NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION
BUSINESS
Agritek Holdings, Inc. (the “Company”
or “Agritek”), formerly known as Mediswipe, Inc.,
and its wholly owned subsidiary, Agritek
Venture Holdings, Inc., acquires and leases real estate to licensed marijuana operators, including providing complete turnkey
growing space and related facilities to licensed marijuana growers and dispensary owners. Additionally, the Company offers
a variety of services and product lines to the medicinal marijuana sector including the distribution of hemp based nutritional
products, a line of innovative solutions for electronically processing merchant transactions and recently, the Company began importing
and distributing vaporizers and e-cigarettes under the Company's Mont Blunt brand.
The Company does not grow, harvest,
distribute or sell marijuana or any substances that violate the laws of the United States of America.
On March
18, 2014,
the Company completed the purchase of 80 acres zoned for agricultural use in Pueblo County, Colorado. The
Company plans to lease individual parcels of the 80 acre parcel to fully-licensed and compliant growers and dispensaries within
the regulated medicinal and recreational market of Colorado. The Company will receive rents and management fees for providing infrastructure,
water, electricity, equipment leasing and security services. The Company is presently working on its first agreements for tenants
to move into the facility during 2014.
On April 28, 2014,
the Company
executed and closed a lease agreement for 20 acres of an agricultural farming facility located
in South Florida following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing
low grade marijuana specifically for the use of treating epilepsy and cancer patients. Pursuant to the lease agreement, through
November 1, 2014, the Company has an option to purchase the land for $1,100,000 and maintains a first right of refusal to purchase
the property for three years.
The Company is continuing
its focus to acquire real property through purchase or lease, and subsequently lease the real estate to licensed marijuana and/or
dispensary owners (see Subsequent Events).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION AND PRINCIPLES
OF CONSOLIDATION
The accompanying condensed consolidated
financial statements have been prepared by the Company without audit and
include
the consolidated accounts of Agritek Holdings, Inc. and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
In the opinion of management, all adjustments necessary to present the financial
position, results of operations and cash flows for the stated periods have been made. Except as described below, these adjustments
consist only of normal and recurring adjustments. Certain information and note disclosures normally included in the Company’s
annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America
have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with a reading
of the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report
filed with the Securities and Exchange Commission (SEC) on April 1, 2014. Interim results of operations for the three and six months
ended June 30, 2014 are not necessarily indicative of future results for the full year. Certain amounts from the 2013 period have
been reclassified to conform to the presentation used in the current period.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid
investments with an original term of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company records accounts receivable
from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision
for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectability
is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables,
based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information
available to make its evaluations, this estimate is susceptible to significant change in the near term. As of June 30, 2014 and
December 31, 2013, based on the above criteria, the Company recorded an allowance for doubtful accounts of $26,754 and expense
for the year ended December 31, 2013.
INVENTORY
Inventory is valued at the lower of cost or
market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving
inventory is made based on management analysis or inventory levels and future sales forecasts.
DEFERRED FINANCING COSTS
The costs related to the issuance of debt are
capitalized and amortized to interest expense using the straight-line method through the maturities of the related debt.
PROPERTY AND EQUIPMENT
Property and equipment are
stated at cost, and except for land, depreciation is provided by use of accelerated and straight-line methods over the estimated
useful lives of the assets. The Company reviews property and equipment for potential impairment whenever events or changes in circumstances
indicate that the carrying amounts of assets may not be recoverable. The estimated useful lives of property and equipment are as
follows:
Office equipment, furniture and vehicles
|
5 years
|
Computer hardware and software
|
3 years
|
REVENUE RECOGNITION
The Company recognizes revenue in accordance
with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are met: (1) persuasive evidence of an arrangement
exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably
assured. The Company recognizes revenue during the month in which products are shipped or commissions are earned.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value measurements are determined
under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair
value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of
the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant
assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be
received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction
between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant
information generated by market transactions involving identical or comparable assets (“market approach”). The Company
also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with
normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted
quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level
3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair
value measurement.
The three hierarchy levels are defined as follows:
Level 1 – Quoted
prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted
prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in
active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices
or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied
to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent
with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed
in the credit default swap market.
The Company's financial instruments
consist primarily of cash, accounts receivable, notes receivable, accounts payable and accrued expenses, note payable and convertible
debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term
maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative
of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.
INCOME TAXES
The Company accounts for income taxes
in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future
tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition
threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on
recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.
Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed,
nor paid, any interest or penalties.
Uncertain tax positions are measured
and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may
be recognized or continue to be recognized. The Company’s tax years subsequent to 2005 remain subject to examination by federal
and state tax jurisdictions.
EARNINGS (LOSS) PER SHARE
Earnings
(loss) per share are computed in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed
by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average
number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income
by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if
any, outstanding during the period. As of June 30, 2014 there were warrants to purchase 300,000 shares of common stock, the Company’s
outstanding convertible debt is convertible into 3,018,182 shares of common stock and
750,000
shares of Class B convertible preferred stock is convertible into 31,551,226 shares of common stock. These amounts are not included
in the computation of dilutive loss per share because their impact is antidilutive.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock awards
issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier
of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the
date at which the counterparty's performance is complete. Stock awards granted to non-employees are valued at their respective
measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in
which services are provided.
For the three and six months ended June
30, 2014, the Company recorded stock and warrant based compensation of $25,000 and $50,000, respectively. For the three and six
months ended June 30, 2013, the Company recorded $3,116,681 and $3,221,015, respectively of stock and warrant based compensation
(See Notes 7 and 8).
USE OF ESTIMATES
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period.
Actual results could differ from those estimates.
ADVERTISING
The Company records
advertising costs as incurred. For the three and six months ended June 30, 2014, advertising expense was $27,703 and $28,703,
respectively and $5,227 and $8,871 for the three and six months ended June, 30 2013, respectively.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting standards that have been
issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption.
NOTE 4 - RECLASSIFICATIONS
Certain prior period balances have been
reclassified to conform to the current period's financial statement presentation. These reclassifications had no impact on previously
reported results of operations or stockholders' deficiency.
NOTE 5 – SALES CONCENTRATION
AND CONCENTRATION OF CREDIT RISK
CASH
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash. The Company maintains cash balances at one financial institution,
which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insured institution insures
up to $250,000 on account balances. As of June 30, 2014, the Company’s cash balance exceeded the insured amount by $59,802.
The company maintains its’ cash balance at a large financial institution and has not experienced any losses in such accounts.
SALES
For the three and six months ended June
30, 2013 and 2014, three (3) customers each accounted for more than 10% of our business, respectively, as follows:
|
|
2013
|
|
2014
|
|
|
Customer
|
|
Sales % Three
Months Ended
June 30,
|
|
Sales % Six
Months Ended
June 30,
|
|
Sales % Three
Months Ended
June 30,
|
|
Sales % Six
Months Ended
June 30,
|
|
Accounts
Receivable
Balance as of
June 30, 2014
|
|
A
|
|
|
|
—
|
|
|
|
58
|
%
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
B
|
|
|
|
40
|
%
|
|
|
17
|
%
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
C
|
|
|
|
27
|
%
|
|
|
11
|
%
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
D
|
|
|
|
23
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
E
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46
|
%
|
|
|
42
|
%
|
|
$
|
230
|
|
|
F
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
%
|
|
|
18
|
%
|
|
$
|
1,000
|
|
|
G
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
%
|
|
|
—
|
|
|
$
|
450
|
|
|
H
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18
|
%
|
|
$
|
4,701
|
|
PURCHASES
For the three
and six months ended June 30, 2014, 100% of the Company’s purchases were from
one
vendor
related to the purchase of our tobacco product line. The balance due this vendor was $4,494 as of June 30, 2014.
For the three
and six months ended June 30, 2013, 100% of the Company’s purchases were from one vendor related to the purchase of
Chillo
and C+Swiss drinks.
NOTE 6 – CONVERTIBLE DEBT AND
NOTE PAYABLE
Convertible Debt
On January 2, 2013, February 11, 2013,
April 10, 2013, July 29, 2013 and October 16, 2013, the Company entered convertible note agreements (the “2013 Notes”)
with Asher Enterprises, Inc. (“Asher”) for $37,500, $27,500, $27,500, $65,000 and $70,000, respectively. We received
net proceeds of $214,000 from the 2013 Notes after debt issuance costs of $13,500 paid for lender legal fees. These debt issuance
costs have been amortized over the earlier of the terms of the Note or any redemptions and accordingly $1,178
and
$4,511 has been expensed as debt issuance costs (included in interest expense) for the
three and six months ended June 30, 2014. There are no remaining debt issuance costs to be amortized.
Among other terms the 2013 Notes were
due nine months from their issuance date, bearing interest at 8% per annum, payable in cash or shares at a conversion price (the
“Conversion Price”) for each share of common stock equal to 50% of the average of the lowest three trading prices (as
defined in the note agreements) per share of the Company’s common stock for the ten trading days immediately preceding the
date of conversion. Upon the occurrence of an event of default, as defined in the 2013 Notes, the Company was required to pay interest
at 22% per annum and the holders could at their option declare a Note, together with accrued and unpaid interest, to be immediately
due and payable. In addition, the 2013 Notes provided for adjustments for dividends payable other than in shares of common stock,
for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant
to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.
The Company determined that the conversion
feature of the 2013 Notes represented an embedded derivative since the Notes were convertible into a variable number of shares
upon conversion. Accordingly, the 2013 Notes were not considered to be conventional debt under EITF 00-19 and the embedded conversion
feature being bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative
instruments being recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount
to each Note. Such discount was being amortized from the date of issuance to the maturity dates of the Notes. The change in the
fair value of the liability for derivative contracts will be recorded in other income or expenses in the consolidated statements
of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The beneficial conversion
feature included in the 2013 Notes resulted in an initial debt discount of $227,500 and an initial loss on the valuation of derivative
liabilities of $35,029 for a derivative liability initial balance of $262,529.
During the six months ended June 30,
2014, the Company issued 760,375 shares of common stock in satisfaction of $135,000 of the 2013 Notes and $5,400 of accrued and
unpaid interest. The shares were issued at approximately $0.18465 per share. The fair value of the derivative liability on the
dates of conversion totaling $175,575 was reclassified to paid-in-capital during the six months ended June 30, 2014.
As of June 30, 2014, the 2013 Asher Notes have been fully satisfied.
On May 20, 2013, the Company entered into
a Securities Purchase Agreement with Typenex Co-Investment, LLC ("Typenex"), for the sale of an 8% convertible note
in the principal amount of up to $667,500 (which includes Typenex legal expenses in the amount of $7,500 and a $60,000 original
issue discount) (the “2013 Company Note”) for a purchase price of $600,000, consisting of $100,000 paid in cash at
closing on May 21, 2013 (the “Initial Cash Purchase Price”) and five secured promissory notes, aggregating $500,000
(the “Investor Notes”), bearing interest at the rate of 8% per annum. Three of the Investor Notes aggregating $300,000
were funded in 2013 and the two remaining Investor Notes of $100,000 each were funded in January 2014.
The 2013 Company Note included
interest at the rate of 8% per annum, due in four equal monthly installments (the “Redemption Price”) beginning on
the six month anniversary of the initial funding. All interest and principal was to be repaid on February 21, 2014. The 2013 Company
Note was convertible into common stock, at Typenex’s option, at a price of $0.055 per share. In the event the Company elected
to prepay all or any portion of the 2013 Company Note, the Company was required to pay to Typenex an amount in cash equal to 125%
multiplied by the sum of all principal, interest and any other amounts owing. Beginning on the date that is six (6) months after
the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid to the Company (the “Initial
Installment Date”), and on each applicable Installment Date thereafter, the Company was to pay the Holder of this Note the
applicable Installment Amount due on such date. Payments of the Installment Amount may be made (a) in cash (a “Company Redemption”),
(b) by converting such Installment Amount into shares of Common Stock (a “Company Conversion”), or (c) by any combination
of a Company Conversion and a Company Redemption so long as the entire amount of such Installment Amount due shall be converted
and/or redeemed by the Company on the applicable Installment Date.
At any time prior to the payment of the applicable
Redemption Price by the Company, the Holder had the option, in lieu of redemption, to cancel the Event of Default Redemption Notice
by written notice to the Company (the “Redemption Cancellation Notice”). Upon the Company’s receipt of a Redemption
Cancellation Notice, the Outstanding Balance of the Note as of the date of the Redemption Notice shall thereafter be due and payable
upon demand, with payment of the Outstanding Balance being due ten (10) Trading Days after written demand therefor from the Holder;
(y) the Conversion Price of this Note shall be automatically adjusted with respect to each conversion under this Note effected
thereafter by the Holder to the lowest of (A) 75% of the lowest Closing Bid Price of the Common Stock during the period beginning
on and including the date on which the applicable Redemption Notice is delivered to the Company and ending on and including the
date of the Redemption Cancellation Notice, (B) the Market Price as of the date of the Redemption Cancellation Notice, (C) the
then current Market Price, and (D) the then current Conversion Price.
The Company determined that the conversion
feature of the 2013 Company Note represents an embedded derivative since the Note is convertible into a variable number of shares
upon conversion. Accordingly, the 2013 Company Note is not considered to be conventional debt under EITF 00-19 and the embedded
conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value
of this derivative instrument has been recorded as a liability on the consolidated balance sheet with since the corresponding amount
recorded as an expense
During the year ended December 31, 2013,
the Company issued 570,090 shares of common stock in satisfaction of $70,000 of the 2013 Company Note. At of December 31, 2013,
the outstanding principal balance of the 2013 Company Note was $597,500.
During the six months ended June 30,
2014, the Company issued 9,311,042 shares of common stock in satisfaction of $597,500 of the 2013 Company Note and $46,391 of accrued
and unpaid interest. The shares were issued at $0.06915 per share. As of June 30, 2014, the 2013 Company Note was fully satisfied.
A summary of the derivative liability balance as of December
31, 2013 and June 30, 2014 is as follows:
Fair Value
|
|
Derivative
Liability Balance
12/31/13
|
|
Initial
Derivative
Liability
|
|
Notes
Converted
|
|
Fair value change – six months ended 6/30/14
|
|
Derivative Liability Balance 6/30/14
|
2013 Notes
|
|
$
|
205,920
|
|
|
|
—
|
|
|
$
|
(175,573
|
)
|
|
$
|
(30,347
|
)
|
|
|
—
|
|
2013 Company Note
|
|
$
|
280,240
|
|
|
|
—
|
|
|
|
(280,240
|
)
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
486,160
|
|
|
|
—
|
|
|
$
|
(455,813
|
)
|
|
$
|
(30,347
|
)
|
|
|
—
|
|
In January 2014,
the Company entered into a Secured Promissory Note for $1,660,000 (the “2014 Company Note”) to Tonaquint, Inc. (“Tonaquint”)
(the same principals as Typenex) which includes a purchase price of $1,500,000 and transaction costs of $160,000. On January 31,
2014, the Company received $300,000 of the purchase price. Tonaquint also issued to the Company 6 secured promissory notes, each
in the amount of $200,000 (the 2014 “Investor Notes”).
All or any portion of the outstanding balance The 2014
Investor Notes may be prepaid, without penalty, along with accrued but unpaid interest at any time prior to maturity. The Company
has no obligation to pay Tonaquint any amounts on the unfunded portion of the 2014 Company Note. The 2014 Company Note bears interest
at 8% per annum (increases to 22% per annum upon an event of default) and is convertible into shares of the Company’s common
stock at Tonaquint’s option at a price of $0.55 per share, exercisable in seven tranches, consisting of a first tranche of
$340,000 of principal and any interest, fees costs or charges, and six additional tranches of $220,000 each, plus any interest,
costs, fees or charges.
Beginning on the date that is six (6) months
after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid to the Company (the “Initial
Installment Date”), and on each applicable Installment Date thereafter, the Company is to pay the Holder, the applicable
Installment Amount due on such date. Ten Installment Amounts of $166,000 plus the sum of any accrued and unpaid interest, fees,
costs or charges may be made (a) in cash (a “Company Redemption”), (b) by converting such Installment Amount into
shares of Common Stock (a “Company Conversion”), or (c) by any combination of a Company Conversion and a Company Redemption
so long as the entire amount of such Installment Amount due shall be converted and/or redeemed by the Company on the applicable
Installment Date. The 2014 Company Note matures fifteen months after the Issuance Date.
As of June 30, 2014, $1,660,000 of principal
and accrued interest of $97,240 is outstanding on the 2014 Company Note, and is carried at $1,581,429, net of a remaining note
discount of $78,571. On June 30, 2014, the Company received an additional $200,000 of the purchase price, and as of June 30, 2014,
the balance of the purchase price of $1,000,000 is included in Notes receivable on the condensed consolidated financial statements
included herein, as well as $94,889 of interest receivable.
Note Payable
On March 18, 2014, in conjunction with
the land purchase of 80 acres in Pueblo County, Colorado, the Company paid $36,000 cash and entered into a promissory note in the
amount of $85,750. The promissory note is being amortized on the basis of five (5) years, payable at $18,719 per year, including
principal and interest at 3.5% per annum. Payments begin December 1, 2014, and shall be due on the first day of each succeeding
December, with any balance of principal and accrued interest due December 1, 2019.
Future principle payments due on the
Company’s convertible debt and note payable as of June 30, 2014, are as follows
Twelve months ending
June 30,
|
|
Amount
|
|
2015
|
|
|
$
|
1,678,719
|
|
|
2016
|
|
|
|
18,719
|
|
|
2017
|
|
|
|
18,719
|
|
|
2018
|
|
|
|
18,719
|
|
|
2019
|
|
|
|
18,719
|
|
|
|
|
|
$
|
1,753,595
|
|
NOTE 7 – RELATED PARTY TRANSACTIONS
Management
fees and stock compensation expense
Effective January 1, 2013, the Company
has agreed to annual compensation of $150,000 for its CEO and $96,000 for the CFO. The Company and the CFO have agreed that $3,000
per month will be paid in cash and $5,000 per month will be paid in restricted shares of common stock. For the three and six months
ended June 30, 2014, the Company expensed $61,500 and $123,000, respectively, included in Administrative and Management Fees in
the Unaudited Condensed Consolidated Statements of Operations, included herein. As of June 30, 2014, the Company owed the CEO $63,137
and the CFO $33,000.
On January 13, 2014, the Company issued
545,454 shares of common stock to Venture Equity, LLC, (“Venture Equity”) a Florida limited liability Company, controlled
by the Company’s CFO, upon the conversion of $60,000 of accrued management fees. The shares were issued at $0.11 per share,
the market price of the common stock on December 31, 2013.
In June 2013, Mr. Friedman agreed to
exchange 3,033,500 shares of common stock in partial consideration for the issuance of 450,000 shares of Class B preferred stock
(see note 8).
Amounts due FROM
800 COMMERCE, Inc.
800 Commerce, Inc.
owed Agritek $
118,594 and $73,894
as of June 30, 2014 and December 31, 2013, respectively, as
a result of advances received from or payments made by Agritek on behalf of 800 Commerce. These advances are non-interest bearing
and are due on demand and are included in Due from Related Party on the balance sheet herein.
NOTE 8 – COMMON AND PREFERRED
STOCK
Common
Stock
Previously the Company appointed Mr. Jayme Canton to be an advisor to the Company’s
Board of Directors. In April 2013, the Company agreed to issue to Mr. Canton 200,000 shares of common stock, a warrant to purchase
300,000 shares of common stock at an exercise price of $0.50 per share with an expiration date on the third year anniversary of
the grant, and $25,000 to be paid in shares of common stock to be issued at the end of each calendar quarter beginning on June
30, 2013 and ending on the earlier of March 31, 2015 (the term of Canton’s advisor role) or the date Canton is no longer
serving as an advisor to the board of directors. During the six months ended June 30, 2014, the Company issued
56,948
shares of common stock, valued at $
25,000
based on the market price of the common
stock of $
0.439
on March 31, 2014. The Company included $25,000 and $
50,000
in stock based compensation expense for the three and six months ended June 30 2014. As of June 30, 2014, the Company owed
Mr. Canton $25,000, which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet herein.
In January
2014 the Company issued in the aggregate 8,467,388 shares of common stock
to Typenex upon the conversion of $523,564 of
the Company Note and accrued and unpaid interest of $3,716. The shares were issued at approximately $0.06227 per share.
On January 13, 2014, the Company issued
545,454 shares of common stock to Venture Equity upon the conversion of $60,000 of accrued management fees. The shares were issued
at $0.11 per share, the market price of the common stock on December 31, 2013.
On January 14, 2014, the Company issued
2,460,968 shares of common stock upon the conversion of 100,000 shares of Class B Preferred Stock.
On January 30, 2014, February 3, 2014
and February 5, 2014, the Company issued in the aggregate 369,420 shares of common stock to Asher upon the conversion of $65,000
of the 2013 Notes and accrued and unpaid interest of $2,600. The shares were issued at approximately $0.18299.
In March 2014, the Company issued 843,654
shares of common stock to Typenex upon the conversion of $116,611 of the Company note and accrued and unpaid interest. The shares
were issued at approximately $0.1382 per share.
On March 17, 2014, the Company issued
4,312,420 shares of common stock upon the conversion of 150,000 shares of Class B Preferred Stock.
On March 31, 2014, the Company issued
56,948 shares of common stock to Jayme Canton upon the conversion of $25,000 of accrued stock compensation.
On April 17, 2014, the Company issued
188,088 shares of common stock in satisfaction of $36,000 of the October 2013 Asher Note. The shares were issued at approximately
$0.19 per share.
On April 20, 2014, the Company issued
202,867 shares of common stock in satisfaction of $34,000 of the October 2013 Asher convertible note and accrued and unpaid interest
of $2,800. The shares were issued at approximately $0.18 per share.
Preferred
Stock
On June 20, 2012 the Company cancelled
and returned to authorized but unissued one million shares of Preferred A Stock, and authorized 1,000,000 shares of Class B Convertible
Preferred Stock (the “Class B Preferred Stock”), par value $0.01. The rights, preferences and restrictions of the Class
B Preferred Stock as amended, state; i) each share of the Class B Convertible Preferred Stock shall automatically convert (the
“Conversion”) into shares of the Corporation’s common stock at the moment there are sufficient authorized and
unissued shares of common stock to allow for the Conversion. The Class B Convertible Preferred Stock will convert in their entirety,
simultaneously to equal one half (1/2) the amount of shares of common stock outstanding on a fully diluted basis immediately prior
to the Conversion. The Conversion shares will be issued pro rata so that each holder of the Class B Convertible Preferred Stock
will receive the appropriate number of shares of common stock equal to their percentage ownership of their Class B Convertible
Preferred Stock and ii) all of the outstanding shares of the Class B Preferred Stock in their entirety will have voting rights
equal to the amount of shares of common stock outstanding on a fully diluted basis immediately prior to any vote. The shares eligible
to vote will be calculated pro rata so that each holder of the Class B Convertible Preferred Stock will be able to vote the appropriate
number of shares of common stock equal to their percentage ownership of their Class B Convertible Preferred Stock. The Class B
Convertible Preferred Stock shall have a right to vote on all matters presented or submitted to the Corporation’s stockholders
for approval in pari passu with holders of the Corporation’s common stock, and not as a separate class.
As of June 30, 2014 and December 31,
2013, the Company had 750,000 and 1,000,000 shares of Series B Preferred Stock (the “Class B Preferred Stock”), par
value $0.01 outstanding, respectively.
Warrants
On April 26, 2013 and in connection
with the appointment of Mr. Jayme Canton to the Company’s advisory board, the Company issued a warrant to Mr. Canton to purchase
300,000 shares of common stock. The warrant has an exercise price of $0.50 per share, remains outstanding and expires April 26,
2016.
NOTE 9 – INCOME TAXES
Deferred income taxes reflect the net
tax effects of operating loss and tax credit carry forwards and temporary differences between carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of the Company’s
ability to realize the benefit of the deferred tax assets, the deferred tax assets are fully offset by a valuation allowance at
June 30, 2014 and 2013.
As of June 30, 2014, the Company had
a tax net operating loss carry forward of approximately $1,356,000.
Any unused portion of this carry
forward expires in 2030. Utilization of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.
NOTE 10 – CONTINGENCIES AND COMMITMENTS
Effective on April 1, 2013, the Company
entered into a three year agreement to rent approximately 2,500 square feet of office space (the “Office Lease”) in
Detroit, Michigan. The monthly rent under this lease was $2,200 per month.
Effective August 28, 2013, the Company
and the landlord amended the Office Lease allowing the Company to move to a new location in downtown Detroit. The new lease was
for 3,657 square feet for monthly rent of $3,047. In November 2013, the Company was notified that the owner of the building (the
Company’s landlord) was delinquent in their obligations to the mortgage holder of the building. In January 2014, due to the
uncertainty of the Company’s Office Lease in Detroit, Michigan, the Company decided to relocate its administrative offices
to West Palm Beach, Florida. Effective April 1, 2014, the Company has entered into a rent sharing agreement for the use of 1,300
square feet with a company controlled by the Company’s CFO. The Company has agreed to pay $1,350 per month for the space.
Effective May 15, 2013 through September
15, 2013, the Company leased warehouse space on a month to month basis for the shipping and logistics of the Company’s Chillo
drink products for $250 per month. Subsequent to September 15, 2013, the Company compensates the landlord on a per pallet fee.
In April 2014, the Company entered into
a ten year sublease agreement for the use of up to 7,500 square feet with a
Colorado
based oncology clinical trial and drug testing company and facility presently doing cancer research and testing for established
pharmaceutical companies seeking FDA approval for new drugs
. The Company has agreed to pay $2,000 per month for the space,
and it will be utilized to market, sell and distribute products to Colorado dispensaries, including managing the banking and credit
card services described below.
Also in April 2014, the Company entered
into a six month lease for an apartment located in Denver, Colorado for the use of Company personnel when traveling to Colorado
on behalf of the Company. The Company has agreed to pay $2,700 per month for the apartment
On May 22, 2014, the Company entered
into a Social Media Consulting Service Contract with a consultant for the consultant to establish the Company’s presence
on social media platforms. The contract is for an initial term of one hundred eighty (180) days beginning on May 28, 2014 and the
Company has agreed to compensate the consultant $3,000 monthly for the management of the Company’s social media presence.
On June 5, 2014, the Company entered
into a one year Order Fulfillment Agreement for the warehousing and distribution of the Company’s wholesale products. The
Company has agreed to pay a minimum of $200 per month for shipping integration and management, in addition to costs associated
with warehousing our products.
Rent expense for the three and six
months ended June 30, 2014 was $24,466 and $27,070,
respectively, compared to $15,031 and $18,783
for the three and six months ended June 30, 2013.
On July 1, 2014, the Company, along with its officers and directors and a company
controlled by the Company’s CEO, was named in a Summons and Complaint. On July 18, 2014, the parties settled the complaint
and agreed to pay $16,750 and the Summons and Complaint has been dismissed with prejudice. The Company applied the payment to
amounts owed related parties.
NOTE 11 – GOING CONCERN
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern. As of June 30, 2014 the Company had an accumulated
deficit of $9,950,878
and working capital deficit of $304,162. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 12 – SEGMENT REPORTING
Description
of segments
During the six months ended June 30,
2014, the Company had operated in one reportable segment, wholesale sales.
During the
six months ended June 30, 2013, the Company had operated in two reportable segments: accounts receivable financing and wholesale
sales. Prior to April 1, 2013, the Company was receiving fees as the agent of record for fees pursuant to the ACS agreement. Beginning
in the quarter ended June 30, 2013, the Company began wholesaling products (Chillo drinks). The accounting policies of the segments
are the same as those described in the Note 1. The Company’s reportable segments are strategic business units that
offer products.
NOTE 13 – SUBSEQUENT EVENTS
On July 11, 2014, the Company signed
a ten year
lease agreement for an additional 40 acres in Pueblo, Colorado,
now bringing total land holdings in the country's first recreational cannabis state to over 120 acres zoned for its planned agricultural
and cultivation facilities located in Pueblo County, Colorado. The lease requires monthly rent payments of $10,000 during
the first year and is subject to a 2% annual increase over the life of the lease. The lease also provides rights to 50 acres of
certain tenant water rights for $50,000 annually plus cost of approximately $2,400 annually. The water rights ensure the Company’s
non-interruption of operations on behalf of new tenants qualified as fully registered and licensed grow and manufacturing operations.
On July 22, 2014, the Company announced
the addition of Mr. Neal Bartoletta to its’ advisory board and
will
compensate Mr. Bartoletta up to 150,000 shares of Company common stock per quarter.
Mr. Bartoletta or a Company he controls plan
to acquire certain real estate in Clark County, Nevada to build a 40,000 sq.
ft. facility dedicated to Nevada’s canna-businesses. Agritek will lease back the property exclusively to
such
entity or Mr. Bartoletta, upon the entity receiving a state license for its new cultivation and conversion facility.
On
July 26, 2014, the Company executed a Real Property Purchase Agreement to acquire approximately 3.5 acres for $224,000, in the
Apex Industrial Park Complex, otherwise known as Nevada “Green Zone”. The closing of the property is expected to occur
within 90 days and is subject to Mr. Bartoletta’s entity receiving a license from the State of Nevada to cultivate, produce
and test medicinal marijuana.
On August 6, 2014, the Company issued
625,978 shares of common stock upon the conversion of $100,000 of the 2014 Company Note. The shares were issued at approximately
$0.16 per share.
On August 8, 2014, the Company received
a payment of $200,000 on notes receivable issued in exchange for convertible promissory note.
The Company’s Management performed
an evaluation of the Company’s activity through the date these financials were issued to determine if they must be reported.
The Management of the Company determined that there were no other reportable subsequent events to be disclosed.