NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -
Organization
Business
Agritek Holdings, Inc. (the “Company”
or “Agritek”) and its wholly owned subsidiary, Agritek Venture Holdings, Inc. (“AVHI”), acquires and leases
real estate to licensed marijuana operators, including providing complete turnkey growing space and related facilities to
licensed marijuana growers and dispensary owners. Additionally, the Company offers a variety of services and product lines
to the medicinal marijuana sector including the distribution of hemp based nutritional products and a line of innovative solutions
for electronically processing merchant transactions.
Note 2 –
Summary of Significant
Account Policies
Basis of Presentation and Principles
of Consolidation
The accompanying condensed consolidated
financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to
present the financial position, results of operations and cash flows for the stated periods have been made. Except as described
below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included
in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. These condensed consolidated unaudited financial statements should be
read in conjunction with a reading of the Company’s consolidated financial statements and notes thereto. Interim results
of operations for the three months ended March 31, 2016 are not necessarily indicative of future results for the full year. Certain
amounts from the 2015 period have been reclassified to conform to the presentation used in the current period.
The condensed consolidated unaudited
financial statements of the Company
include the consolidated accounts of Agritek and its
wholly owned subsidiaries, AVHI and Prohibition Products, Inc. (“PPI”). PPI, a Florida corporation, was originally
formed on July 1, 2013 as The American Hemp Trading Company, Inc. (“AHTC”) and on August 27, 2014, AHTC changed its
name to PPI. All intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original term of three months or less to be cash equivalents.
Accounts Receivable
The Company records accounts receivable
from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision
for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectability
is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables,
based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information
available to make its evaluations, this estimate is susceptible to significant change in the near term. As of March 31, 2016, based
on the above criteria, the Company has an allowance for doubtful accounts of $43,408.
Inventory
Inventory, if any, consists of finished goods
and is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for
potentially obsolete or slow moving inventory is made based on management analysis or inventory levels and future sales forecasts.
Deferred Financing Costs
The costs related to the issuance of debt are
capitalized and amortized to interest expense using the effective interest method through the maturities of the related debt.
Derivative Financial Instruments
The Company does not use derivative
instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments,
including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or
credits to income.
For option-based simple derivative financial
instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is re-assessed at the end of each reporting period.
Debt Issue Costs and Debt Discount
The Company may record debt issue costs
and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the
form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion
of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued,
the Company may provide the debt holder with an original issue discount. The original issue discount would be recorded
to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
Marketable Securities
The Company classifies its marketable
securities as available-for-sale securities, which are carried at their fair value based on the quoted market prices of the securities
with unrealized gains and losses, net of deferred income taxes, reported as accumulated other comprehensive income (loss), a separate
component of stockholders’ equity. Realized gains and losses on available-for-sale securities are included in net earnings
in the period earned or incurred.
Investment of Non-Marketable Securities
The Company’s investment in non-marketable
securities consist of cash investments in a less than 10% interest in two privately held companies that provide merchant processing
services. Petrogress, Inc. (formerly 800 Commerce, Inc. and a subsidiary of the Company through its’ deconsolidation in May
2012) derived substantially all of its’ revenues, through April 2015, form these privately held companies.
Property and Equipment
Property and equipment are
stated at cost, and except for land, depreciation is provided by use of a straight-line method over the estimated useful lives
of the assets. The Company reviews property and equipment for potential impairment whenever events or changes in circumstances
indicate that the carrying amounts of assets may not be recoverable. In November 2015, the Company was made aware that the land
transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company
was a party to the land purchase, however, it was recently discovered, and the second party to the land contract never filed the
original quit claim deed on behalf of the Company, even though a copy of the notarized quit claim deed was sent to the Company.
To date, the Company has paid a total of $47,438.00 ($36,000 at closing) and is on the deed of trust of the property with a remaining
note balance of approximately $75,000 held by the original owner. Accordingly, until the deed is properly recorded, the Company
reduced the remaining balance of the note payable for the acquisition of the land of $74,313 and recorded a reserve allowance for
the remaining balance of the asset of $54,490. The estimated useful lives of property and equipment are as follows:
Furniture and equipment
|
5 years
|
The Company's property and equipment consisted of the following
at March 31, 2016 and December 31, 2015:
|
|
2016
|
|
2015
|
Furniture and equipment
|
|
|
13,829
|
|
|
$
|
13,829
|
|
Accumulated depreciation
|
|
|
(5,453
|
)
|
|
|
(4,742
|
)
|
Balance
|
|
$
|
8,396
|
|
|
$
|
9,087
|
|
Depreciation expense of $691 and $447
was recorded for the three months ended March 31, 2016 and 2015, respectively.
Long-Lived Assets
Long-lived assets are reviewed for impairment
when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on events
and changes in circumstances on June 30, 2015, the Company reviewed the carrying amount of goodwill initially recorded from an
acquisition in September 2014, and determined that the carrying amount may not be recoverable and accordingly recognized an impairment
loss of $192,849 for the three months ended March 31, 2015.
Revenue Recognition
The Company recognizes revenue in accordance
with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are met: (1) persuasive evidence of an arrangement
exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably
assured. The Company recognizes revenue during the month in which products are shipped or commissions are earned. No revenue has
been recognized from leasing arrangements to date.
Fair Value of Financial Instruments
Fair value measurements are determined
under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair
value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of
the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant
assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
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 March 31, 2016 and 2015 there were warrants to purchase 1,300,000
shares of common stock
and the Company’s outstanding convertible debt is convertible into 369,855,632 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 months ended March 31,
2016 and 2015, the Company recorded stock and warrant based compensation of $2,371 and $16,484, respectively. (See Notes 7 and
8).
Use of Estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Advertising
The Company records advertising costs
as incurred. For the three months ended March 31, 2016 and 2015, advertising expense was $3,059 and $7,543, respectively.
Note 3 –
Recent Accounting Pronouncements
Accounting standards that have been
issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption.
Note 4 –
Impairment of Goodwill
On September
12, 2014, the Company completed the asset acquisition of the entire line of products, technology and customers of Dry Vapes
Holdings, Inc.
The Company recorded the acquisition
using the acquisition method, which requires the Company to record the acquired assets and assumed liabilities (if any) at their
acquisition date fair values and record any excess of the consideration given, including liabilities assumed (if any) over the
fair value of the assets acquired as goodwill. The acquired assets consisted solely of inventory. The transaction resulted in
the Company recording goodwill of $192,849. Based on events and changes in circumstances on March 31, 2015, the Company reviewed
the carrying amount of the goodwill, and determined that the carrying amount may not be recoverable and accordingly recognized
an impairment loss of $192,849 for the three months ended March 31, 2015.
Note 5 –
Sales Concentration
and Concentration of Credit Risk
Cash
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash. The Company maintains cash balances at one financial institution,
which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insured institution insures
up to $250,000 on account balances. The company maintains its’ cash balance at a large financial institution and has not
experienced any losses in such accounts.
Sales and Accounts Receivable
Following is a summary of customers
who accounted for more than ten percent (10%) of the Company’s revenues for the three months ended March 31, 2016 and 2015
and the accounts receivable balance as of March 31, 2016:
|
Customer
|
|
Sales % Three
Months Ended
March 31, 2016
|
|
Sales % Three
Months Ended
March 31, 2015
|
|
Accounts
Receivable
Balance as of
March 31, 2016
|
|
A
|
|
|
|
100
|
%
|
|
|
—
|
|
|
$
|
—
|
|
|
B
|
|
|
|
—
|
|
|
|
70
|
%
|
|
$
|
—
|
|
|
C
|
|
|
|
—
|
|
|
|
22
|
%
|
|
$
|
—
|
|
Purchases
For the three months ended March 31,
2016 the Company’s purchases were from one vendor.
Note 6 –
Convertible Debt
and Note Payable
2014 Convertible Note
In January 2014, the Company entered into a
Secured Promissory Note for $1,660,000 (the “2014 Company Note”) to Tonaquint, Inc. (“Tonaquint”) which
includes a purchase price of $1,500,000 and transaction costs of $160,000. On January 31, 2014, the Company received $300,000 of
the purchase price. Tonaquint also issued to the Company 6 secured promissory notes, each in the amount of $200,000 (the 2014 “Investor
Notes”). All or any portion of the outstanding balance of the 2014 Investor Notes may be prepaid, without penalty, along
with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay Tonaquint any amounts on the
unfunded portion of the 2014 Company Note. The 2014 Company Note bears interest at 8% per annum (increases to 22% per annum upon
an event of default) and is convertible into shares of the Company’s common stock at Tonaquint’s option at a price
of $0.55 per share, exercisable in seven tranches, consisting of a first tranche of $340,000 of principal and any interest, fees
costs or charges, and six additional tranches of $220,000 each, plus any interest, costs, fees or charges.
Beginning on the date that is six (6) months
after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid to the Company (the “Initial
Installment Date”), and on each applicable Installment Date thereafter, the Company is to pay the Holder, the applicable
Installment Amount due on such date. Ten Installment Amounts of $166,000 plus the sum of any accrued and unpaid interest, fees,
costs or charges may be made (a) in cash (a “Company Redemption”), (b) by converting such Installment Amount into shares
of Common Stock (a “Company Conversion”), or (c) by any combination of a Company Conversion and a Company Redemption
so long as the entire amount of such Installment Amount due shall be converted and/or redeemed by the Company on the applicable
Installment Date. The 2014 Company Note matured fifteen months after the Issuance Date.
During the year ended December 31, 2014,
the Company received an additional $800,000 of the purchase price and an additional $200,000 (including $21,188 of interest) during
the year ended December 31, 2015. On December 16, 2015, the Company and AVHI, the Company’s wholly owned subsidiary entered
into a Deed in Lieu of Foreclosure Agreement (the “DLF Agreement”) with Tonaquint, pursuant to which in exchange for
the Company conveying its’ interest in the Company’s Nevada owned real estate (the “Property”), Tonaquint
agreed to refrain and forbear from exercising and enforcing its remedies under their 2014 Convertible Note. Additionally, the Company
received $25,000 and a reduction of the Note balance of $500,000. AVHI had a cost of approximately $224,466 for the Property.
As of the date of the DLF Agreement,
the Company and Tonaquint agreed to offset the remaining unpaid principal balance of the Investor Notes of $176,642 to the Note.
The parties further agreed that accrued and unpaid interest of $316,723 would be added to the Note and each party confirmed that
the Note balance as of the DLF Agreement was $311,815. As of December 31, 2015, $311,815 of principal and accrued interest of $1,041
is outstanding on the 2014 Company Note.
On January 19, 2016, the Company accepted
and agreed to a Debt Purchase Agreement (the “DPA”), whereby LG Capital Funding, LLC (“LG”) acquired $157,500
of the Tonaquint 2014 Convertible Note in exchange for $75,000. The Company issued an 8% Replacement Note to LG for $157,500 (the
“Second Replacement Note”). The Second Replacement Note is due January 19, 2017 and is convertible into shares of the
Company’s common stock at any time at the discretion of LG at a variable conversion price (“VCP”). The VCP is
calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied
by fifty eight percent (58%), representing a forty two percent (42%) discount.
On January 19, 2016, the Company accepted
and agreed to a DPA, whereby Cerebrus Finance Group, LTD (“Cerebrus”) acquired $154,315 of principal and $2,434.09
of accrued and unpaid interest of the Tonaquint 2014 Convertible Note in exchange for $75,000. The Company issued an 8% Replacement
Note to Cerebrus for $156,749.09 (the “Third Replacement Note”). The Third Replacement Note is due January 19, 2017
and is convertible into shares of the Company’s common stock at any time at the discretion of LG at a VCP. The VCP is calculated
as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty
eight percent (58%), representing a forty two percent (42%) discount.
As of March 31, 2016, the 2014 Company
Note was paid in full.
2015 Convertible Notes
On March 2, 2015, the Company issued
a Convertible Promissory Note for $79,000 to Vis Vires Group (“Vis Vires”). The Company received net proceeds of $75,000
after debt issuance costs of $4,000 paid for lender legal fees. The Note matured on November 25, 2015 and can be converted at a
39% discount to the market price as defined in the Note. As of December 31, 2015, the principal balance of the Vis Vires note was
$49,200. On January 6, 2016, the Company accepted and agreed to a DPA, whereby LG acquired the 2015 convertible promissory note
from Vis Vires. The Company issued an 8% Replacement Note to LG for $53,613 (the “First Replacement Note”). The First
Replacement Note is due January 5, 2017 and is convertible into shares of the Company’s common stock at any time at the discretion
of LG at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the
conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. As of March 31, 2016,
the balance of the First Replacement Note is $53,613.
On March 27, 2015, the Company issued
a Convertible Promissory Note for $27,000 to GW Holding Group, LLC (“GW”). On March 31, 2015, the Company received
net proceeds of $25,000 after debt issuance costs of $2,000 paid for lender legal fees. The Note matured on March 27, 2016 and
converts at a 42% discount to the market price as defined in the Note. On March 8, 2016, the Company issued 4,800,354 shares of
common stock upon the conversion of $7,425 of principal and $928 accrued and unpaid interest on the 2015 GW Note. The shares were
issued at approximately $0.00174 per share. As of March 31, 2016 and December 31, 2015, the principal balance of the GW note is
$16,075 and $23,500, respectively.
March 27, 2015, the Company issued a
Convertible Promissory Note for $78,750 to LG. The Company received net proceeds of $75,000 after debt issuance costs of $3,750
paid for lender legal fees. The Note matured on March 27, 2016 and converts at a 42% discount to the market price as defined in
the Note. On March 7, 2016, the Company issued 4,016,471 shares of common stock upon the conversion of $6,500 of principal and
$489 accrued and unpaid interest on the 2015 LG Note. The shares were issued at approximately $0.00174 per share. On March 17,
2016, the Company issued 3,980,431 shares of common stock upon the conversion of $9,000 of principal and $696 accrued and unpaid
interest on the 2015 LG Note. The shares were issued at approximately $0.002436 per share. As of March 31, 2016 and December 31,
2015, the principal balance of the LG Note was $50,000 and $65,500, respectively.
On
March 30, 2015,
the Company issued a Convertible Promissory Note for $27,000 to Service Trading Company, LLC (“Service”).
On April 6, 2015, the Company received net proceeds of $25,000 after debt issuance costs of $2,000 paid for lender legal fees.
The Note matures March 30, 2016 and converts at a 42% discount to the market price as defined in the Note. On March 17, 2016, the
Company issued 4,918,624 shares of common stock upon the conversion of $3,000 of principal and $138 accrued and unpaid interest
on the 2015 Service Note. The shares were issued at approximately $0.000638 per share. As of March 31, 2016 and December 31, 2015,
the principal balance of the Service Note was $19,000 and $22,500, respectively.
The
debt issuance costs of $11,750 in the aggregate included in the 2015 Convertible Notes, will be amortized over the earlier of
the terms of the Note or any redemptions and accordingly, $1,563 has been expensed as debt issuance costs (included in interest
expense) for the three months ended March 31, 2016.
Among other terms the 2015 Notes are
due nine to twelve months from their issuance date, bearing interest at 8% per annum, payable in cash or shares at a conversion
price (the “Conversion Price”) for each share of common stock equal to 39% - 42% of the average of the lowest three
trading prices (as defined in the note agreements) per share of the Company’s common stock for the ten to eighteen trading
days immediately preceding the date of conversion. Upon the occurrence of an event of default, as defined in the 2015 Convertible
Notes, the Company was required to pay interest at 22% per annum and the holders could at their option declare a Note, together
with accrued and unpaid interest, to be immediately due and payable. In addition, the 2015 Convertible Notes provide for adjustments
for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock
for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where
there is a change in control of the Company.
The Company determined that the conversion
feature of the 2015 Convertible Notes represent an embedded derivative since the Notes are convertible into a variable number
of shares upon conversion. Accordingly, the 2015 Convertible Notes were not considered to be conventional debt under EITF 00-19
and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly,
the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with the corresponding
amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the maturity dates of
the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in
the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance
sheet. The embedded feature included in the 2015 Convertible Notes resulted in an initial debt discount of $211,750, an initial
derivative liability expense of $71,761 and an initial derivative liability of $283,511.
2016 Convertible Notes
On January 19, 2016, the Company completed
the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase
Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”)
in the aggregate principal amount of $76,080, and delivered on January 31, 2016, gross proceeds of $62,500 excluding transaction
costs, fees, and expenses.
On January 19, 2016, the Company completed
the closing of a private placement financing transaction with Cerebrus, pursuant to a Securities Purchase Agreement (the “Cerebrus
Purchase Agreement”). Pursuant to the Cerebrus Purchase Agreement, Cerebrus purchased an 8% Convertible Debenture (the “Cerebrus
Debenture”) in the aggregate principal amount of $34,775, and delivered on January 25, 2016, gross proceeds of $25,000 excluding
transaction costs, fees, and expenses.
On March 23, 2016, the Company completed
the closing of a private placement financing transaction with Cerebrus, pursuant to a Securities Purchase Agreement (the “Cerebrus
Purchase Agreement”). Pursuant to the Cerebrus Purchase Agreement, Cerebrus purchased an 8% Convertible Debenture (the “Cerebrus
Debenture”) in the aggregate principal amount of $22,000, and delivered on March 31, 2016, gross proceeds of $20,000 excluding
transaction costs, fees, and expenses.
Principal and interest on the above
three convertible debentures is due and payable one year from their respective funding date, and the LG and Cerebrus Debentures
are convertible into shares of the Company’s common stock at any time at the discretion of LG and Cerebrus, respectively,
at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion
date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.
The Company may prepay the LG and/or
the Cerebrus Debentures, subject to prior notice to the holder within an initial 30 day period after issuance, by paying an amount
equal to 118% multiplied by the amount that the Company is prepaying. For each additional 30 day period the amount being prepaid
is multiplied by an additional 6%, up to a maximum of 148% on the 180
th
day from issuance. Beginning on the 180
th
day
after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still outstanding,
unless the Company and the holder agree otherwise in writing.
The Company determined that the conversion
feature of the 2016 Convertible Notes represent an embedded derivative since the Notes are convertible into a variable number of
shares upon conversion. Accordingly, the 2016 Convertible Notes were not considered to be conventional debt under EITF 00-19 and
the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the
fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with the corresponding
amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the maturity dates of
the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the
consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet.
The embedded feature included in the 2016 Convertible Notes resulted in an initial debt discount of $500,718, an initial derivative
liability expense of $338,478 and an initial derivative liability of $839,196.
As of March 31, 2016, the Company revalued
the embedded conversion feature of the 2015 and 2016 Convertible Notes. The fair value of the 2015 and 2016 Convertible Notes
was calculated at March 31, 2016 based on the Black Scholes method consistent with
the
terms of the related debt.
A
summary of the derivative liability balance as of March 31, 2016 is as follows:
Beginning
Balance
|
|
$
|
167,014
|
|
Initial Derivative
Liability
|
|
|
839,880
|
|
Fair Value Change
|
|
|
(7,616
|
)
|
Debt extinguishment
|
|
|
(84,057
|
)
|
Reduction
for conversions
|
|
|
(86,490
|
)
|
Ending Balance
|
|
$
|
828,731
|
|
The
fair value at the commitment date for the 2016 Convertible Notes and the re-measurement dates for the Company’s derivative
liabilities were based upon the following management assumptions as of March 31, 2016:
|
|
|
Commitment date
|
|
|
|
Remeasurement date
|
|
Expected dividends
|
|
|
-0-
|
|
|
|
-0-
|
|
Expected volatility
|
|
|
243%-267%
|
|
|
|
267
|
%
|
Expected term
|
|
|
12 months
|
|
|
|
1-12 months
|
|
Risk free interest
|
|
|
.44%-.68%
|
|
|
|
.18%-.65%
|
|
A
summary of the convertible notes payable balance as of March 31, 2016 is as follows:
|
|
2016
|
Beginning Balance
|
|
$
|
472,515
|
|
Convertible notes-newly issued
|
|
|
132,855
|
|
Accrued interest added to Note
|
|
|
6,848
|
|
Conversion of convertible notes
|
|
|
(25,925
|
)
|
Unamortized discount
|
|
|
(423,181
|
)
|
Ending Balance
|
|
$
|
163,112
|
|
During
the three months ended March 31, 2016, the Company issued the following shares of common stock upon the conversion of portions
of the
2015 Convertible Notes and accrued interest thereon:
Date
|
|
Principal
Conversion
|
|
Interest
Conversion
|
|
Total
Conversion
|
|
Conversion
Price
|
|
Shares
Issued
|
|
Issued
to
|
|
3/7/16
|
|
$
|
6,500
|
|
|
$
|
489
|
|
|
$
|
6,989
|
|
|
$
|
.00174
|
|
|
|
4,016,471
|
|
|
LG
|
|
3/8/16
|
|
$
|
7,425
|
|
|
$
|
928
|
|
|
$
|
8,353
|
|
|
$
|
.00174
|
|
|
|
4,800,354
|
|
|
GW
|
|
3/17/16
|
|
$
|
9,000
|
|
|
$
|
696
|
|
|
$
|
9,696
|
|
|
$
|
.002436
|
|
|
|
3,980,431
|
|
|
LG
|
|
3/17/16
|
|
$
|
3,000
|
|
|
$
|
138
|
|
|
$
|
3,138
|
|
|
$
|
.000638
|
|
|
|
4,918,624
|
|
|
Service
|
|
|
|
|
$
|
25,925
|
|
|
$
|
2,251
|
|
|
$
|
28,176
|
|
|
|
|
|
|
|
17,715,880
|
|
|
|
Note Payable Land
On March 18, 2014, in conjunction with
the land purchase of 80 acres in Pueblo County, Colorado, the Company paid $36,000 cash and entered into a promissory note in
the amount of $85,750. The promissory note is being amortized on the basis of five (5) years, with principal payments of $17,150
plus interest at 3.5% due annually on December 1 of each year. Payments begin December 1, 2014, and shall be due on the first
day of each succeeding December, with any balance of principal and accrued interest due December 1, 2020. On March 4, 2015, and
May 4, 2015, the Company paid $9,000 and $2,437, respectively, of the December 1, 2014 amount. As of September 30, 2015, the balance
of note is $74,313, including a past due amount of $5,713 of the December 2014 amount due. In November 2015, the Company was made
aware that the land transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The
company was a party to the land purchase, however, it was then discovered the second party to the land contract never filed the
original quit claim deed on behalf of the Company, even though a copy of the notarized quit claim deed was sent to the Company.
To date, the Company has paid a total of $47,438 ($36,000 at closing) and is on the deed of trust of the property. Accordingly,
until the deed is properly recorded, the Company reduced the remaining balance of the note payable for the acquisition of the
land of $74,313 and during the year ended December 31, 2015, recorded a reserve allowance for the remaining balance of the asset
of $54,490.
Note 7 –
Related Party Transactions
Management Fees and Stock Compensation
Expense
Effective January 1, 2013, the Company
agreed to an annual compensation of $150,000 for its CEO, Mr. Michael Friedman (resigned March 20, 2015, re-appointed November
4, 2015), and $96,000 for the CFO, Mr. Barry Hollander (resigned September 15, 2015). Effective March 20, 2015, Mr. Justin Braune
was named CEO and President. Mr. Braune also was appointed to the Board of Directors. The Company agreed to an annual compensation
of $100,000 for Mr. Braune in his role of CEO and Director of the Company and to issue Mr. Braune 15,000,000 shares of restricted
common stock. Mr. Braune resigned from the board of directors
and as
CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation. The Company also initially issued
Mr. Braune 12,500,000 shares of common stock on October 13, 2015. On October 16, 2015, Mr. Braune advised the Company’s
transfer agent at the time to cancel the shares.
For
the three months ended March 31, 2016 and 2015, the Company recorded expenses to its officers the following amounts included in
Administrative and Management Fees in the consolidated statements of operations, included herein:
|
|
2016
|
|
2015
|
Mr. Braune
|
|
$
|
—
|
|
|
$
|
4,615
|
|
Mr. Friedman
|
|
|
37,500
|
|
|
|
37,500
|
|
Mr. Hollander
|
|
|
—
|
|
|
|
24,000
|
|
Total
|
|
$
|
37,500
|
|
|
$
|
66,115
|
|
As
of March 31, 2016 and December 31, 2015, the Company owed the following amounts, included in due to related party on the Company’s
consolidated balance sheet:
|
|
2016
|
|
2015
|
Mr. Friedman
|
|
$
|
578
|
|
|
$
|
8,580
|
|
Mr. Braune
|
|
|
16,667
|
|
|
|
16,667
|
|
Mr. Hollander
|
|
|
12,731
|
|
|
|
12,731
|
|
Total
|
|
$
|
29,976
|
|
|
$
|
37,798
|
|
On
April 14, 2015, the Company appointed Dr. Stephen Holt to the Advisory Board of the Board of Directors of the Company. The Company
issued 5,000,000 shares of restricted common stock to Dr. Holt for his appointment. The Company valued the 5,000,000 shares of
common stock at $100,000 ($0.02 per share, the market price of the common stock on the grant date) as stock compensation expense
for the year ended December 31, 2015. Additionally, the Company agreed the advisor shall receive a non-qualified stock option
to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05
per share. 400,000 Option Shares vested immediately and the remaining 600,000 Option Shares vest over 12 months. Accordingly,
the Company has recorded $2,371 for the three months ended March 31, 2016 in stock compensation expense and all of the options
have veste
d.
Amounts Due from 800 Commerce, Inc.
800 Commerce, Inc., a commonly controlled
entity until February 29, 2016, owed Agritek $282,947 as of February 29, 2016, as a result of advances received from or payments
made by Agritek on behalf of 800 Commerce. These advances were non-interest bearing and were due on demand.
Effective February 29, 2016, the Company received 1,102,462 shares of common stock of Petrogress, Inc. (formerly known as 800 Commerce,
Inc.) as settlement of the $282,947 owed to the Company.
Note 8 –
Common and Preferred
Stock
Common Stock
2016
Issuances
During
the three months ended March 31, 2016, the Company issued the following shares of common stock upon the conversions of portions
of the 2015 Convertible Notes:
Date
|
|
Principal
Conversion
|
|
Interest
Conversion
|
|
Total
Conversion
|
|
Conversion
Price
|
|
Shares
Issued
|
|
Issued
to
|
|
3/7/16
|
|
$
|
6,500
|
|
|
$
|
489
|
|
|
$
|
6,989
|
|
|
$
|
.00174
|
|
|
|
4,016,471
|
|
|
LG
|
|
3/8/16
|
|
$
|
7,425
|
|
|
$
|
928
|
|
|
$
|
8,353
|
|
|
$
|
.00174
|
|
|
|
4,800,354
|
|
|
GW
|
|
3/17/16
|
|
$
|
9,000
|
|
|
$
|
696
|
|
|
$
|
9,696
|
|
|
$
|
.002436
|
|
|
|
3,980,431
|
|
|
LG
|
|
3/17/16
|
|
$
|
3,000
|
|
|
$
|
138
|
|
|
$
|
3,138
|
|
|
$
|
.00038
|
|
|
|
4,918,624
|
|
|
Service
|
|
|
|
|
$
|
25,925
|
|
|
$
|
2,251
|
|
|
$
|
28,176
|
|
|
|
|
|
|
|
17,715,880
|
|
|
|
P
referred
Stock
On
June 26, 2015, the Company filed with the Delaware Secretary of State the Amended and Restated Designation Preferences and Rights
(the “Certificate of Designation”) of Class B Prefer
red Stock (the “Series B Preferred Stock”).
Pursuant to the Certificate of Designation, 1,000 shares constitute the Series B Preferred Stock. The Series B Preferred Stock
and any accrued and unpaid dividends thereon shall, with respect to rights on liquidation, winding up and dissolution, rank senior
to the Company’s issued and outstanding common stock and Series A preferred stock.
The Series
B
P
ref
e
r
red
S
tock
has
the right to vote in aggregate, on all shareholder matters equal
to 51% of the total vote, no matter how many shares of common stock or other voting stock of the Company are issued or outstanding
in the future.
The Series B Preferred Stock has a right to vote on all matters presented or
submitted to the Company’s stockholders for approval in pari passu with the common stockholders, and not as a separate class.
The holders of Series B Preferred Stock have the right to cast votes for each share of Series B Preferred Stock held of record
on all matters submitted to a vote of common stockholders, including the election of directors. There is no right to cumulative
voting in the election of directors. The holders of Series B Preferred Stock vote together with all other classes and series of
common stock of the Company as a single class on all actions to be taken by the common stockholders except to the extent that voting
as a separate class or series is required by law. As of March 31, 2016 and December 31, 2015, there were 1,000 shares of Class
B Preferred Stock outstanding.
Warrants
On April 14, 2015, in connection with
the appointment of Dr. Stephen Holt to the advisory board, the Company agreed the advisor shall receive a non-qualified stock option
to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05
per share and expiring April 14, 2018. Option Shares of 400,000 vested immediately and 50,000 Option Shares vest each month form
April 2015 through March 2016. Accordingly, as of March 31, 2016, 1,000,000 Option Shares have vested and the Company recorded
$2,317 as stock compensation expense for the three months ended March 31, 2016, based on Black-Scholes.
On April 26, 2013 and in connection
with the appointment of Mr. James Canton to the Company’s advisory board, the Company issued a warrant to Mr. Canton to purchase
300,000 shares of common stock. The warrant expired April 26, 2016.
Additionally, the Company also evaluated
all outstanding warrants to determine whether these instruments may be tainted. All warrants outstanding were considered tainted
as a result of the Company not having reserved the underlying shares of common stock of the warrants. The Company valued the embedded
derivatives within the warrants using the Black-Scholes valuation model. As of March 31, 2016, the Company estimated the
fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of .08 to 2.0 years;
(2) a computed volatility rate of 267%; (3) a discount rate of .18% to .73%; and (4) zero dividends. The valuation of this embedded
derivative was recorded with an offsetting gain/loss on derivative liability.
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
March 31, 2016 and 2015.
As of March 31, 2016, the Company had
a tax net operating loss carry forward of approximately $3,929,000. Any unused portion of this carry forward expires in 2030. Utilization
of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.
Note 10 –
Commitments and Contingencies
Office Space
Effective April 1, 2014, the Company
entered into a rent sharing agreement for the use of 1,300 square feet with a company controlled by the Company’s CFO. The
Company agreed to pay $1,350 per month for the space. The Company terminated the agreement in September 2015.
In April 2014, the Company entered into
a ten year sublease agreement for the use of up to 7,500 square feet with a
Colorado based
oncology clinical trial and drug testing company and facility presently doing cancer research and testing for established pharmaceutical
companies seeking FDA approval for new drugs
. Pursuant to the lease, as amended, the Company agreed to pay $3,500 per month
for the space, and it will be utilized to market, sell and distribute products to Colorado dispensaries.
For the three months ended March 31,
2016 and 2015, the Company recorded rent expense of $10,500 and $15,129, respectively.
Leased Properties
On April 28, 2014,
the Company executed and closed a 10 year lease agreement for 20 acres of an agricultural farming facility located in South Florida
following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing low grade marijuana
specifically for the use of treating epilepsy and cancer patients. Pursuant to the lease agreement, the Company maintains
a first right of refusal to purchase the property for three years. The Company has recorded $9,561 of expense (included in leased
property expenses) for the three months ended March 31, 2016 and 2015.
The Company is currently
in default of the lease agreement, as rents have not been for the second year of the lease beginning May 2015.
On July 11, 2014,
the Company signed a ten year
lease agreement for an additional 40 acres in Pueblo, Colorado.
The lease requires monthly rent payments of $10,000 during the first year and is subject to a 2% annual increase over the life
of the lease. The lease also provides rights to 50 acres of certain tenant water rights for $50,000 annually plus cost of approximately
$2,400 annually. The Company paid the $50,000 in July 2014, and has not used the property and any water and has not paid for any
water rights after June 30, 2015. The Company has recorded $32,850 and $45,350 of expense for the three months ended March 31,
2016 and 2015, respectively, (included in leased property expenses). The Company is currently in default of the lease agreement,
as rents have not been paid since February 2015.
Note 11 –
Going Concern
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern. As of March 31, 2016 the Company had an accumulated
deficit of $13,999,137
and working capital deficit of $1,361,486. 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 three months ended March
31, 2016 and 2015, the Company operated in one reportable segment, wholesale sales.
Note 13 –
Subsequent Events
2016 Convertible Notes
On April 15, 2016, the Company completed
the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement (the “LG Purchase
Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the “LG Debenture”)
in the aggregate principal amount of $65,625, and delivered on April 15, 2016, gross proceeds of $62,500 excluding transaction
costs, fees, and expenses.
Principal and interest on the above
is due and payable one year from the funding date, and is convertible into shares of the Company’s common stock at any time
at the discretion of LG at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately
prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.
The
Company may prepay the LG Debenture, subject to prior notice to the holder within an initial 30 day period after issuance, by
paying an amount equal to 118% multiplied by the amount that the Company is prepaying. For each additional 30 day period the amount
being prepaid is multiplied by an additional 6%, up to a maximum of 148% on the 180
th
day from issuance. Beginning
on the 180
th
day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so
long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing.
On
May 6, 2016, the Company, B. Michael Freidman and Barry Hollander (former CFO) were named as defendants in a Summons/Complaint
filed by Justin Braune in Palm Beach County Civil Court, Florida. The complaint alleges that Mr. Braune is entitle to 27,500,000
shares of common stock of the Company. The defendants will defend this lawsuit as Mr. Braune sent an email to the Company and
the Company’s transfer agent cancelling 12,500,000 shares on October 16, 2015 and his letter of resignation dated November
4, 2015, clearly stated that he confirmed he had cancelled 15,000,000 shares of common stock. Mr. Braune’s letter of resignation
was filed as Exhibit 5.1 on Form 8-K with the SEC on November 9, 2015.