our business plan.
Employees
As of the date of this Annual Report, our
Oregon operations have a total of seventeen (17) part-time store employees including budtenders, trimmers, growers, and 4 full-time
employees- a Store Manager, a Sales and Marketing Coordinator, the Director of Dispensary and Grow Operations and a Master Grower.
Additionally, we engage several consultants to assist with daily duties and business plan implementation and execution. Additional
employees will be hired and other consultants engaged in the future as our business expands.
We have a limited operating history
with our current business
.
The Company was incorporated in 1993 and has
engaged in a number of businesses as both a private and as a publicly held company, including the online sale of specialty foods,
online marketing and website development.
KAYS’s legal marijuana business, which
it has focused on since 2014, only commenced generating more than a limited level of revenues subsequent to the commencement of
legal recreational marijuana sales in Oregon on October 1, 2015. Accordingly, our operations continue to be subject to all the
problems, expenses, difficulties, complications and delays encountered in an early stage business. Their can be no assurance that
the Company will generate significant revenues or operate at a profit.
The Company will require additional
financing to become commercially viable.
The Company’s current legal marijuana
operations can be capital intensive.
During the years ended December 31, 2016 and
2015, we raised approximately $1,185,000 and $940,000, respectively, through a series of private of debt and equity offerings
to finance operations for its legal marijuana operations in Oregon.
The Company incurred net losses of
$19,849,262 and $3,225,394 for the years ended December 31, 2016 and 2015, respectively. The majority of our net loss during
the year ended December 31, 2016 was a result of the derivative liabilities from the conversion of debt in the year ended
December 31, 2016 and from the stabilization of our stock prices the reduces the volatility factors used in the derivative
calculations. At December 31, 2016, we had a total stockholders' deficit of $ 20,990,060 and a working capital
deficiency of $9,417,677. Their can be no assurance that the Company will become commercially viable without additional
financing, the availability and terms of which are uncertain. If the Company can not secure necessary capital when needed on
commercially reasonable terms, its business, condition (financial and otherwise) and commercial viability may be harmed.
Although management believes that it will be able to successfully execute its business plan, which includes third party
financing and the raising of capital to meet the Company’s future liquidity needs, there can be no assurances in this
regard. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
We currently rely on certain key individuals,
and the loss of one of these key individuals could have an adverse effect on the Company.
Our success depends to a certain degree upon
certain key members of our management. These individuals are a significant factor in our growth and success. The loss of the services
of such members of management could have a material adverse effect on our Company.
The Company’s success will be dependent
in part upon its ability to attract qualified personnel and consultants.
The Company’s success will be dependent
in part upon its ability to attract qualified creative marketing, sales and development professionals. The inability to do so
on favorable terms may harm the Company’s proposed business.
KAYS must effectively meet the challenges
of managing expanding operations.
The Company’s business plan anticipates
that operations will undergo significant expansion in 2017 and beyond. This expansion will require the Company manage a larger
and more complex organization, which could place a significant strain on our managerial, operational and financial resources.
Management may not succeed with these efforts. Failure to expand in an efficient manner could cause expenses to be greater than
anticipated, revenues to grow more slowly than expected and could otherwise have an adverse effect on the business, financial
condition and results of operations.
Marijuana remains illegal in the United
States under federal law
.
Notwithstanding its legalization for recreational
and/or medical use by a growing number of states, the growing, transport, possession or selling of marijuana continues to be illegal
under federal law. Although the Obama administration has made a policy decision to allow implementation of state laws legalizing
recreational and/or medical marijuana use and not to federally prosecute anyone operating under state law, the continuance of
that policy is not assured under the Trump administration and could change at any time, which might render our marijuana operations
illegal and adversely affecting KAYS’s business, financial condition and results of operations.
The marketing and market acceptance
of marijuana may not be as rapid as KAYS expects.
The market for legal marijuana is quickly
evolving, and activity in the sector is expanding rapidly. Demand and market acceptance for legal marijuana are subject to uncertainty
and risk, as changes in the price and possible adverse political efforts could influence and denigrate demand. KAYS cannot predict
whether, or how fast, this market will grow or how long it can be sustained. If the market for legal marijuana develops more slowly
than expected or becomes saturated with competitors, KAYS’s operating results could be adversely impacted.
KAYS’s marijuana activities are
part of an emerging industry.
The Company intends to implement an aggressive
plan of growth to enter the legal recreational and medical marijuana industry. The legal marijuana industry is new and emerging,
and has yet to fully define competitive, operational, financial and other parameters for successful operations. By pursuing a
growth strategy to enter a new and emerging industry, the Company’s operations may be adversely impacted as the industry’s
competitive, operational, financial and other parameters take shape. Given the fluidity of the industry, the Company may make
errors in implementing its business plan, thereby limiting some or all of its ability to perform in accordance with its expectations.
Our business could be affected by changes
in governmental regulation.
Federal, state and local laws and regulations
governing legal recreational and medical marijuana use are broad in scope and are subject to evolving interpretations, which could
require us to incur substantial costs associated with compliance. In addition, violations of these laws or allegations of such
violations could disrupt KAYS’s planned business and adversely affect our financial condition and results of operations.
In addition, it is possible that additional or revised federal, state and local laws and regulations may be enacted in the future
governing the legal marijuana industry. There can be no assurance that KAYS will be able to comply with any such laws and regulations
and its failure to do so could significantly harm our business, financial condition and results of operations.
Our business will be subject to other
operating risks which may adversely affect the Company’s financial condition.
Our planned operations will be subject to
risks normally incidental to manufacturing operations which may result in work stoppages and/or damage to property. This may be
caused by:
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breakdown of the equipment;
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imposition of new government regulations;
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sabotage by operational personnel;
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fire, flood, or other acts of God.
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We will likely face significant competition.
The legal marijuana industry is in its early
stages and is attracting significant attention from both small and large entrants into the industry. KAYS expects to encounter
significant competition as it implements its business strategy. The ability of KAYS to effectively compete could be hindered by
a lack of funds, poor positioning, management error, and other factors. The inability to effectively compete could adversely affect
our business, financial condition and results of operations.
Our internal controls may be inadequate,
which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. As defined in Exchange Act `Rule 13a-15(f), internal control
over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial
office and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that:
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pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
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provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the Company are being made only in accordance with authorizations of management and/or directors of the Company; and
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provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
|
We do not have a sufficient number of employees
to segregate responsibilities and may be unable to afford increasing our staff or engaging outside consultants or professionals
to overcome our lack of employees. During the course of our testing, we may identity other deficiencies that we may not be able
to timely remediate. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards
are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis
that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of
2002 (“
Sarbanes Oxley
”
). Moreover, effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. If
we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could
lose confidence in our reported financial information, and the trading price of our common stock, if a market ever develops, could
drop significantly
The Jumpstart our Business Startups
Act of 2012 (the “Jobs Act”) has reduced the information that the Company is required to disclose.
Under the Jobs Act, the information that the
Company will be required to disclose has been reduced in a number of ways.
As a company that had gross revenues of less
than $1 billion during the Company’s last fiscal year, the Company is an “
emerging growth company
,” as
defined in the Jobs Act (an “
EGC
”). The Company will retain that status until the earliest of (a) the last
day of the fiscal year which the Company has total annual gross revenues of $1,000,000,000 (as indexed for inflation in the manner
set forth in the Jobs Act) or more; (b) the last day of the fiscal year of following the fifth anniversary of the date of the
first sale of the common stock pursuant to an effective registration statement under the Securities Act; (c) the date on which
the Company has, during the previous three year period, issued more than $1,000,000,000 in non-convertible debt; or (d) the date
on which the Company is deemed to be a “
large accelerated filer
,” as defined in Rule 12b-2 under the Exchange
Act or any successor thereto. As an EGC, the Company is relieved from the following:
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The Company is excluded from Section 404(b) of Sarbanes-Oxley, which otherwise would
have required the Company’s auditors to attest to and report on the Company’s internal control over financial reporting.
The Jobs Act also amended Section 103(a)(3) of Sarbanes-Oxley to provide that (i) any new rules that may be adopted by the
PCAOB requiring mandatory audit firm rotation or changes to the auditor’s report to include auditor discussion and analysis
(each of which is currently under consideration by the PCAOB) shall not apply to an audit of an EGC; and (ii) any other future
rules adopted by the PCAOB will not apply to the Company’s audits unless the SEC determines otherwise.
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The Jobs Act amended Section 7(a) of the Securities Act to provide that the Company
need not present more than two years of audited financial statements in an initial public offering registration statement and
in any other registration statement, need not present selected financial data pursuant to Item 301 of Regulation S-K for any period
prior to the earliest audited period presented in connection with such initial public offering. In addition, the Company is not
required to comply with any new or revised financial accounting standard until such date as a private company (i.e., a company
that is not an “
issuer
” as defined by Section 2(a) of Sarbanes-Oxley) is required to comply with such new or
revised accounting standard. Corresponding changes have been made to the Exchange Act, which relates to periodic reporting requirements,
which would be applicable if the Company were required to comply with them.
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As long as the Company is an EGC, the Company may comply with Item 402 of Regulation
S-K, which requires extensive quantitative and qualitative disclosure regarding executive compensation, by disclosing the more
limited information required of a “
smaller reporting company
.”
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In the event that the Company registers the common stock under the Exchange Act as
it intends to do, the Jobs Act will also exempt the Company from the following additional compensation-related disclosure provisions
that were imposed on U.S. public companies pursuant to the Dodd-Frank Act: (i) the advisory vote on executive compensation
required by Section 14A(a) of the Exchange Act; (ii) the requirements of Section 14A(b) of the Exchange Act relating to shareholder
advisory votes on “golden parachute” compensation; (iii) the requirements of Section 14(i) of the Exchange Act as
to disclosure relating to the relationship between executive compensation and our financial performance; and (iv) the requirement
of Section 953(b)(1)of the Dodd-Frank Act, which requires disclosure as to the relationship between the compensation of the Company’s
chief executive officer and median employee pay.
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The costs of being a public company
could result in us being unable to continue as a going concern.
As a public company, we are required to comply
with numerous financial reporting and legal requirements, including those pertaining to audits and internal control. The costs
of this compliance could be significant. If our revenues do not increase and/or we cannot satisfy many of these costs through
the issuance of our shares, we may be unable to satisfy these costs in the normal course of business that would result in our
being unable to continue as a going concern.
Management and the Board of Directors
may be Indemnified.
The Certificate of Incorporation and Bylaws
of KAYS provide for indemnification of directors and officers at the expense of the respective corporation and limit their liability.
This may result in a major cost to the corporation and hurt the interests of stockholders because corporate resources may be expended
for the benefit of directors and officers. The Company has been advised that, in the opinion of the Securities and Exchange Commission,
indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
The market for the KAYS Shares is extremely
limited and sporadic
KAYS’s common stock is quoted on the
OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc. The market KAYS’s for common stock is limited
and sporadic. Trading in stock quoted on the OTCQB is often thin and characterized by wide fluctuations in trading prices, due
to many factors that may have little to do with our operations or business prospects. This volatility could depress the market
price of KAYS’s common stock for reasons unrelated to operating performance. Moreover, the trading of securities in the
OTCQB is often more sporadic than the trading of securities listed on a quotation system like NASDAQ, or a stock exchange like
the New York Stock Exchange.
KAYS’s common stock is a penny
stock. Trading of KAYS’s common stock may be restricted by the penny stock regulations adopted by the Securities and Exchange
Commission (the “SEC”) and FINRA’s sales practice requirements, which may limit a stockholder’s ability
to buy and sell our common stock.
KAYS’s common stock is a penny stock.
The SEC has adopted Rule 15g-9 which generally defines
“penny stock
” to be any equity security that has a market
price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.
KAYS’s common stock is covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers
who sell to persons other than established customers and accredited investors. The term “
accredited investor
”
refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to
a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form
prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny
stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information
must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing
before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that
is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade
our securities. We believe that the penny stock rules discourage investor interest in, and limit the marketability of, KAYS’s
common stock.
In addition to the penny stock rules promulgated
by the SEC, FINRA (the Financial Industry Regulatory Authority) has adopted rules that require when recommending an investment
to a customer, a broker- dealer must have reasonable grounds for believing that the investment is suitable for that customer.
Prior to recommending speculative low -priced securities to their non-institutional customers, broker-dealers must make reasonable
efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information.
Under interpretations of these rules, the FINRA believes that there is a high probability that speculative low-priced securities
will not be suitable for at least some customers. FINRA’s requirements make it more difficult for broker-dealers to recommend
that their customers buy KAYS’s common stock, which may limit investor ability to buy and sell KAYS’s common stock.
The market for penny stocks has experienced
numerous frauds and abuses that could adversely impact KAYS’s common stock.
Company management believes that the market
for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
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control of the market for the security by one or a few broker-dealers that are often
related to a promoter or issuer;
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manipulation of prices through prearranged matching of purchases and sales and false
and misleading press releases;
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boiler room practices involving high pressure sales tactics and unrealistic price
projections by sales persons;
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excessive and undisclosed bid-ask differentials and markups by selling broker-dealers;
and
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wholesale dumping of the same securities by promoters and broker-dealers after prices
have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
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The board of directors of KAYS has the
authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stockholders
and with the ability to adversely affect common stockholder voting power and rights upon liquidation.
KAYS’s Certificate of Incorporation
allows us to issue shares of preferred stock without any vote or further action by our stockholders. Our board of directors has
the authority to fix and determine the relative rights and preferences of preferred stock. As a result, our board of directors
could authorize the issuance of a series of preferred stock that would grant to holders of preferred stock the rights to our assets
upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the
right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
The ability of our principal stockholders,
including our CEO, to control our business may limit or eliminate minority stockholders’ ability to influence corporate
affairs.
The principal stockholder of KAYS holds 22,996,833
shares of common stock and $500K in principal amount of convertible promissory notes which are convertible into 50,000 shares
of Series C Convertible Stock. Additionally, our CEO owns 5,280,144 shares of common stock and 50,000 shares of Series C Convertible
Preferred Stock. These preferred shares notes can be converted into a total of 43,329,970 shares of KAYS common stock which, added
to the common shares of KAYS held by both parties gives them approximately 41% of votes on matters presented to stockholders.
Accordingly, they are in a position to significantly influence membership of our board of directors as well as all other matters
requiring stockholder approval. The interests of our principal stockholders may differ from the interests of other stockholders
with respect to the issuance of shares, business transactions with or sales to other companies, selection of other officers and
directors and other business decisions. The minority stockholders have no way of overriding decisions made by our principal stockholders.
This level of control may also have an adverse impact on the market value of our shares because our principal stockholders may
institute or undertake transactions, policies or programs that result in losses and/or may not take any steps to increase our
visibility in the financial community and/or may sell sufficient numbers of shares to significantly decrease our price per share.
We do not expect to pay cash dividends
in the foreseeable future.
KAYS has not paid cash dividends on its shares
of common stock and does not intend to do so at any time in the foreseeable future. The future payment of dividends depends upon
future earnings, capital requirements, financial requirements and other factors that the companies’ boards of directors
will consider. Since they do not anticipate paying cash dividends on the common stock, return on investment, if any, will depend
solely on an increase, if any, in the market value of the common stock.
The conversion of KAYS’ outstanding
preferred stock by the CEO and convertible debt held by our principal stockholder would result in the issuance of
43,329,970
shares of KAYS’ common stock. Additionally, conversion of other convertible debt described in this Annual Report would
result in further dilution to KAYS’ stockholders. Accordingly, such market overhang could adversely impact the market price
of the common stock.
KAYS has 50,000 shares of Series C Convertible
Preferred Stock outstanding, all of which are held by our CEO. Additionally, KAYS has $500K in principal amount of convertible
promissory notes outstanding held by our principal stockholder, which are convertible into 50,000 shares of Series C Convertible
Stock. These preferred shares and convertible promissory notes can be converted into a total of 43,329,970 shares of KAYS common
stock. Additionally, the company has other convertible debt described in this Annual Report, which would result in further dilution
if converted Such market overhang could adversely impact the market price of KAYS’s common stock as a result of the dilution
which would result if such securities were converted into shares of KAYS common stock.
Future sales of shares of KAYS common
stock pursuant to Rule 144 under the Securities Act could adversely affect the market price of KAYS’s common stock.
KAYS has a substantial number of shares of
common stock which were issued in transactions exempt from the registration requirements of the Securities Act and are now available
for public sale pursuant to the Rule 144 under the Securities Act. Such sales could adversely affect the market price of KAYS’s
common stock.
Because we are not subject to compliance
with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested-director
transactions, conflicts of interest and similar matters.
Sarbanes-Oxley as well as rule changes proposed
and enacted by the SEC, the NYSE/AMEX and the NASDAQ Stock Market as a result of Sarbanes-Oxley, require the implementation of
various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management
and the securities markets and apply to securities that are listed on those exchanges or the NASDAQ Stock Market. Because we are
not currently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the
substantial additional costs associated with voluntary compliance, we have not yet adopted these measures.
We do not currently have independent audit
or compensation committees. As a result, directors have the ability, among other things, to determine their own level of compensation.
Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such
standards of corporate governance may leave our stockholders without protections against interested- director transactions, conflicts
of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations
as a result thereof.
We intend to comply with all corporate governance
measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract
and retain qualified officers, directors and members of board committees required to provide for our effective management as a
result of Sarbanes-Oxley. The enactment of Sarbanes-Oxley has resulted in a series of rules and regulations by the SEC that increase
responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these
recent changes may make it more costly or deter qualified individuals from accepting these roles.
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Item 1B.
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Unresolved Staff Comments.
|
Not applicable.
We do not own any real property.
The Company maintains office space at 305
South Andrews Avenue, Suite 209, Fort Lauderdale, Florida 33301, pursuant to the terms of a commercial office lease providing
for rental payments of $2,544 per month. The lease was extended on March 18, 2017, for an additional 1 year.
Our Kaya Shack™ retail outlet located
at 1719 SE Hawthorne Boulevard, Portland, Oregon 97214, is occupied pursuant to a lease expiring in April 2019, at a current monthly
rental of $ 2,433.60. The lease provides for an annual rental rate increase of 4% effective May of each year, and two (2) five-year
extension options at market rate.
Our Kaya Shack™ Marijuana Superstore
located at 5757 Commercial Street SE, Salem, Oregon 97306 is occupied pursuant to a lease expiring in May 2020, at a current monthly
rental of $ 4,195.84. The lease provides for an annual rental rate increase of 3% effective May of each year, and two (2) five-year
extension options at market rate.
Our Kaya Shack™ Marijuana Superstore
opened in March 2017 at 2505 Liberty Road NE #120, Salem, Oregon 97301. Is occupied pursuant to a lease expiring in August, 2022,
at a current monthly rental of $ 6,182.23. The lease provides for an annual rental rate increase of 3 % effective August of each
year, and two (2) five-year extension options at market rate.
Our Kaya Shack™ Marijuana Superstore
located dispensary at 1252 23
rd
St. SE #150, Salem, Oregon 97306, which we anticipate will open during the second quarter
of 2017, is occupied pursuant to a lease expiring in August, 2022 at a current monthly rental of $ 6,720.02 The lease provides
for an annual rental rate increase of 3% effective May of each year, and two (2) five-year extension options at market rate.
Until March 31, 2017, we operated our Kaya
Shack™ West Coast Base of Operation in Portland, Oregon pursuant to a lease which was originally scheduled to expire in
2019. The current rental for that facility was $6,240.00. As disclosed in “
Item 1. Business
” we terminated
that lease by agreement with the landlord as part of our plan to relocate our grow and manufacturing operations to and expand
them in a larger facility.
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ITEM 3.
|
Legal Proceedings.
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Swartz Litigation
On August 22, 2014, a complaint was filed
in the Circuit Court of the 17
th
Judicial Circuit in and for Broward County, Florida (CACE 14-016324) entitled
Neil
Swartz vs. Alternative Fuels Americas, Inc.
The complaint by Mr. Swartz (a former executive
officer and director of the Company) alleges that 44,880 shares of our Series A Preferred Stock (which our SEC filings reflect
were contributed back to the Company for cancellation) were, in fact, not returned, and are still the property of Neil Swartz.
Additionally, the complaint alleges that 5,120 shares of our Series A Preferred Stock held by us in book-entry form for Mr. Swartz
should be released to Mr. Swartz.
On April 15, 2016, we entered into a Settlement
Agreement with Mr. Swartz pursuant to which, among other matters, Mr. Swartz:
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relinquished any and all rights to the 44,880 shares of our Series A Preferred Stock
that had been returned to the Company for cancellation;
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relinquished any and all rights to 2,354 shares of our Series A Preferred Stock that
he had alleged were held in book-entry form for him;
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retained the remaining 2,766 shares of our Series A Preferred Stock that he had alleged
were held in book-entry form for him and exercised his right to convert those shares into 1,200,249 “
restricted
”
shares of our common stock;
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agreed to volume limitations on the public resale of the 1,200,249 “
restricted
”
shares of our common stock issued to him upon conversion of the 2,766 shares of our Series A Preferred Stock; and
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voluntarily dismissed the lawsuit with prejudice.
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In addition to the foregoing, the parties
also exchanged mutual releases.
Goldin Litigation
On June 22, 2016, Daniel A. Goldin and Wally
Goldin commenced an action in Oregon Circuit Court, Multnomah County, against the Company, Marijuana Holdings Americas, Inc.,
its direct majority-owned subsidiary, Craig Frank, the Company’s Chairman, President and Chief Executive Officer, William
David Jones, a consultant to the Company and BMN Capital Group, LLC, a limited liability company owned by Mr. Jones (the “
Action
”).
The plaintiffs allege, in a complaint which has been amended three times, breach of contract, state securities fraud and state
racketeering claims against the defendants arising from alleged misrepresentations made in subscription agreements with the Company
entered into in October 2015 and January 2016 by Daniel A. Goldin and Wally Goldin, respectively, pursuant to which they each
purchased 2,222,222 “
restricted
” shares of the Company’s our common stock for $100,000 in a private transaction.
In addition, Daniel A. Goldin alleged that the Company breached a purported employment agreement with him pursuant to which he
was purportedly to be compensated for working in our Oregon operations through a combination of cash and stock. The Plaintiffs
are seeking monetary damages.
The Company believes that the claims
and allegations set forth in the complaint filed in the Action are without merit and contain factual misstatements, and that the
Company possesses documentation to establish that the plaintiffs’ investments were not solicited by the Company but that
plaintiff Daniel A. Goldin unilaterally contacted the Company and represented himself as an “
accredited investor
”
with expertise in the marijuana industry and proposed an investment in the Company. The Company is vigorously defending against
the claims, has answered the complaint denying all of the plaintiff’s allegations and has brought various counterclaims
against them arising from the plaintiffs’ misrepresentations. The action is currently in the discovery phase. Moreover,
the Company believes that plaintiff Daniel Goldin has publicly sold the shares that he purchased from the Company for an amount
significantly in excess of the purchase price, which adversely impacts his claim for damages.
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ITEM 4.
|
Mine Safety Disclosures.
|
Not applicable.
NOTE 1 – ORGANIZATION AND NATURE OF THE BUSINESS
Organization
Kaya Holdings, Inc. FKA (Alternative Fuels
Americas, Inc.) is a holding company. The Company was incorporated in 1993 and has engaged in a number of businesses. Its name
was changed on May 11, 2007 to NetSpace International Holdings, Inc. (a Delaware corporation) (“NetSpace”). NetSpace
acquired 100% of Alternative Fuels Americas, Inc. (a Florida corporation) in January 2010 in a stock-for-member interest transaction
and issued 6,567,247 shares of common stock and 100,000 shares of Series C convertible preferred stock to existing shareholders.
Certificate of Amendment to the Certificate of Incorporation was filed in October 2010 changing the Company’s name from
NetSpace International Holdings, Inc. to Alternative Fuels Americas, Inc. (a Delaware corporation). Certificate of Amendment to
the Certificate of Incorporation was filed in March 2015 changing the Company’s name from Alternative Fuels Americas, Inc.
(a Delaware corporation) to Kaya Holdings, Inc.
The Company has two subsidiaries: Alternative Fuels Americas, Inc. (a Florida corporation) which is wholly
owned and Marijuana Holdings Americas, Inc. a Florida corporation (“MJAI”) which is majority owned. MJAI conducts operations
in Oregon through controlling ownership interests in Oregon based entities MJAI Oregon 1 LLC, MJAI Oregon 2 LLC, MJAI Oregon 3
LLC and MJAI Oregon 4 LLC.
Nature of the Business
The Company operates a subsidiary, Marijuana
Holdings Americas, Inc., a Florida corporation, that pursues medical and/or recreational licenses for the growing, processing
and/or sale of marijuana in jurisdictions where it is legal and permissible under local laws. The subsidiary was formed in March
2014.
In March 2014 Marijuana Holdings Americas,
Inc. (through local Oregon subsidiaries) began the application process to obtain licenses to operate medical marijuana dispensaries
in Oregon. On March 21, 2014 the Company received notice from the Oregon Health Authority that MJAI Oregon 1 LLC had been granted
provisional licensing approval to operate their first Medical Marijuana Dispensary in Portland, Oregon and subsequently received
full licensing approval for the first “Kaya ShackTM” retail medical marijuana dispensary, which we began operating
July 3, 2014. As of December 31, 2016 the provisional Medical license that allowed the company to sell Medical and Recreational
products has expired and the company has applied for a recreational license with the City of Portland Oregon. As of January 1,
2017, MJAI Oregon 1 LLC is currently operating as a Medical dispensary.
As of December 31, 2016 the company’s
subsidiary MJAI Oregon 2 LLC was licensed for the sale of recreational Marijuana in the City of Salem Oregon.
NOTE 2 - LIQUIDITY AND GOING CONCERN
The Company’s consolidated financial
statements as of and for the year ended December 31, 2016 have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of
$19,849,262 for the year ended December 31, 2016 and a net loss of $3,225,394 for the year ended December 31, 2015. At December
31, 2016 the Company has a working capital deficiency of $994,324, when not including non-cash derivative liabilities and is totally
dependent on its ability to raise capital. The Company had a plan of operations and acknowledges that its plan of operations may
not result in generating positive working capital in the near future. Even though management believes that it will be able to successfully
execute its business plan, which includes third-party financing and capital issuance, and meet the Company’s future liquidity
needs, there can be no assurances in that regard. These matters 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 material uncertainty. Management recognizes that the Company must generate additional funds to successfully develop its operations
and activities. Management plans include:
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the sale of
additional equity and debt securities,
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alliances and/or partnerships
with entities interested in and having the resources to support the further development of the Company’s business plan,
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business transactions to
assure continuation of the Company’s development and operations,
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development of a unified
brand and the pursuit of licenses to operate recreational and medical marijuana facilities under the branded name.
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NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The accompanying consolidated financial
statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States
of America (U.S. GAAP) under the accrual basis of accounting.
Use of Estimates
The preparation of financial statements
in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Such estimates and assumptions impact both
assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful
lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share
based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates
of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.
Making estimates requires management to
exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or
set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate
could change in the near term due to one or more future non-conforming events. Accordingly, actual results could differ significantly
from estimates.
Risks and Uncertainties
The Company’s operations are subject
to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business
failure.
The Company has experienced, and in the
future expects to continue to experience, variability in its sales and earnings. The factors expected to contribute
to this variability include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the
product, (ii) competition inherent at other locations where product is expected to be sold (iii) general economic conditions and
(iv) the related volatility of prices pertaining to the cost of sales.
Fiscal Year
The Company’s fiscal year-end is December
31.
Principles of Consolidation
The consolidated financial statements include
the accounts of Kaya Holdings, Inc. and its subsidiary, Alternative Fuels Americas, Inc. (a Florida corporation) and Marijuana
Holdings Americas, Inc. (a Florida corporation) which is a majority owned subsidiary including all wholly owned LLC’s (MJAI
Oregon 1 LLC, MJAI Oregon 2 LLC, MJAI Oregon 3 LLC, MJAI Oregon 4 LLC). All inter-company accounts and transactions have
been eliminated in consolidation.
Non-Controlling Interest
The company owns 55% of Marijuana Holdings
Americas, Inc.
Cash and Cash Equivalents
Cash and cash equivalents are carried at
cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments
with an original maturity of three months or less. The Company had no cash equivalents
Inventory
Inventory consists of finished goods purchased,
which are valued at the lower of cost or market value, with cost being determined on the first-in, first-out method. The
Company periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of
any anticipated changes in future demand. Total Value of Finished goods inventory as of December 31, 2016 is $83,997
and $80,657 as of December 31, 2015. No allowance was necessary as of December 31, 2016 and 2015.
Property and Equipment
Property and equipment is stated at cost,
less accumulated depreciation and is reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Depreciation of property and equipment is
provided utilizing the straight-line method over the estimated useful lives, ranging from 5-7 years of the respective assets.
Expenditures for maintenance and repairs are charged to expense as incurred.
Upon sale or retirement of property and
equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the
statements of operations.
Long-lived assets
The Company reviews long-lived assets and
certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its intangible assets,
management performs an analysis of the anticipated undiscounted future net cash flow of the individual assets over the remaining
amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future
cash flows.
Operating Leases
We lease our retail stores under non-cancellable
operating leases. Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions.
We recognize rent expense on a straight-line basis over the lease term, excluding contingent rent, and record the difference between
the amount charged to expense and the rent paid as a deferred rent liability.
Deferred Rent and Tenant Allowances
Deferred rent is recognized when a lease
contains fixed rent escalations. We recognize the related rent expense on a straight-line basis starting from the date of possession
and record the difference between the recognized rental expense and cash rent payable as deferred rent. Deferred rent also includes
tenant allowances received from landlords in accordance with negotiated lease terms. The tenant allowances are amortized
as a reduction to rent expense on a straight-line basis over the term of the lease starting at the date of possession.
Earnings Per Share
In accordance with ASC 260, Earnings per
Share, the Company calculates basic earnings per share by dividing net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted earnings per share are computed if the Company has net income; otherwise it would
be antidilutive, and would result from the conversion of a convertible note.
Income Taxes
The Company accounts for income taxes in
accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes.
Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and
benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers
tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning
strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the
carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax
assets based on the “more likely than not” criteria of ASC 740.
ASC 740-10 requires that the Company recognize
the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount
recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized
upon ultimate settlement with the relevant tax authority.
Fair Value of Financial Instruments
The Company measures assets and liabilities
at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents
the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction
between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an
asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair
value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels
of inputs to measure fair value:
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Level
1 – Observable inputs that reflect quoted market prices in active markets for identical
assets or liabilities.
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Level
2 - Inputs reflect quoted prices for identical assets or liabilities in markets that
are not active; quoted prices for similar assets or liabilities in active markets; inputs
other than quoted prices that are observable for the assets or liabilities; or inputs
that are derived principally from or corroborated by
observable
market data by correlation or other means.
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Level
3 – Unobservable inputs reflecting the Company’s assumptions incorporated
in valuation techniques used to determine fair value. These assumptions are required
to be consistent with market participant assumptions that are reasonably available.
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The carrying amounts of the Company’s
financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses,
certain notes payable and notes payable – related party, approximate their fair values because of the short maturity of
these instruments.
The Company accounts for its derivative
liabilities, at fair value, on a recurring basis under level 3. See Note 6.
Embedded Conversion Features
The Company evaluates embedded conversion
features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion
feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair
value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated
under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
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.
Beneficial Conversion Feature
For conventional convertible debt where
the rate of conversion is below market value, the Company records a "beneficial conversion feature" ("BCF")
and related debt discount.
When the Company records a BCF, the relative
fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional
paid in capital) and amortized to interest expense over the life of the debt.
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.
Extinguishments of Liabilities
The Company accounts for extinguishments
of liabilities in accordance with ASC 860-10 (formerly SFAS 140) “Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities”. When the conditions are met for extinguishment accounting, the liabilities are derecognized
and the gain or loss on the sale is recognized.
Stock-Based Compensation - Employees
The Company accounts for its stock based
compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement
principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant
to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the
fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which
it is probable that performance will occur.
If the Company is a newly formed corporation
or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement
memorandum (based on sales to third parties) (“PPM”), or weekly or monthly price observations would generally be more
appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between
the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar
instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions
for inputs are as follows:
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Expected term of share
options and similar instruments: The expected life of options and similar instruments represents the period of time the option
and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards
Codification the expected term of share options and similar instruments represents the period of time the options and similar
instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’
expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant
to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting
term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded;
(ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option
grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term;
or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise
data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method
to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise
data to provide a reasonable basis upon which to estimate expected term.
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Expected volatility of the entity’s
shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic
entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate
the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting
that particular index, and how it has calculated historical volatility using that index. The Company uses the average
historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments
as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations
would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations
for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent
trading in the market.
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Expected annual rate of quarterly dividends. An
entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected
dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s
current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share
options and similar instruments.
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Risk-free
rate(s). An entity that uses a method that employs different risk-free rates shall disclose
the range of risk-free rates used. The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of grant for periods within the expected
term of the share options and similar instruments.
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Generally, all forms of share-based payments,
including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value
on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest.
The expense resulting from share-based payments
is recorded in general and administrative expense in the statements of operations.
Stock-Based Compensation – Non
Employees
Equity Instruments Issued to Parties
Other Than Employees for Acquiring Goods or Services
The Company accounts for equity instruments
issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting
Standards Codification (“Sub-topic 505-50”).
Pursuant to ASC Section 505-50-30, all transactions
in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The
measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance
is complete or the date on which it is probable that performance will occur. If the Company is a newly formed corporation
or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement
memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily
price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack
of consistent trading in the market.
The fair value of share options and similar
instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions
for inputs are as follows:
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Expected term of share
options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification
the expected term of share options and similar instruments represents the period of time the options and similar instruments
are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected
exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data
to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of
the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term
of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term.
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Expected volatility of the entity’s
shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic
entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate
the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting
that particular index, and how it has calculated historical volatility using that index. The Company uses the average
historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments
as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations
would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations
for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent
trading in the market.
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Expected annual rate of quarterly dividends. An
entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected
dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s
current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share
options and similar instruments.
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Risk-free rate(s). An entity that uses
a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free
interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term
of the share options and similar instruments.
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Pursuant to ASC paragraph 505-50-25-7, if
fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods
or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the
elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A
grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether
the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity
under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances.
Pursuant to ASC paragraph 505-50-45-1, a
grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable
equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific
performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity
by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the
balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other
than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement
date for transactions that are within the scope of this Subtopic.
Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an
entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period
of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any
measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash
for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A
recognized asset, expense, or sales discount shall not be reversed if a share option and similar instrument that the counterparty
has the right to exercise expires unexercised.
Pursuant to ASC paragraph 505-50-30-S99-1,
if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity
instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are
not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should
be recorded.
Revenue Recognition
Revenue is recorded when all of the following
have occurred: (1) persuasive evidence of an arrangement exists, (2) asset is transferred to the customer without further obligation,
(3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
Cost of Sales
Cost of sales represents costs directly
related to the purchase of goods and third party testing of the Company’s products.
Related Parties
The Company follows subtopic 850-10 of the
FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the related
parties include a. affiliates of the Company; b. Entities for which investments in their equity securities would be required,
absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted
for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts
that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management of the Company;
f. other parties with which the Company may deal if one party controls or can significantly influence the management or operating
policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate
interests; and g. Other parties that can significantly influence the management or operating policies of the transacting parties
or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that
one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall
include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other
similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of
consolidated or combined financial statements is not required in those statements.
The disclosures shall include: a. the nature
of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts
were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary
to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for
each of the periods for which income statements are presented and the effects of any change in the method of establishing the
terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet
presented and, if not otherwise apparent, the terms and manner of settlement.
Contingencies
The Company follows subtopic 450-20 of the
FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the
consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one
or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings
or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material
loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent
liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are
generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. However, there is no
assurance that such matters will not materially and adversely affect the Company’s business, consolidated financial position,
and consolidated results of operations or consolidated cash flows.
Uncertain Tax Positions
The Company did not take any uncertain tax
positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for
the reporting periods ended December 31, 2016, 2015 and 2014.
Related Parties
The Company follows subtopic 850-10 of the
FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the related
parties include (i) affiliates of the Company; (ii) Entities for which investments in their equity securities would be required,
absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted
for by the equity method by the investing entity; (iii) trusts for the benefit of employees, such as pension and profit-sharing
trusts that are managed by or under the trusteeship of management; (iv) principal owners of the Company; (v) management of the
Company; (vi) other parties with which the Company may deal if one party controls or can significantly influence the management
or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its
own separate interests; and (vii) other parties that can significantly influence the management or operating policies of the transacting
parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall
include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other
similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of
consolidated or combined financial statements is not required in those statements. The disclosures shall include: (i) the nature
of the relationship(s) involved; (ii) a description of the transactions, including transactions to which no amounts or nominal
amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary
to an understanding of the effects of the transactions on the financial statements; (iii) the dollar amounts of transactions for
each of the periods for which income statements are presented and the effects of any change in the method of establishing the
terms from that used in the preceding period; and (iv) amounts due from or to related parties as of the date of each balance sheet
presented and, if not otherwise apparent, the terms and manner of settlement.
Subsequent Events
The Company follows the guidance in Section
855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate
subsequent events through the date when the financial statements are issued.
Pursuant to ASU 2010-09 of the FASB Accounting
Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed
to users, such as through filing them on EDGAR.
Recently Issued Accounting Pronouncements
In November 2015, the Financial Accounting
Standards Board issued Accounting Standards Update No. 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes” (“ASU 2015-17”) to simplify the presentation of deferred income taxes. Under this update, all
deferred income tax assets and liabilities, along with any related valuation allowance, are required to be classified as noncurrent
on the balance sheet. We do not believe the adoption of this update will have a material impact on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842).” The ASU will increase transparency and comparability among entities by recognizing lease assets and lease
liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU will require lessees to recognize
in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. The ASU is effective for annual reporting periods beginning after December 15,
2018 and interim periods within those annual periods. We do not believe the adoption of this update will have a material impact
on our financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements
to Employee Share-Based Payment Accounting, which simplifies the accounting and reporting for share-based compensation, including
the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement
of cash flows. For public business entities, the amendments in this Update are effective for annual periods beginning after December
15, 2016, and interim periods within those annual periods. We currently do not expect the adoption of this update to have a material
effect on our consolidated results of operations and financial position.
In August 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (”ASU”) No. 2016-15, “Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU includes specific guidance
to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.
The ASU is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual
periods. The Company does not expect the adoption of this ASU to have a significant impact on the consolidated financial statements.
In May 2014, the FASB has issued ASU No.
2014-09, “Revenue from Contracts with Customers (Topic 606)”. The guidance in this update supersedes the revenue
recognition requirements in Topic 605, “Revenue Recognition.” In addition, the existing requirements for
the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example,
assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill
and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue)
in this Update. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. The amendments in ASU No, 2014-09 are effective for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period. Early application is not permitted. We do not believe the adoption
of this update will have a material impact on our financial statements.
Management does not believe that any other
recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying
financial statements.
Re-Classifications
Certain amounts in 2015 were reclassified to
conform to the 2016 presentation. These reclassifications had no effect on consolidated net loss for the periods presented.
The fair value of the warrants on the date
of issuance and on each re-measurement date of those warrants classified as liabilities is estimated using the Black-Scholes option
pricing model using the following assumptions: contractual life according to the remaining terms of the warrants, no dividend yield,
weighted average risk-free interest rate of 1.93% at December 31, 2016 and weighted average volatility of 141.19%. For this
liability, the Company developed its own assumptions that do not have observable inputs or available market data to support the
fair value. This method of valuation involves using inputs such as the fair value of the Company's various classes of preferred
stock, stock price volatility, the contractual term of the warrants, risk free interest rates and dividend yields. Due to the nature
of these inputs, the valuation of the warrants is considered a Level 3 measurement. The warrant liability is recorded in other
liabilities on the Company's Consolidated Balance Sheets. The warrant liability is marked-to-market each reporting period with
the change in fair value recorded on the Consolidated Statement of Operations and Comprehensive Loss until the warrants are exercised,
expire or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument.
NOTE 4 – CONVERTIBLE DEBT
These debts have a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative
component of the obligation are initially valued and classified as a derivative liability with an offset to discounts on convertible
debt. Discounts have been amortized to interest expense over the respective term of the related note. In determining the indicated
value of the convertible note issued, . In determining the indicated value of the convertible note issued, the Company used the
Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%,
trading prices ranging from $.05 per share to $0.49 per share and a conversion price ranging from $0.03 per share to $0.045 per
share. The total derivative liabilities associated with these notes are $3,044,859 at December 31, 2016 and $2,640,030 as of December
31, 2015.
Convertible
Debt Summary
|
Footnote
|
Debt
|
Debt
Classification
|
Interest
|
Due
|
Ending
|
Number
|
Type
|
Current
|
Long
Term
|
Rate
|
Date
|
12.31.16
|
12.31.15
|
|
|
|
|
|
|
|
|
A
|
Convertible
|
X
|
|
10.0%
|
1-Jan-17
|
$ 25,000
|
$ 25,000
|
B
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
58,556
|
58,556
|
C
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
29,278
|
29,278
|
D
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
186,316
|
186,316
|
E
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
-
|
126,000
|
F
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
-
|
117,113
|
G
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
-
|
117,113
|
H
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
55,895
|
55,895
|
I
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
67,074
|
67,074
|
J
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
23,442
|
23,442
|
K
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
23,442
|
23,442
|
L
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
27,116
|
27,116
|
M
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
116,966
|
116,966
|
N
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
50,000
|
-
|
O
|
Convertible
|
X
|
|
12.0%
|
31-Mar-17
|
100,000
|
-
|
P
|
Convertible
|
X
|
|
12.0%
|
1-Jan-18
|
50,000
|
-
|
Q
|
Convertible
|
X
|
|
12.0%
|
1-Jan-18
|
50,000
|
-
|
R
|
Convertible
|
|
X
|
12.0%
|
1-Jan-18
|
200,000
|
-
|
S
|
Convertible
|
|
X
|
12.0%
|
1-Jan-18
|
50,000
|
-
|
T
|
Convertible
|
|
X
|
12.0%
|
1-Jan-19
|
250,000
|
-
|
U
|
Convertible
|
X
|
|
|
1-Jan-17
|
-
|
-
|
V
|
Convertible
|
|
X
|
12.0%
|
1-Jan-18
|
25,000
|
-
|
W
|
Convertible
|
|
X
|
12.0%
|
1-Jan-18
|
15,000
|
-
|
X
|
Convertible
|
|
X
|
12.0%
|
1-Jan-18
|
60,000
|
-
|
Y
|
Convertible
|
|
X
|
12.0%
|
1-Jan-18
|
50,000
|
-
|
Z
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
-
|
25,000
|
AA
|
Convertible
|
X
|
|
6.0%
|
1-Apr-16
|
23,500
|
23,500
|
BB
|
Convertible
|
X
|
|
10.0%
|
21-Sep-17
|
50,000
|
50,000
|
CC
|
Convertible
|
X
|
|
10.0%
|
21-Sep-17
|
100,000
|
100,000
|
DD
|
Convertible
|
X
|
|
10.0%
|
21-Sep-17
|
50,000
|
50,000
|
EE
|
Convertible
|
X
|
|
0.0%
|
31-Dec-17
|
500,000
|
500,000
|
FF
|
Convertible
|
X
|
|
0.0%
|
31-Dec-17
|
250,000
|
250,000
|
Current
Debt
|
|
|
|
|
1,736,585
|
1,021,811
|
Long-Term
Debt
|
|
|
|
|
750,000
|
950,000
|
Total
Convertible Debt
|
|
|
|
|
$ 2,486,585
|
$ 1,971,811
|
FOOTNOTES FOR CONVERTIBLE
DEBT SUMMARY TABLE
(1)
|
|
(A)
At the option
of the holder the convertible note may be converted into shares of the Company’s common stock at the lesser of $0.40 or
20% discount to the market price, as defined, of the Company’s common stock. The Company is currently in discussions with
the lender on a payment schedule. The outstanding balance of this note is convertible into a variable number of the Company’s
common stock. Therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The
derivative component of the obligation are initially valued and classified as a derivative liability with an offset to discounts
on convertible debt. Discounts have being amortized to interest expense over the respective term of the related note. In determining
the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest
rate of ranging from 0.08% to .62%, volatility ranging from 134% of 157%, trading prices ranging from $.08 per share to $0.49
per share and a conversion price ranging from $0.05 per share to $0.39 per share. The balance of the convertible note at December
31, 2016 including accrued interest and net of the discount amounted to $41,216.
|
A recap of the balance of outstanding
convertible debt at December 31, 2016 is as follows:
Principal balance
|
|
$
|
25,000
|
|
Accrued
interest
|
|
|
16,216
|
|
Balance maturing for the period
ending:
|
|
|
|
|
December 31, 2016
|
|
$
|
41,216
|
|
The Company valued the derivative liabilities
at December 31, 2016 at $24,599. The Company recognized a change in the fair value of derivative liabilities for the year ended
December 31, 2016 of $(1,969), which were charged to operations. In determining the indicated values at December 31, 2016,
since the debt is in default, the company used the maximum value these embedded options represent, with a trading price of $.2675,
and conversion prices of $0.13 per share.
|
|
|
|
|
|
(B),
(C), (D), (E), (F), (G), (H), (I), (J), (K), (L), (M)
On December
31, 2015 the Company renegotiated twelve (12) convertible and non-convertible notes payable. The Total face value of the notes
issued was $888,500 the six month notes were due on December 31, 2015 The new notes are convertible after January 1, 2016 and
are convertible into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at
the date when the debt becomes convertible was $0.087. The debt was issued is a result of a financing transaction and contain
a beneficial conversion feature. As of December 31, 2015, the balance was $947,311. The beneficial conversion feature in the amount
of $947,311 will be expensed as interest over the term of the note (one year). All these amended debts have a price adjustment
provision. Therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The
derivative component of the obligation are initially valued and classified as a derivative liability with an offset to discounts
on convertible debt. Discounts have being amortized to interest expense over the respective term of the related note. In determining
the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest
rate of ranging from 0.05% to 1.06%, volatility ranging from 153% of 221%, trading prices ranging from $.078 per share to $0.10
per share and a conversion price ranging from $0.03 per share to $0.04 per share. The total derivative liabilities associated
with these notes are $2,640,030 at December 31, 2015 and $5,238,941 at December 31, 2016, respectively.
|
(N)
On January 8, 2016 the Company received
$50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2017. The derivative component of the obligation is initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading
prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.03 per share.
(O)
On March 31, 2016 the Company received
$100,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in March of 2017. The derivative component of the obligation is initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading
prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.03 per share.
(P)
On July 13, 2016 the Company received
$50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2018. The derivative component of the obligation is initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading
prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.03 per share.
(Q)
On August 30, 2016 the Company received
$50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2018. In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134%
of 157%, trading prices ranging from $.05 per share to $0.49 per share a conversion price of $0.03 per share.
(R)
On November 3, 2016 the Company received
$200,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2018 In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134%
of 157%, trading prices ranging from $.05 per share to $0.49 per share a conversion price of $0.03 per share.
(S)
On December 1, 2016 the Company received
$50,000 from the issuance of convertible debt. Interest is stated at 10% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2018 In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134%
of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.03 per share.
(T)
On December 30, 2016 the Company received
$250,000 from the issuance of convertible debt. Interest is stated at 10% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2019 In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134%
of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.03 per share.
(U)
On March 13, 2016 the Company received
$25,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2017 In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134%
of 157%, trading prices ranging from $.05 per share to $09. per share and a conversion price of $0.03 per share. The Note and Interest
was converted to common shares on September 13, 2016, leaving a balance of zero due.
(V)
On September 13, 2016 the Company received
$25,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2017. In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134%
of 157%, trading prices ranging from $.05 per share to $0.49 per share a conversion price of $0.03 per share.
(W)
On October 16, 2016 the Company received
$15,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2019 In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134%
of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.04 per share.
(X)
On November 18, 2016 the Company received
$60,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2019 In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134%
of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.04 per share.
(Y)
On December 7, 2016 the Company received
$50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2019 In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134%
of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.04 per share.
(Z)
On October 1, 2015, the Company renegotiated
a convertible notes payable in the amount of $25,000. The original note was issued March 13, 2015 and due September 30, 2015, with
conversion rate of $0.06 per share. The new notes has extended the due date to January 1, 2017 and are convertible into the Company’s
common stock at a conversion rate of $0.045 per share.
(AA)
On July 27, 2015 the company issued a note
payable for $28,500 The Company agrees to pay to the Holder $28,500 plus accrued interest pursuant to the following schedule:
An initial payment of $5,000 is due no later
than December 1, 2015. This amount represents the balance of the security deposit due for the lease of Commercial/Manufacturing
Space occupied by MJAI Oregon 1, LLC, a majority-owned subsidiary of the company.
The note is convertible after March 31, 2016
and is convertible into the Company’s common stock at a conversion rate of $0.10 per share or 20% discount to the thirty
day moving average stock price.
A final payment of $42,700 principal, plus
any accrued Interest at 10% is due no later than April 1, 2017. This amount represents the balance of accrued rent due for the
initial monthly lease payments from August 1, 2015 through December 31, 2016
(BB)
On September 23, 2015 the Company received
a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate amount of $50,000 with interest
accruing at 10%. The note is convertible after September 23, 2017and is convertible into the Company’s common stock at a
conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078. The
debt issued is a result of a financing transaction and contain a beneficial conversion feature.
(CC)
On September 23, 2015 the Company received
a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest
accruing at 10%. The note is convertible after September 23, 2017 and is convertible into the Company’s common stock at a
conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078. The
debt issued is a result of a financing transaction and contain a beneficial conversion feature.
(DD)
On September 23, 2015 the Company received
a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate amount of $50,000 with interest
accruing at 10%. The note is convertible after September 23, 2017 and is convertible into the Company’s common stock at a
conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078. The
debt issued is a result of a financing transaction and contain a beneficial conversion feature.
(EE) and (FF)
At December 31, 2013 the Company
was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100 principal and $103,895 accrued
interest, with interest accruing at 10%. On January 2, 2014 the Company entered into a Debt Modification Agreement whereby the
total amount of the debt was reduced to $750,000 and there is no accrued interest or principal due until December 31, 2017. $500,000
of the debt is convertible into 50,000 Series C Convertible Preferred Shares of AFAI, which if converted are subject to resale
restrictions through December 31, 2017. The two-year note in the aggregate amount of $500,000 is convertible into the Company’s
preferred stock at a conversion rate of $10.00 per share of preferred. At a conversion rate of 433.9297 common shares to 1 preferred
share, this would result in a total of 21,696,485 common shares issued if all debt was converted. The market value of the stock
at the date of issuance of the debt was $0.04. The debt issued is a result of a financing transaction and contain a beneficial
conversion feature valued at $367,859 to be amortized over the life of the debt. The net balance reflected on the balance sheet
is $298,908. The remaining $250,000 is not convertible. The company has imputed interest on both the convertible debt and the non-convertible
debt. The company used an interest rate of 12% for calculation purposes. The net balance of $250,000 of the non-convertible portion
is reflected on the balance sheet. This note was modified and restated as of June 20, 2015, see Footnote 10.
(GG), (HH), (II), (JJ)
NOTE 5 - NON-CONVERTIBLE DEBT
A-Non Related Party
|
|
December 31,
2016
|
|
December 31,
2015
|
Note 1
|
|
|
68,556
|
|
|
|
95,422
|
|
Note 2
|
|
|
68,556
|
|
|
|
95,422
|
|
Note 3
|
|
|
65,262
|
|
|
|
-0-
|
|
Note 4
|
|
|
65,262
|
|
|
|
-0-
|
|
Note 5
|
|
|
31,661
|
|
|
|
-0-
|
|
Total Non-Convertible Debt
|
|
|
299,297
|
|
|
|
190,844
|
|
On September 8, 2015 the Company received
a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest
accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $100,000 10% promissory note due September 9, 2017 has been
fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017.
On September 9, 2015 the Company received
a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest
accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $100,000 10% promissory note due September 9, 2017 has been
fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017.
On May 17, 2016 the Company received
a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest
accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 17 2018 has been fully
repaid or the start of the Acceleration Period as defined in “The Note” or May 17, 2018.
On May 9, 2016 the Company received a total
of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing
at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable shares of
the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years
commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9, 2018 has been fully repaid or
the start of the Acceleration Period as defined in “The Note” or May 9, 2018
On September 16, 2016 the Company received
a total of $31,661 to be used for equipment in exchange for a two year note in the aggregate amount of $31,661 with interest accruing
at 18% per year and a 10% loan fee. The note is due September of 2018 with monthly payments of principal and interest.
B-Related
Party
|
|
|
|
|
|
|
|
|
Loan payable - Stockholder, 0%, Due December 31, 2017 (1)
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
(1)
|
|
At December 31, 2013 the Company was indebted to an affiliated shareholder of the Company for $840,955, which
consisted of $737,100 principal and $103,895 accrued interest, with interest accruing at 10%. On January 2, 2014 the Company entered
into a Debt Modification Agreement whereby the total amount of the debt was reduced to $750,000 and there is no accrued interest
or principal due until December 31, 2017. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares
of AFAI, which if converted are subject to resale restrictions through December 31, 2015. The two-year note in the aggregate amount
of $500,000 is convertible into the Company’s preferred stock at a conversion rate of $10.00 per share of preferred. At a
conversion rate of 433.9297 common shares to 1 preferred share, this would result in a total of 21,696,485 common shares issued
if all debt was converted. The market value of the stock at the date of issuance of the debt was $0.04. The debt issued is a result
of a financing transaction and contain a beneficial conversion feature valued at $500,000 to be amortized over the life of the
debt. Total amortization for the quarter ended December 31, 2016 was $201,092. As of December 31, 2016, the balance of the debt
was $500,000. The net balance reflected on the balance sheet is $298,908. The remaining $250,000 is not convertible. The company
has imputed interest on both the convertible debt and the non-convertible debt. The company used an interest rate of 12% for calculation
purposes. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet.
|
NOTE 6 – STOCKHOLDERS’ EQUITY
The Company has 10,000,000 shares of preferred
stock authorized with a par value of $0.001, of which 100,000 shares have been designated as Series C convertible preferred stock
(“Series C” or “Series C preferred stock”). The Board has the authority to issue the shares in one or more
series and to fix the designations, preferences, powers and other rights, as it deems appropriate.
Each share of Series C has 433.9297 votes
on any matters submitted to a vote of the stockholders of the Company and is entitled to dividends equal to the dividends of 433.9297
shares of common stock. Each share of Series C preferred stock is convertible at any time at the option of the holder into 433.9297
shares of common stock.
The Company has 250,000,000 shares of common
stock authorized with a par value of $0.001. Each share of common stock has one vote per share for the election of directors and
all other items submitted to a vote of stockholders. The common stock does not have cumulative voting rights, preemptive, redemption
or conversion rights.
In January 2014 the Company authorized the
issuance of 2,400,000 shares of common stock to consultants. The shares were valued at $96,000, the fair value of the stock at
the time. Also during January, 2014 Marijuana Holdings Americas, Inc. agreed to issue 55 shares of Convertible Preferred shares
to the Company, and 15 shares each to the Company's president and a company controlled by a shareholder. These shares are convertible
to a number of shares which once issued will provide the shareholder an ownership interest in the outstanding common shares of
55%, 15% and 15%, for the Company, its president and a shareholder, respectively. Although none of the preferred shares have been
converted at the date of this filing, the Company maintains effective majority control over the subsidiary.
At the end of December 31, 2014 the company
had authorized the issuance of 1,500,000 shares of common stock to be issued. 250,000 shares for cash received of $25,000 and
the remaining 1,250,000 shares to be issued for consulting services. The consulting shares were approved to be issued on January
27, 2015 for the period ended December 31, 2014 and we valued at $0.07 per share for a total value of services rendered of $87,500.
Total Stock subscriptions payable of $112,500 as of December 31, 2014
During January 2015 the company issued 8,200,000
shares of common stock valued in a range of $0.05 to $0.07 per share. Total cash received was $114,000. Total interest paid with
shares was $1,500. Total value of debt paid was $30,000. Total value of assets acquired was $17,500. Total consulting services
were $444,500.
During the quarter ended September 30, 2015
the Company issued 800,000 shares of common stock valued in a range of $0.05 to $0.09 per share Total value of assets acquired
was $27,000. Total consulting services were $37,000
During the quarter ended September 30, 2015
the Company issued 100,000 shares of common stock valued at $0.08 as payment for interest of $8,000
On August 12, 2015 the Company received
$20,000 from the sale of 400,000 restricted common shares of stock to an accredited investor that is a current shareholder of
the company.
On August 15, 2015 the Company received
$20,000 from the sale of 400,000 restricted common shares of stock to an accredited investor that is a current shareholder of
the company.
On April 27, 2015 the Company received a
total of $30,000 from an accredited investor in exchange for a six month note in the aggregate amount of $30,000. The note is
convertible after April 27, 2015 and is convertible into the Company’s common stock at a conversion rate of $0.05 per share.
On September 23, 2015 the balance was converted into 600,000 shares of common stock... The company issued 150,000 shares of common
stock as interest. The value of the shares as of the date of issuance as $0.08.
On September 10, 2015 the Company received
$25,000 from the sale of 416,666 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current
shareholder of the company.
On September 29, 2015 the Company received
$5,000 from the sale of 100,000 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor.
On October 13, 2015 the Company received
$100,000 from the sale of 2,222,222 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a
current shareholder of the company.
In January of 2016 the Company received
$100,000 from the sale of 2,222,222 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a
current shareholder of the company.
In February of 2016 the Company issued 4,200,000
restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company.
As a conversion of $126,000 Note Payable due January 1, 2017.
In February of 2016 the Company issued
|
·
|
An
aggregate of 200,000 shares to our two non-employee directors (100,000 shares each) for
services as directors;
|
|
·
|
An
aggregate of 2,435,000 shares to consultants for services rendered.
|
In April of 2016 the Company issued 150,000
restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company.
As a payment of interest on a Note Payable due January 1, 2017.
In April of 2016 the Company issued 1,200,249
common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company. As a conversion
of preferred stock of 2,766 shares. On the same date the shareholder returned 2,454 preferred shares to be cancelled.
In June of 2016 the Company authorized the
issuance of 100,000 restricted common shares of Kaya Holdings, Inc. stock as payment of consulting fees. The shares were valued
at $7,610.
In September of 2016 the Company issued 2,300,000
common shares of Kaya Holdings Inc. stock consisting of 2,000,000 shares to its President and Chief Executive Officer, 200,000
shares for director fees and 100,000 shares to a consultant for director fees. The shares were valued at $161,000.
In September of 2016 the Company authorized
the issuance of 6,825,000 shares of common shares of Kaya Holdings Inc. for employees compensation, legal and consulting fees.
The shares were valued at $477,750
In September of 2016 the Company issued 4,380,000 restricted common shares of
Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company. As a conversion of $131,400
Note Payable due January 1, 2017.
In September of 2016 the Company issued
1,486,111 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the
company. As a conversion of $50,000 Note Payable due January 1, 2017.
In October of 2016, the Company received $10,000
from the issuance of 200,000 of common shares
NOTE 7 - DERIVATIVE LIABILITIES
The Company identified conversion features
embedded within convertible debt and issued in 2013 and subsequent periods. The Company has determined that the features associated
with the embedded conversion option, in the form a ratchet provision, should be accounted for at fair value, as a derivative liability,
as the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion
transactions.
Additionally, due to a recognition of tainting,
due to shares not being held in reserve in 2014 all convertible notes are considered to have a derivative liability, therefore
the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.06%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion
price ranging from $0.03 per share to $0.045 per share.
As a result of the application of ASC No.
815, the fair value of the ratchet feature related to convertible debt and warrants is summarized as follow:
Balance as of December 31, 2015
|
|
$
|
4,594,411
|
|
|
|
|
|
|
Change in Derivative Values
|
|
|
14,889,353
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
19,483,763
|
|
The fair value at the commitment and re-measurement
dates for the Company’s derivative liabilities were based upon the following management assumptions as December 31, 2016:
The Company recorded the debt discount to
the extent of the gross proceeds raised, and expensed immediately the remaining fair value of the derivative liability, as it
exceeded the gross proceeds of the note.
The Company recorded a derivative expense
of $(1,148,758) and $-0- for the years ended December 31, 2016 and 2015, respectively
The Company recorded a change in the value
of embedded derivative liabilities income/(expense) of $ (14,302,811) and $(4,438,281) for the years ended December 31, 2016 and
2015, respectively
NOTE 8 – LEASES
The Company is obligated under operating
lease agreements for its corporate office in Fort Lauderdale, which expired in March 2016 and the lease is currently month to
month. The Company signed 2 new leases that started in November 2016 for retail locations. We currently lease four retail locations.
Minimum future lease commitments are:
|
Year
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
153,864
|
|
|
2018
|
|
|
|
261,941
|
|
|
2019
|
|
|
|
166,191
|
|
|
2020
|
|
|
|
180,305
|
|
|
2021
|
|
|
|
121,329
|
|
Rent expense was $221,308 for the year ended
December 31, 2016, and $129,408 for the year ended December 31, 2015, respectively.
In April, 2014 MJAI, through its wholly
owned subsidiary, MJAI Oregon 1, LLC (MJAI Oregon 1), entered into a lease for space to operate their first medical marijuana
dispensary in Portland, Oregon. The five-year lease requires MJAI Oregon 1 to pay a monthly rental fee of $2,255 the first year
with annual lease payment escalations of 4% and a security deposit of $12,000. The dispensary is located are located at 1719 SE
Hawthorne Boulevard, Portland, Oregon and will operate under the proprietary brand name of “Kaya Shack “TM.
On June 1, 2015 through its wholly owned
subsidiary, MJAI Oregon 2, LLC (MJAI Oregon 2), entered into a lease for space to operate a dispensary in Salem, Oregon. The five-year
lease requires MJAI Oregon 2 to pay a monthly rental fee of $3,584 the first year with annual lease payment escalations of 1%
and a security deposit of $7,106., The Salem, Oregon location operates under the proprietary brand name of “Kaya Shack “TM.
On August 1, 2015 the Company announced
that it had signed a lease for a 6,000 square foot facility in central Portland to serve as the Company's expanded Marijuana and
Cannabis Manufacturing Complex and West Coast Operations Base. This lease was terminated on December 31, 2016.
On November 1, 2016 MJAI, through its wholly
owned subsidiary, MJAI Oregon 3, LLC (MJAI Oregon 3) Oregon company, entered into a lease for space to operate their third recreational
and medical marijuana dispensary in Oregon. The five-year lease requires MJAI Oregon 3 to pay a monthly rental fee of $4,367 the
first year with annual lease payment escalations of 3% and a security deposit of $5,261. The Salem, Oregon location operates under
the proprietary brand name of “Kaya Shack “TM.
On November 1, 2016 MJAI, through its wholly
owned subsidiary, MJAI Oregon 4, LLC (MJAI Oregon 4) Oregon company, entered into a lease for space to operate their forth recreational
and medical marijuana dispensary in Oregon. The five-year lease requires MJAI Oregon 4 to pay a monthly rental fee of $4,617 the
first year with annual lease payment escalations of 3% and a security deposit of $5,770. The Salem, Oregon location operates under
the proprietary brand name of “Kaya Shack “TM.
NOTE 9 – RELATED PARTY TRANSACTIONS
The Company has agreements covering certain
of its management personnel. Such agreements provide for minimum compensation levels and are subject to annual adjustment.
The Company’s Chief Executive Officer
holds 50,000 shares of its Series C preferred stock. These shares can be converted into 21,696,485 shares of the Company’s
common stock at his option.
The Company’s largest stockholder
has from time to time provided unsecured loans to the Company, See Note 4 for the detail of the convertible and non-convertible
debt with a face value of $750,000
NOTE 10 – DEBT
EXTINGUISHMENT
At June 19, 2015 the Company was indebted
on convertible debt to an non-affiliated shareholder of the Company for $484,000, which consisted of $445,000 principal and $38,000
accrued interest, with interest accruing at 10% convertible at $.04 per share. On June 20, 2015 the Company entered into a Debt
Modification Agreement whereby the total amount of the debt was not changed. However the interest rate was increased to 12% and
the debt conversion rate was reduced from $.04 per share to $.03 per share there is no accrued interest or principal due until
December 31, 2015. The market value of the stock at the date of issuance of the debt was $0.089 per share. As a result, the Company
determined a loss on debt extinguishment of $398,275 was recorded to the statement of operations pertaining to a third party as
a loss to the statement of operations the Company accounted for this loss on extinguishment as a capital transaction and recorded
this amount as a reduction of debt discount.
At June 19, 2015 the Company was indebted
on non-convertible debt to an non-affiliated shareholder of the Company for $269,500, which consisted of $240,000 principal and
$29,500 accrued interest, with interest accruing at 10%. On June 20, 2015 the Company entered into a Debt Modification Agreement
whereby the total amount of the debt was not changed. However, the interest rate was increased to 12% and a convertible feature
was added to the debt with conversion rate of $.03 per share there is no accrued interest or principal due until December 31,
2015. The market value of the stock at the date of issuance of the debt was $0.089 per share. As a result, the Company determined
a loss on debt extinguishment of $531,983 was recorded to the statement of operations pertaining to a third party as a loss to
the statement of operations the Company accounted for this loss on extinguishment as a capital transaction and recorded this amount
as a reduction of debt discount.
NOTE 11 – STOCK OPTION PLAN
In 2011 the Alternative Fuels America, Inc.
2011 Incentive Stock Plan (the “Plan”), which provides for equity incentives to be granted to the Company’s
employees, executive officers or directors or to key advisers or consultants. Equity incentives may be in the form of stock options
with an exercise price not less than the fair market value of the underlying shares as determined pursuant to the 2011 Incentive
Stock Plan, restricted stock awards, other stock based awards, or any combination of the foregoing. The 2011 Incentive Stock Plan
is administered by the board of directors.
NOTE 12 – INCOME TAXES
The Company has a deferred tax asset as
shown in the following:
|
|
2016
|
|
2015
|
|
|
|
|
|
Tax loss carryforward
|
|
$
|
2,100,000
|
|
|
$
|
2,616,000
|
|
Valuation
allowance
|
|
|
(2,100,000
|
)
|
|
|
(2,616,000
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
A valuation allowance has been recognized
to offset the deferred tax assets because realization of such assets is uncertain.
The Company has net operating loss carry
forwards of approximately $6,567,000 at December 31, 2016 that expire beginning in 2026. However, utilization of these losses
may be limited pursuant to Section 382 of the Internal Revenue Code due to a recapitalization in 2007 and subsequent stock issuances.
NOTE 13 – WARRANTS
On September 8, 2015 the Company received
a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest
accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $100K, 10% promissory note due September 9, 2017 has been fully
repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017.
On September 9, 2015 the Company received
a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest
accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $100K, 10% promissory note due September 9, 2017 has been fully
repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017.
On May 9, 2016 the Company received a total
of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing
at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable shares of
the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years
commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9, 2018 has been fully repaid or
the start of the Acceleration Period as defined in “The Note” or May 9, 2018.
On May 17, 2016 the Company received a total
of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing
at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable shares of
the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years
commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 17 2018 has been fully repaid or
the start of the Acceleration Period as defined in “The Note” or May 17, 2018.
Warrants
issued to Non-Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Warrants
|
|
|
|
Exercise
|
|
|
|
Contract
|
|
|
|
|
Issued
|
|
|
|
Price
|
|
|
|
Terms
Years
|
|
Balance as of
December 31, 2015
|
|
|
6,323,166
|
|
|
|
0.0316297
|
|
|
|
1.75
|
|
Granted
|
|
|
4,742,374
|
|
|
|
0.0316297
|
|
|
|
2.00
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance
as of December 31, 2016
|
|
|
11,065,540
|
|
|
|
0.0316297
|
|
|
|
1.79
|
|
NOTE 14 – COMMITMENTS AND CONTINGENCIES
The Company is,
from time to time involved in litigation in the normal course of business. While it is not possible at this time to establish
the ultimate amount of liability with respect to contingent liabilities, including those related to legal proceedings, management
is of the opinion that the aggregate amount of any such liabilities, for which provision has not been made, will not have a material
adverse effect on the Company’s financial position.
NOTE 15 – SUBSEQUENT
EVENTS
During January and February of 2017 the company
issued $1,850,000 in convertible debt due on January 1, 2019. The notes carry an interest rate of 8% annual interest rate and are
convertible at an average price of approximately $.08 per share.
On January 20, 2017, we entered into an agreement
whereby the City of Portland agreed to license our Portland Kaya Shack™ retail outlet. Since that time, we completed all
OLCC Licensing requirements, on March 29, 2017 passed our retail license inspection and expect to receive our OLCC recreational
license for the Portland Kaya Shack™ outlet by not later than April 30, 2017, at which time, we will be able to commence
legal recreational marijuana sales at that location.
In early February of 2017, the Company began
the process of filing applications to add Home Delivery Service for three of its Kaya Shack™ retail marijuana stores at the
advice of one of their OLCC examiners. As of the date of this Annual Report, the Company has received approvals from the OLCC to
add Home Delivery to their two currently OLCC licensed locations, expects to receive approval for Home Delivery at its third location
in conjunction with the anticipated issuance of its OLCC location license and is also applying for Home Delivery licensing at its
fourth retail outlet, which is currently under construction.
On February 27, 2017 the Board of Directors
and a majority of the shareholders of Kaya Holdings, Inc. voted and approved an increase in the authorized common shares to 500,000,000.
On March 21, 2017, the Company announced that it had secured the
OLCC recreational retailer marijuana license and had opened its third retail outlet, a 2,600 square foot Kaya Shack™ Marijuana
Superstore in North Salem, Oregon.
On March 21, 2017, KAYS announced that it was
in the process of expanding its grow and manufacturing operations and had retained a realtor to assist in identifying a suitable
3060 acre tract of land in Oregon which would permit KAYS to expand its grow operations to the maximum space currently allowed
by law utilizing a mix of indoor and greenhouse cultivation. KAYS believes that the acquisition of a property will position the
Company for future development, including increased Marijuana Canopy production, development of marijuana processing facilities
and other cannabis related endeavors (subject to local zoning restrictions or liberalization of restrictions). As part of this
expansion, KAYS ceased operations of its Portland grow facility at the end of March 2017, arranged to maintain its genetics library
of over 30 strains of cannabis at an OHA licensed medical grow site and contracted with farmers to meet demand until the new facility
is secured, built and fully operational.
On April 11, 2017 the Company took delivery
of its first four Fiat 500 cars to begin building their Kaya Car™ Home Delivery Service fleet. The cars are presently being
customized with distinctive Kaya Shack™ vehicle wrapping featuring the Company’s branding logos and colors, and the
Company is developing the Kaya Shack™ Delivery App for use by its customers to order “Fast, Free Delivery” of
the complete line of both medical and recreational grade Kaya Shack™ cannabis products. The Company intends to initiate its
Kaya Car™ Home Delivery Service within the next 30-60 days, contemporaneously with a grand opening celebration for all four
then OLCCLicensed Kaya Shack™ retail marijuana stores and to commence the to move to the next stage of
branding and retail development.