Annual Report (10-k)

Date : 04/17/2017 @ 4:35PM
Source : Edgar (US Regulatory)
Stock : Cannasys, Inc. (PC) (MJTK)
Quote : 0.0036  0.0 (0.00%) @ 2:05AM

Annual Report (10-k)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x

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

 

For the fiscal year ended December 31, 2016

 

 

¨

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

 

For the transition period from _______________ to _______________

 

Commission File Number: 000-54476

 

CANNASYS, INC.

(Exact name of registrant as specified in its charter)

 

 

Nevada

88-0367706

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

1350 17 th Street, Suite 150, Denver, Colorado

80202

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code:

Telephone (720) 420-1290

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

None

n/a

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $0.001

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  o No  x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o

Accelerated filer  o

Non-accelerated filer  o

Smaller reporting company  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o No  x

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant, after giving retroactive effect to a 20:1 reverse split of the outstanding shares that was effective in October 2016, computed by reference to the price at which the common equity was last sold as of June 30, 2016, was $292,757,387.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of April 7, 2017, there were 1,053,279,877 shares of common stock, $0.001 par value, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE. None.

 


 

CannaSys, Inc.

Form 10-K for the fiscal year ended December 31, 2016

 

 

 

Table of Contents

 

Item

 

 

Page

 

 

Part I

 

--

 

Special Note on Forward-Looking Statements

3

1

 

Business

4

1A

 

Risk Factors

23

1B

 

Unresolved Staff Comments

32

2

 

Properties

32

3

 

Legal Proceedings

32

4

 

Mine Safety Disclosures

32

 

 

 

 

 

 

Part II

 

5

 

Market for Registrant’s Common Equity, Related Stockholder Matters

 

 

 

and Issuer Purchases of Equity Securities

32

6

 

Selected Financial Data

33

7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

7A

 

Quantitative and Qualitative Disclosures about Market Risk

38

8

 

Financial Statements and Supplementary Data

38

9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

38

9A

 

Controls and Procedures

39

9B

 

Other Information

40

 

 

 

 

 

 

Part III

 

10

 

Directors, Executive Officers and Corporate Governance

41

11

 

Executive Compensation

44

12

 

Security Ownership of Certain Beneficial Owners and Management and Related

 

 

 

Stockholder Matters

46

13

 

Certain Relationships and Related Transactions, and Director Independence

47

14

 

Principal Accounting Fees and Services

48

 

 

 

 

 

 

Part IV

 

15

 

Exhibits and Financial Statement Schedules

50

--

 

Signatures

58

 

 

 

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SPECIAL NOTE ON FORWARD LOOKING STATEMENTS

 

This annual report on Form 10-K contains statements about the future, sometimes referred to as “forward-looking” statements. Forward-looking statements are typically identified by the use of the words “believe,” “may,” “could,” “should,” “expect,” “anticipate,” “estimate,” “project,” “propose,” “plan,” “intend,” and similar words and expressions. Statements that describe our future strategic goals, plans, objectives, and predictions are also forward-looking statements.

 

This report contains forward-looking statements relating to our anticipated revenues, gross margin and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity, and financing sources. This forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include those relating to our liquidity requirements, the continued growth of the software industry, the success of our product development, marketing and sales activities, vigorous competition in the software industry, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates and the trading price of our common stock), domestic or global economic conditions, the inherent uncertainty and costs of prolonged arbitration or litigation, and changes in federal or state tax laws or the administration of such laws.

 

Any forward-looking statements, including those regarding our or our management’s current beliefs, expectations, anticipations, estimations, projections, proposals, plans or intentions, are not guarantees of future performance or results or events and involve risks and uncertainties, such as those discussed in this report.

 

The forward-looking statements are based on present circumstances and on our predictions respecting events that have not occurred, that may not occur, or that may occur with different consequences from those now assumed or anticipated. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the risk factors discussed in this report. These cautionary statements are intended to be applicable to all related forward-looking statements wherever they appear in this report. Any forward-looking statements are made only as of the date of this report, and we assume no obligation to update forward-looking statements to reflect subsequent events or circumstances.

 

 

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PART I

 

ITEM 1. BUSINESS

 

Overview

 

General

 

Since 2013, we have focused on developing and acquiring products and services that are attractive components of the ancillary services segment of the regulated cannabis industry. We do not grow or produce cannabis or products that contain cannabis. We sell value-add services that we believe enhance branding, marketing, and other key touch-points within the regulated cannabis industry.

 

The cannabis industry is rapidly changing, driven by favorable regulatory expansion at the state level, enhanced regulation around cultivation and testing, and maturation of marketing and branding efforts among both retailers and branded product companies. Our initial products, CannaCash, CannaTrade, ExchangeHemp, and CannaLIMS, either have been merged with our newly launched products or remain components of our product suite as we seek to introduce streamlined, more cost-effective, and high-margin technology and services into the changing marketplace.

 

Our initial consumer product, BumpUp Rewards, was introduced into the market as CannaCash in July 2014 and did not fully reach the market as BumpUp Rewards until July of 2015. We continued to pursue selective market penetration for BumpUp Rewards in order to gain information on the consumer’s purchasing habits and retailers’ marketing needs. However, we have deemphasized BumpUp Rewards and BumpUp Rewards white-label applications in order to concentrate our efforts on marketing and distributing Citizen Toke, a text-message-based social customer acquisition platform for retailers and branded products companies.  

 

Intent to Acquire Alliance Financial Network, Inc.

 

On March 29, 2017, we announced that we intended to acquire Alliance Financial Network, Inc. (“AFN”), a Colorado-based financial technology company that provides a unique, proprietary digital transaction and mobile payment solution for bank-choked and cash-intensive industries. AFN is a federally registered financial institution that has developed, owns, and operates eXPO™, its electronic eXchange POrtal.

 

eXPO™ provides access for consumers and businesses to transfer funds electronically, whether consumer-to-consumer, consumer-to-business, business-to-consumer, or business-to-business, outside traditional banking channels. Federal and federally insured state banks currently do not serve those who grow and sell cannabis products on the stated ground that growing and selling cannabis is illegal under federal law. We believe AFN’s eXPO™ delivers electronic payment solutions to the cannabis and other bank-choked industries. eXPO™ has the ability to accurately track and report local, state, and if applicable, federal tax obligations of consumers and retailers.

 

As noted above, AFN and eXPO™ are registered with the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) as a financial institution. This registration provides AFN with the appropriate regulatory framework and guidance on a federal level for Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance. The eXPO™ mobile application is downloadable by consumers and businesses once they become an eXPO™ member.

 

Under the non-binding provisions of the Letter of Intent with AFN, we would acquire AFN through a tax-free merger with our subsidiary. If the acquisition is completed, AFN stockholders would receive a

 

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controlling block of our equity, and AFN would name designees to our board and executive team. The combined company, to be renamed Alliance Financial Network, Inc., would market AFN’s products and platforms, as well as our suite of products. The parties are preparing definitive agreements that we anticipate executing before month end. However, we cannot assure that we will be able to agree to the terms of definitive agreements or that the transaction will be completed.

 

2016 Activities

 

In the last year, we have worked to acquire technology and branding assets that enhance our asset base while restructuring the overall business to streamline product and service integration and operations. The cannabis industry continues to encounter resistance from traditional loyalty marketers, branded consumer products companies, as well as traditional banking, all of which we believe present an opportunity for us. We believe the integration of Citizen Toke with AFN’s eXPO™ solution is a unique platform for both consumer transaction solutions in the cannabis industry.  

 

We believe we are close to achieving our strategic goals of creating a highly distributable and scalable solution for consumer transactions in the cannabis industry. The economic model for AFN is very complementary to our core products. Once scaled, eXPO™ can have a meaningful impact on our ongoing financial results. Finally, eXPO™ has wide reaching applications beyond the cannabis industry, including the firearms industry, which will diversify AFN’s revenue stream and provide additional long-term value creation for our investors.

 

Our principal activities to date have been the following:

 

  Raising Capital . We have been focused primarily on raising capital to finance our operations and software research and development.  

 

  Creating New Products . We have developed new software products, including BumpUp Rewards, CannaLIMS, a laboratory information management systems product, as well as BumpUp Rewards white-label. We recently acquired, and will continue to develop, market, and distribute Citizen Toke as we deemphasize the remainder of our business-to-business products.  

 

  Strategic Relationships . We have concentrated our efforts on establishing complementary strategic relationships and selecting acquisitions in order to facilitate new and complementary product development and distribution. Specifically, we have sought to use our currency to consolidate a vertically integrated value chain delivering consumer-oriented solutions for the cannabis industry. We acquired Citizen Toke in August 2016 and followed that acquisition with our intent to acquire AFN and combine the two products into a vertically integrated solution.  

 

  Marketing and Distribution . We have selectively marketed our core software products to the cannabis industry.  

 

The availability, functionality, and payment options of our products are tailored, based on state and local laws and regulations. Our software products are centrally hosted by us and accessed by the client through web browsers and mobile applications.

 

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We believe legal compliance is important in this industry in which we serve directly regulated growers, distributors, retailers, and customers. We check the state licensure status of producers and retailers, regularly monitor disciplinary actions, and routinely update our compliance database. We will stop doing business with firms that are not properly licensed. Our operating systems integrate regulatory compliance and operational accounting. We have in place standard contracts with a verified legal signing authority for our counterparties, as well as end-user licensing agreements, with which to hold accountable the parties we approve to use either system.

 

Products

 

eXPO™

 

On March 29, 2017, we announced our intent to acquire 100% of the assets of Alliance Financial Network, Inc., and its eXPO™ product. eXPO™ provides end-to-end transaction processing solutions for retailers operating in bank-choked industries, including the cannabis industry. We are now negotiating the terms of definitive transaction documents.  

 

Citizen Toke

 

On August 10, 2016, we acquired Citizen Toke, a mobile, text-message-based deals platform focused on user acquisition and customer engagement for both regulated cannabis retailers and branded non-cannabis products companies, from Beta Killers LLC. Beta Killers LLC is an innovation laboratory that develops technologies to improve the ways consumers and businesses interact. Simultaneously, we agreed to provide $100,000 in cash to fund development of a more advanced version of Citizen Toke’s software platform and engaged the Citizen Toke lead developer as an adviser. We are negotiating collaborative arrangements with partners to launch the Citizen Toke platform in Colorado and California. Based on initial feedback from customers, retailers, and branded products companies, we plan to focus on launching the Citizen Toke application into the market.  

 

Mile High Consulting and Branding, Inc. Branded Products

 

We expect product licensing and distribution opportunities through Mile High Consulting and Branding, Inc., a Colorado corporation, of which we own 51% and MHB, Inc. owns 49%. Mile High Consulting and Branding is focused on licensing products with retired professional athletes alongside the Gridiron Cannabis Coalition, an organization that promotes lawful medicinal marijuana use.

 

BumpUp Rewards

 

We developed BumpUp Rewards as an affiliate-based membership rewards loyalty program, based on Loyl.Me’s Automated Cloud and Customer Relationship Management Platform, designed specifically for the cannabis industry. An early version of BumpUp Rewards was introduced into the market as CannaCash in July 2014. The BumpUp Rewards application is free for customers and an efficient use of marketing dollars for dispensaries and providers. The BumpUp Rewards application allows for strong social media ties and an electronic solution for providing gifts, points, and discounts to friends and family. BumpUp Rewards includes an internal control mechanism designed to enhance compliance with the regulatory requirements applicable to individual retail outlets and customers based on applicable state licensing information and customers’ locations. BumpUp Rewards enables retailers to gain new customers through gifts, to retain customers through the affiliate and store-specific points program, and to tailor specials and free advertising via the BumpUp Rewards program to a growing customer marketplace. We license our customers to use this product and provide updates in consideration of the payment of monthly fees.

 

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For retail establishments, BumpUp Rewards offers the ability to gain new customers through gifts, retain customers through the affiliate and store-specific points program, and tailor specials and free advertising via the BumpUp Rewards program to an increasingly significant customer marketplace.

 

We deemphasized the BumpUp product in order to concentrate our efforts on marketing and distributing Citizen Toke.

 

BumpUp Rewards White-Label Applications

 

On December 22, 2015, we entered into a joint software development and marketing agreement with National Concessions Group, Inc., the organization responsible for marketing and branding a cannabis product brand called O.penVAPE. BumpUp Rewards white-label application, the product of this joint effort, is an advanced version of our BumpUp Rewards application intended to incentivize product and corporate sales organizations through a proprietary points system. O.PenVape’s “O Rewards” loyalty application, based on our BumpUp Rewards platform, became available for download to consumers in both iOS and Android devices in beta format in March 2016.  

 

We deemphasized the BumpUp white-label product in order to concentrate our efforts on marketing and distributing Citizen Toke.

 

CannaLIMS

 

CannaLIMS is a laboratory management information system product focused solely on the cannabis marketplace to assist cannabis laboratories in meeting multiple state and local level regulatory reporting requirements, which we update regularly. We license our CannaLIMS system to customers, who access the software through web browsers and mobile applications, for recurring license fees. We launched this product into the market and have secured recurring revenue clientele. However, to date, demand for CannaLIMS has been limited as many laboratories build and use their own software, so we have shelved its marketing and development for the time being.

 

Marketing

 

We strive to integrate our marketing and sales strategies in order to minimize our user acquisition costs for software products we license while maximizing the distribution of our branded products businesses. We plan to gain scale through the implementation of social media, search-engine optimization, and web-based marketing. We also have a strategic relationship and minority interest in Duby, LLC, a social media application focused on cannabis users. Duby and its management team have helped us in introducing and marketing our services to its customers as well as assisting with acquiring new customers.

 

Going forward, we plan to continue to broaden the products and services we offer through our established marketing channels. We market all of our products within regulatory constraints.

 

We cannot assure that we will be able to attain any of the above operational goals or that we will be able to obtain funding that may be required to support such level of operations.

 

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Strategic Relationships

 

Beta Killers LLC

 

Beta Killers LLC provides professional services related to technology, product, and software development; branding, marketing, and business development; products sales and growth; and customer relations to us. We have committed $100,000 to Beta Killers to deliver a more advanced version of Citizen Toke’s software platform. We have also engaged Beta Killers’ chief executive officer and lead developer of Citizen Toke as our adviser. We are very encouraged by positive feedback from customers, retailers, and branded products companies and plan to focus our efforts on launching Citizen Toke into the market immediately.  

 

MHB, Inc. and Mile High Consulting and Branding, Inc.

 

MHB, Inc., a Colorado corporation doing business as Mile High Brands, is a lifestyle branding agency focused on the regulated cannabis industry. Its clients include celebrities and product companies that wish to access the rapidly growing cannabis marketplace.

 

In November 2015, we closed a share exchange agreement with MHB that provided, among other things, an equal exchange of common stock, reciprocal seats on the board of directors, and a share of gross revenues. In December 2016, we revised our share exchange agreement with MHB to reduce the share exchange to 15,000 shares of each company and deemphasized our strategic stake in MHB in favor of our newly formed Mile High Consulting and Branding, Inc. joint venture company as discussed below.

 

In May 2016, we entered into a Stockholders Agreement with MHB, Inc., as co-founders, to govern our new joint venture company, Mile High Consulting and Branding, Inc. Although we own 51% of the new joint venture company and control its board of directors, under the Stockholders Agreement, distributions of revenue from a particular opportunity may vary depending on the nature of the opportunity, who brought to opportunity to the joint venture’s attention, funding requirements for the opportunity, and other factors. The revenue split will be based on the respective ownership interest of the stockholders, currently 49% to MHB, Inc. and 51% to us, unless the board agrees on a different allocation.

 

Mile High Consulting and Branding plans to secure agreements with celebrity partners to provide branding opportunities through a “matching service” between the celebrity and a branded products company. Branded products companies will develop the product and provide a revenue sharing agreement with Mile High Consulting and Branding, as applicable. These types of opportunities–primarily organically sourced–are those that will be developed through Mile High Consulting and Branding. We do not plan to include existing or legacy technology products in our transactions with Mile High Consulting and Branding.

 

Green Capital Ventures, Inc.

 

On November 17, 2015, we entered into a joint marketing and distribution partnership in California with Green Capital Ventures, Inc. Green Capital is a holding company and consulting firm focused on launching and commercializing products with an altruistic objective. The principals of Green Capital founded the Gridiron Cannabis Coalition, an organization dedicated to the advancement of medicinal cannabis as a treatment for brain disease and bodily injuries resulting from playing professional sports. Together with Green Capital, we intend to seek commercial partnerships for Gridiron Cannabis Coalition and to support its marketing efforts, beginning in Colorado.

 

 

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We are supporting the marketing effort to launch a pain relief transdermal patch marketed as “Gridline Cannabis” with distribution partners and retailers throughout Colorado through our Citizen Toke software.

 

National Concessions Group, Inc.

 

On December 22, 2015, we entered into a technology development and joint marketing agreement with National Concessions Group, Inc., a cannabis marketing and distribution company whose products are marketed under the “O.penVAPE” brand. We are working with National Concessions Group to develop O.PenVape’s “O Rewards” loyalty application based on our BumpUp Rewards platform. O Rewards, launched in beta format in March 2016, is a loyalty product focused on retail brands in the cannabis industry. We will jointly market this application to other product manufacturers in the cannabis industry. This is our first market introduction of BumpUp Rewards white label.

 

We also engaged National Concessions Group to assist us with marketing, public relations, and introductions to potential investors, including other efforts for both parties’ mutual benefit. To begin this strategic relationship, we agreed to issue warrants to purchase 2,500 shares of our common stock per quarter, at a price per share equal to the trailing 60-day volume weighted average price per share of our common stock, up to a maximum of 15,000 shares, for ongoing services. After issuing the initial warrant to purchase 2,500 shares, during the quarter ended September 30, 2016, we terminated our distribution and marketing relationship with National Concessions Group, Inc., and our obligation to issue additional warrants in order to concentrate our efforts on additional relationships related to Citizen Toke.

 

KiwiTech, LLC

 

In December 2015, we entered into an agreement with KiwiTech, LLC, to expand, support, and further develop our software products and web and mobile applications. KiwiTech is a business incubator providing a combination of mobile technology development solutions and active investment into new technologies. Under the agreement, we engaged KiwiTech to perform not less than $250,000 in hourly labor charges for development work between January 1 and December 31, 2016. This minimum commitment will be paid 50% in cash and 50% through the issuance of warrants for the purchase of our common stock. On January 21, 2016, we issued to KiwiTech a warrant for the purchase of 15,625 shares, at the exercise price of $0.40 per share, with an expiration date of December 31, 2025.

 

Duby, LLC

 

On December 10, 2015, we acquired a 1.083% interest in Duby, LLC, a social media application focused on cannabis consumers. As part of the acquisition, Duby agreed to assist in the promotion of our products and services on its platform. We purchased the interest in Duby as part of ongoing negotiations for the joint marketing and promotion of our respective products. On May 13, 2016, we announced that Duby had agreed to join forces with us to accelerate new user adoption for our latest product, Citizen Toke.

 

Other Relationships

 

In February 2015, we entered into a licensing agreement with Loyl.Me, LLC, for its Automated Cloud and Customer Relationship Management Platform. We owed a final cash installment of $15,000 to Loyl.Me as part of a base fee for the software license and we were required to remit to Loyl.Me 8% of our gross revenues generated from the licensing agreement. Because we had not had a meaningful demand for Loyl.Me’s software, we did not owe any amounts under the royalty arrangement. On October 3, 2016, we entered into an agreement to terminate the license agreement and the services agreement, and Loyl.Me waived the final $15,000 cash payment.

 

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In April 2015, we signed a definitive agreement with PhytaTech Labs for the first installation of our CannaLIMS software, a lab information management system targeted for cannabis testing facilities and laboratories. In conjunction with this agreement, we signed a joint software development agreement in partnership with PhytaTech Labs, a multi-jurisdictional lab operator. However, we deemphasized our development and marketing of this product as most laboratories develop their own internal laboratory information management system.

 

In April 2015, Rocky Mountain Hemp Association (also known as the National Hemp Association) selected our online service, ExchangeHemp, as its exclusive trading platform and marketplace. In September 2015, we launched ExchangeHemp in partnership with the National Hemp Association as part of an exclusive joint marketing agreement between our customers and National Hemp Association’s member entities. Although we are excited about the opportunity although the venture has not been successful, and we have since deemphasized our ExchangeHemp business.

 

In May 2015, we signed an agreement for implementation of our BumpUp Rewards loyalty marketing platform on StrainData, a wholly owned subsidiary of CannLabs, Inc. To date, no business activity has been procured under this agreement.

 

In September 2015, we entered into a letter of intent with Green Tree International, Inc., the parent company of Amercanex, the American Cannabis Exchange, and the American Hemp Exchange, to sell our CannaTrade and ExchangeHemp trading platforms to Amercanex for a combination of cash and seats on the Amercanex exchange. The transaction was not consummated, and the letter of intent expired according to its terms. We have since deemphasized our CannaTrade and ExchangeHemp businesses.

 

Between December 2015 and March 31, 2016, we worked with LuvBuds, LLC, which marketed products such as branded logo t-shirts, mugs, and other accessories. We are no longer pursuing this relationship.

 

We continually review the commercial viability and opportunities that we believe are afforded by each of our strategic relationships and consider prospects for other relationships. Accordingly, we may change or terminate existing strategic relationships or enter into new relationships.

 

Competition

 

The current market for cannabis-related technology is highly fragmented because of the new emergence of the industry, which is continuously evolving as states in addition to Colorado, Washington, California, and Oregon implement new laws allowing production and sale of medical or recreational cannabis. We believe the primary competition is currently store-specific loyalty programs, marketing outreach, and point-of-sale systems for the BumpUp Rewards product. However, there are few, if any, products in the marketplace that have the capability and reach of Citizen Toke leveraged together with Duby’s user base. Finally, new products to facilitate transactions, now principally completed for cash, via an electronic payment medium such as AFN’s eXPO™ have entered the cannabis industry marketplace. We continue to monitor the competitive environment for eXPO™ and AFN.

 

Although cannabis is illegal under federal law, we believe there is popular demand for cannabis, and do not believe that prospective customers are generally deterred from doing business with a company because of fears of federal enforcement of laws prohibiting the sale or possession of medical or recreational cannabis. As demonstrated by the table of state cannabis regulations below, the number of states enacting safe access to cannabis laws continues to increase.

 

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Government Regulations

 

We will operate only in states that have legalized various aspects of medical or recreational use of cannabis and that have established laws and regulations governing the operations of their respective licensees. We do not produce, transport, process, or sell cannabis or products containing cannabis, but only provide the cannabis-related industry with ancillary technology programs in accordance with applicable state laws.

 

Although we do not cultivate, process, possess, distribute, or sale cannabis or cannabis products, because our products and services are related to the cannabis industry, we and our products and services are possibly subject to a number of federal, state, and local laws, rules, and regulations directly and indirectly regulating the cannabis industry conduct through financial and other regulations, such as the anti-money laundering provisions of the Bank Secrecy Act (BSA) and provisions under the jurisdiction of the Federal Deposit Insurance Corporation (FDIC), the Financial Crimes Enforcement Network (FinCEN), and others.

 

Federally insured and regulated financial institutions face conflicting regulatory requirements that treat the cannabis industry as illegal under federal law even when it is permitted under some state laws. However, 32 states plus the District of Columbia allow medical cannabis, and the issue is further complicated with Washington and Colorado legalizing recreational use. Initially, when Colorado legalized and regulated medical and recreational cannabis, federally insured and regulated bodies and other financial institutions refused cannabis business source deposits and other business. Currently, given FinCEN’s recent guidance released on February 14, 2014, financial institutions may provide services to cannabis-related businesses consistent with their BSA obligations. FinCEN’s guidance is discussed in greater detail below.

 

U.S. Controlled Substances Act

 

The cannabis industry is regulated by the federal, state, and local governments. Regulation varies from state to state. Federally, cannabis is currently classified as a Schedule I controlled substance under the U.S. Controlled Substances Act, U.S.C. Section 811 (CSA), which generally means that Congress has determined that cannabis is a dangerous drug and that the cultivation, process, distribution, and sale of cannabis and cannabis products are serious crimes. The CSA does not distinguish between medical and recreational use of cannabis; all uses are prohibited. On the other hand, several states have legalized various aspects of cannabis process and distribution, although such activities are subject to stringent state licensing and regulations. In many states, a clear, continuing, unresolved conflict exists between federal and state laws. In addition to the complex web of federal and state regulations, in response to regulatory concerns, the banking and financial services industry has created stringent barriers to allowing cannabis producers and retailers to have normal banking relationships.

 

The federal government formally opposes the use of medical and recreational cannabis. Although many states have chosen to enact rules and regulations permitting the use of medical cannabis for their citizens under a state-approved medical cannabis program, cannabis continues to be illegal under federal law. The state medical cannabis programs provide protection from state criminal prosecution for patients and primary caregivers who are qualified to participate in the program and are in compliance with the regulations governing the program, but provide no protection from federal prosecution for violation of the CSA.

 

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State Regulation

 

In November 2012, Colorado residents voted in favor of Amendment 64, an initiative ballot measure that allowed for the “personal use and regulation of marijuana” in Colorado. The initiative, enacted as Article 18, Sec. 16 of the Colorado State Constitution and implemented on January 1, 2014, allows “recreational use” by adults age 21 and older and authorizes Colorado to regulate commercial cultivation, process, and sale of cannabis. Similarly, in November 2012, the residents of Washington voted in favor of Initiative 502, which allows for “recreational use” by adults age 21 and older and authorizes Washington to regulate commercial cultivation, process, and sale of cannabis.

 

Although Colorado and Washington have enacted voter-initiated measures to allow for the personal use of small amounts of cannabis by its citizens, both states are clear to remind their citizens that cannabis is currently illegal under federal law and classified as a Class I Controlled Substance.

 

As we are an ancillary services provider to the cannabis industry, we are not directly affected by government regulations. However, our clients may be. That being said, the State of Colorado Department of Revenue Enforcement Division State statute (C.R.S § 12-43.3-307; C.R.S. § 12-43.4-306) mandates that anyone working within Colorado’s marijuana industries (medical or retail, including service providers) be licensed by the Marijuana Enforcement Division (MED) in order to ensure that they meet mandated statutory requirements. A registered and approved vendor within the state of Colorado obtains a MED Vendor badge, which ensures that the vendor has passed the MED background check and met the statutory criteria to work within Colorado’s marijuana industries. We have obtained a license from MED for the products and services we provide and believe we are in material compliance with applicable regulations. As part of our business, we may from time to time visit our client or have nonpublic access to our clients’ facilities. As a result, approval from the MED is an important part of our business.  

 

There are several states with initiatives for state medical cannabis programs pending on the ballot for upcoming elections, while other states move forward through the legislative process. The following table reflects the current status of cannabis regulations:

 

State

Status

Details and Difference in Laws

CO (1)

Medical and recreational laws passed and in effect

Enacted a state-wide regulatory agency to govern medical and recreational businesses: Colorado Department of Revenue Marijuana Enforcement Division. Recreational law allows in-state residents age 21 and older to purchase up to 1 ounce of cannabis per day. Recreational law allows out-of-state residents age 21 and older to purchase up to 1/4 ounce of cannabis per transaction. Medical sales require patients to register with the Colorado Department of Public Health and Environment. Medical patients may purchase up to 2 ounces of cannabis per day.

 

WA (1)

Medical and recreational laws passed and in effect

Enacted a state-wide regulatory agency to govern medical and recreational businesses: Initiative 502 for access to recreational cannabis is governed by the Washington Liquor Control Board. Recreational law allows persons age 21 and older to possess 1 ounce of cannabis. As of July 1, 2016, all cannabis producers, processors, and retail stores must be licensed by the Washington Liquor Control Board. Licensed retail stores may apply for and get a medical cannabis endorsement for dual use sales.

 

 

 

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State

Status

Details and Difference in Laws

OR (1)

Medical and recreational laws passed and in effect

Medical patients must register with the Oregon Health Authority. Medical cannabis dispensaries are regulated by the Oregon Health Authority. Patients are allowed to possess up to 24 ounces of cannabis. Measure 91, which passed in November 2014, allows recreational cannabis sales to be governed by the Oregon Liquor Control Commission, which will tax and regulate recreational cannabis similar to alcohol. The Oregon Medical Marijuana Program (OMMP) and the Medical Marijuana Dispensary Program are both administered by the Oregon Health Authority’s Public Health Division. This also includes recreational sales that began in dispensaries on October 1, 2015.

 

NV (1)

Medical laws passed and in effect

Medical patients must register with the Nevada Division of Public and Behavioral Health. Applications to open medical cannabis dispensaries are currently being reviewed by the Nevada Division of Public and Behavioral Health. Patients are allowed to possess up to 2-1/2 ounces of cannabis. On November 8, 2016, the voters approved a ballot measure to legalize the use of recreational cannabis. The new law legalizes one ounce or less of cannabis for recreational use for persons 21 years or older beginning 2017. The initiative will tax cannabis sales and allocate tax revenue to education.

 

DC (1)

Medical and recreational laws passed and in effect

Medical patients must register with the District of Columbia Department of Health. Medical cannabis dispensaries are regulated by the District of Columbia Department of Health. Patients are allowed to possess up to 2 ounces of cannabis. Recreational cannabis was approved in the last election. Washington D.C. passed Initiative 71 in November 2014. Initiative 71 permits the use of up to 2 ounces of marijuana and the possession and cultivation of up to 3 marijuana plants. While Washington D.C. voters passed medical and adult use initiatives, the U.S. Congress has blocked the District from spending any resources to enact a law or regulated program.

 

AK (1)

Medical and recreational laws passed and in effect

Medical patients must register with the Alaska Division of Public Health. Medical cannabis dispensaries are currently not allowed. Patients are allowed to possess up to 1 ounce of cannabis. Ballot Measure 2, which will tax and regulate recreational cannabis similar to alcohol, was approved in November 2014 and became effective February 2015. The final set of rules adopted by the Marijuana Control Board under the governance of Alaska Department of Commerce were to be implemented in early 2016. On February 24, 2016, the Alaska Marijuana Control Board began accepting applications for marijuana business licenses. On November 8, 2016, the voters of Arizona did not pass the legalization initiative. At this time, only medical cannabis laws remain in the state of Arizona.

 

 

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State

Status

Details and Difference in Laws

IL (2)

Medical law passed

Medical patients must register with the Illinois Department of Public Health. Medical cannabis dispensaries are regulated by the Illinois Department of Financial and Professional Regulation. Medical cannabis cultivation facilities are regulated by the Illinois Department of Agriculture. Patients are allowed to possess up to 2-1/2 ounces of cannabis. The sale of medical cannabis to qualifying patients and caregivers began in November 2015 at eight dispensaries located throughout the state.

 

AZ (2)

Medical laws passed and in effect

Medical patients must register with the Arizona Department of Health Services. Medical cannabis dispensaries are regulated by the Arizona Department of Health Services. Patients are allowed to possess up to 2-1/2 ounces of cannabis. The Arizona Marijuana Legalization Initiative appeared on the November 2016 ballot. The state legalization initiative failed to pass.

 

FL (2)

CBD-only medical law passed

Amendment 2 to legalize a full medical cannabis program did not pass on the November 2014 ballot. Currently, Florida has CBD-only specific law for qualifying conditions such as: cancer, muscle spasms, and seizures. State-qualified patients may possess cannabis strains containing 10% or more of CBD and no more than eight-tenths of 1% of THC. On March 25, 2016, the Governor signed House Bill 307 expanding Florida’s medical marijuana law allowing terminally ill patients to access THC dominant marijuana. On November 8, 2016, the voters of Florida approved an amendment to the state’s constitution expanding the medical marijuana laws.

 

CA (2)

Medical laws passed and in effect

Medical patients must register with the California Department of Public Health. There is no state regulatory agency overseeing medical cannabis dispensaries, but some cities regulate dispensaries locally. There is no specific possession limit in place. On November 8, 2016, the voters of California approved Proposition 64 allowing for adult-use recreational sales to begin in 2018.

 

NY (2)

Medical laws passed

Medical patients will have to register with the New York State Department of Health. Medical cannabis dispensaries will be regulated by the New York State Department of Health. Patients are allowed to possess a 30-day supply of only extracts and concentrates from cannabis. The New York State Department of Health launched the state’s Medical Marijuana Program on January 7, 2016. The program approved forms of medical cannabis available with a physician’s certification at designated dispensaries across New York state and licensed operators within the state.

 

 

 

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State

Status

Details and Difference in Laws

ME (3)

Medical laws passed and in effect

Medical patients must register with the Maine Department of Health and Human Services. Medical cannabis dispensaries are regulated by the Licensing and Regulatory Services under the Maine Department of Health and Human Services. Patients are allowed to possess 2-1/2 ounces of cannabis. On November 8, 2016, the voters of Maine passed Question 1 legalizing adult-use recreational sales.

 

NH (3)

Medical laws passed and in effect

Medical patients will register with the New Hampshire Department of Health and Human Services. The New Hampshire Department of Health and Human Services will regulate and govern medical cannabis dispensaries. Patients will be allowed to possess up to 2 ounces of cannabis. On Monday, December 28, 2015, the New Hampshire Department of Health and Human Services began to issue Registry Identification Cards by mail to qualifying patients and designated caregivers whose applications have been approved.

 

VT (3)

Medical laws passed and in effect

Medical patients must register with the Vermont Department of Public Safety. Medical cannabis dispensaries are regulated by the Vermont Department of Public Safety. Patients are allowed to possess up to 2 ounces of cannabis.

 

MA (3)

Medical laws passed and in effect

Medical patients must register with the Massachusetts Department of Public Health. Medical cannabis dispensaries are operational and regulated by the Massachusetts Department of Public Health. Patients are allowed to possess a 60-day supply of cannabis. On November 8, 2016, the voters of Massachusetts elected to pass Question 4 legalizing the adult use and cultivation of marijuana. Under the new law, as of December 15, 2016, adults over the age of 21 can possess up to one ounce and cultivate up to six plants in their personal residence.

 

RI (3)

Medical laws passed and in effect

Medical patients must register with the Rhode Island Department of Health. Medical cannabis dispensaries are regulated by the Rhode Island Department of Health. Patients are allowed to possess 2-1/2 ounces of cannabis.

 

CT (3)

Medical laws passed and in effect

Medical patients must register with the Connecticut Department of Consumer Protection. Medical cannabis dispensaries are regulated by the Connecticut Department of Consumer Protection. Patients are allowed to possess a 30-day supply of cannabis.

 

NJ (3)

Medical laws passed and in effect

Medical patients must register with the New Jersey Department of Health. Medical cannabis dispensaries are regulated by the New Jersey Department of Health. Patients are allowed to purchase up to 2 ounces of cannabis per month.

 

 

 

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State

Status

Details and Difference in Laws

DE (3)

Medical laws passed and in effect

Medical patients must register with the Delaware Division of Public Health. Medical cannabis dispensaries are regulated by the Delaware Health and Social Services. Patients are allowed to possess 6 ounces of cannabis.

 

MD (3)

Medical laws passed

Medical patients will have to register with the Maryland Department of Health and Mental Hygiene. Medical cannabis dispensaries will be regulated by the Maryland Department of Health and Mental Hygiene. Maryland’s medical cannabis operations are regulated by the Maryland Medical Cannabis Commission. State regulations allow for 94 dispensaries, two per state Senate district, and 15 grow facilities.

 

MI (3)

Medical laws passed and in effect

Medical patients must register with the Michigan Department of Licensing and Regulatory Affairs. Medical cannabis dispensaries are not currently allowed, but a proposed bill would allow cities and localities to license and regulate them. Patients are allowed to possess up to 2-1/2 ounces of cannabis.

 

 

 

 

MN (3)

Medical law passed and in effect

Medical patients have to register with the Minnesota Department of Health. Medical cannabis dispensaries will be regulated by the Minnesota Department of Health. Patient possession limits are to be determined, but only nonsmokable forms of cannabis are allowed.

 

MT (3)

Medical law passed and in effect

Medical patients must register with the Montana Department of Public Health and Human Services. Medical cannabis dispensaries are currently not allowed, but legal actions are seeking to reopen them. Patients are allowed to possess up to 1 ounce of cannabis. On November 8, 2016, the voters approved Medical Marijuana Initiative known as I-182 eliminating the current state requirement of a three-patient to caregiver limit.

 

NM (3)

Medical laws passed and in effect

Medical patients must register with the New Mexico Department of Health. Medical cannabis dispensaries are regulated by the New Mexico Department of Health. Patients are allowed to possess up to 6 ounces of cannabis.

 

HI (3)

Medical laws passed and in effect

Medical patients must register with the Hawaii Department of Public Safety. Patients are allowed to possess up to 3 ounces of cannabis. The Hawaii Department of Health licenses and regulates the dispensary program and licensed dispensaries were expected to be operational by summer of 2016.

 

NC (3)

SC (3)

CBD-only medical law passed and rulemaking is in progress

Rulemaking is in progress to regulate a CBD-only medical cannabis program in these states.

 

 

 

 

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State

Status

Details and Difference in Laws

MS (3)

CBD-only medical law passed

This program does not provide reasonable access to CBD medicine for patients. Only institutions of higher learning are able to cultivate cannabis and process it to create CBD-only medication.

 

AL (5)

CBD-only medical law passed and rulemaking is in progress

This program is likely to be nonfunctional as it requires a cannabis prescription, which is federally illegal. This program also does not protect patients from arrest and prosecution.

 

TN (5)

CBD-only medical law passed

This law allows a CBD-only medical cannabis study to be conducted by universities only. This study will likely not get underway as universities will not risk losing federal funding.

 

KY (5)

CBD-only medical law passed

This law does not provide for a source for CBD extracts or production. This program is likely to be nonfunctional as it requires a cannabis prescription, which is federally illegal.

 

WI (3)

IA (3)

CBD-only medical cannabis law in effect

This law does not provide for reasonable access to CBD products for patients in these states.

 

 

 

 

MO (3)

CBD-only medical law passed

This law allows for cultivation and processing by state-licensed facilities. Only patients with intractable epilepsy would be allowed access to the CBD medication.

 

UT (5)

CBD-only medical law passed and in effect

It is unclear if patients will have reasonable access to CBD medication through colleges and universities allowed to study hemp.

 

PA (3)

Medical laws passed

In May 2016, Pennsylvania’s Medical Marijuana Act went in to effect. On January 17, 2017, the PA Department of Health released applications for grower/processor and dispensary permits. The first round of application approvals is expected June 2017.

 

VA (5)

No functional medical laws in effect

Current medical cannabis law requires a prescription, which is not possible under federal law.

 

WV (3)

No medical laws in effect

There is support for future legislation to legalize medical cannabis.

 

GA (3)

CBD-only medical law passed and in effect

The state has passed a medical CBD law allowing for the use of cannabis extracts that are high in CBD and low in THC to treat severe, debilitating epileptic conditions.

 

ND (3)

 

Medical laws passed

The North Dakota Medical Marijuana Legalization Initiative, also known as Initiated Statutory Measure 5, was passed on November 8, 2016.

 

 

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State

Status

Details and Difference in Laws

IN (3)

LA (3)

SD (3)

WY (3)

 

No medical laws passed

There is little legislative support for medical cannabis in these states.

AR (3)

No medical laws passed

A November 2012 effort to pass a medical cannabis law garnered 48% of the vote. The voters passed the Arkansas Medical Cannabis Act on November 8, 2016, allowing medical cannabis access in the state.

 

NE (3)

No medical laws passed

A medical cannabis law was proposed, but failed to make it through committee in 2014, and again failed in 2016.

 

KS (3)

No medical laws passed

Two medical cannabis laws were proposed, but failed to make it through committee in 2014.

 

OK (3)

CBD-only medical law passed and in effect

This law does not provide for reasonable access to CBD products for patients in these states. The current law allows for access to high CBD cannabis oil, but only for minors, and only if they have severe forms of epilepsy or other serious seizure conditions.

 

TX (3)

No medical laws passed

Governor Rick Perry has signaled his support of states’ rights to legalize cannabis. In February 2015, Texas House Bill 2165 was introduced to legalize and regulate cannabis sales, however, the bill did not advance before the end of session.

 

ID (3)

No medical laws passed

There is little support for medical cannabis laws from the Idaho Legislature, but significant support among voters.

 

OH (3)

No medical laws in effect

A state medical marijuana initiative passed, and the state is currently accepting applications for growers, processors, and dispensaries.

_______________

(1)   We intend to do business in this state.  

(2)   We are considering doing business in this state.  

(3)   We are not considering doing business in this state.  

 

Federal Efforts to Accommodate State Legislation

 

On February 14, 2014, FinCEN issued guidance under the BSA relating to FinCEN’s and the FDIC’s expectations regarding BSA compliance for cannabis-related businesses. The FinCEN guidance was issued in light of recent state initiatives to legalize certain cannabis-related activity and the related guidance by the U.S. Department of Justice (“DOJ”) concerning cannabis-related enforcement priorities as outlined in the “Ogden Memo” (October 19, 2009) and the “Cole Memos” (August 29, 2013 and February 14, 2014). As discussed in more detail below, the Ogden Memo and Cole Memos identified the eight priorities for enforcing the CSA against cannabis-related conduct.

 

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The Ogden Memo issued by the DOJ on October 19, 2009, provides clarification and guidance in states that have enacted laws authorizing the medical use of cannabis. The Ogden Memo states: “Rather than developing different guidelines for every possible variant of state and local law, this memorandum provides uniform guidance to focus federal investigations and prosecutions in these states on core federal enforcement priorities.”

 

The memorandum also states that the prosecution of significant traffickers of illegal drugs, including cannabis, and the disruption of illegal drug manufacturing and trafficking networks continues to be a core priority in the department’s efforts against narcotics and dangerous drugs, and the department’s investigative and prosecutorial resources should be directed toward these objectives, and as a general matter, pursuit of these priorities should not focus federal resources in states on individuals whose actions are in clear and unambiguous compliance with existing state laws. However, prosecution of commercial enterprises that unlawfully market and sell cannabis for profit continues to be an enforcement priority of the department. The DOJ believes claims of compliance with state or local law may mask operations inconsistent with the terms, conditions, or purposes of those laws, and federal law enforcement should not be deterred by such assertions when otherwise pursuing the department’s core enforcement priorities. The Ogden Memo then lists the eight priorities of enforcement set forth below. When any of the following characteristics are present, the conduct will not be in clear and unambiguous compliance with applicable state law and may indicate illegal drug trafficking activity of potential federal interest:

  distribution to minors;  

  revenue from the sale of cannabis going to criminal enterprise, gangs, and cartels;  

  the diversion of cannabis from states where it is legal under state law in some form to other states;  

  state-authorized cannabis activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;  

  violence and the use of firearms in the cultivation and distribution of cannabis;  

  drugged driving and the exacerbation of other adverse public health consequences associated with cannabis use;  

  the growing of cannabis on public lands and the attendant public safety and environmental dangers posed by cannabis production on public lands; and  

·   cannabis possession or use on federal property.  

 

The first Cole Memo issued June 29, 2011, seeks to clarify and provide guidance in response to inquiries from state and local governments seeking guidance about the DOJ’s position on the enforcement of the CSA in jurisdictions that have under consideration or implemented legislation that would sanction and regulate the commercial cultivation and distribution of cannabis. This Cole Memo reinforces the Ogden Memo that the DOJ’s view “of the efficient use of limited federal resources” has not changed. However, this Cole Memo also makes it clear that the Ogden Memo was never intended to shield activities from federal enforcement action and prosecution, even when those activities purport to comply with state law. Persons who are in the business of cultivating, selling, or distributing cannabis, and those who knowingly facilitate such activities, are in violation of the CSA regardless of state law, and those engaged in transactions involving the proceeds of such an activity may also be in violation of federal money-laundering statutes and other federal financial laws. The second Cole Memo dated February 14, 2014, for the most part reiterates the government’s position outlined in the first Cole Memo as well as tying in FinCEN’s position as outlined in its guidance of the same date.

 

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The FinCEN guidance clarifies how banks can offer services to cannabis-related businesses consistent with their BSA reporting obligations by filing suspicious activity reports (SARs) and provides three categories of SAR filings for cannabis-related business:  “marijuana limited,” “marijuana priority,” and “marijuana termination.” If a financial institution provides financial services to a cannabis-related business that it reasonably believes, based on its customer due diligence review, does not implicate one of the Cole Memos priorities or violate state law, it should file a “marijuana limited” SAR. Since the eight priorities of the Cole Memos principally deal with the illegal cultivation and distribution of cannabis and we do not engage in these activities, we anticipate that financial institutions providing financial services to us will file, if deemed required, “marijuana limited” SARs relating to our activities. In addition to our compliance with state laws and regulations, we will seek to meet FinCEN’s guidance to the extent that it indirectly affects our business, through our systems, procedures, and protocols to review customer licensing and identification procedures of customers and retail customers. Furthermore, we will, to the extent practicable as an ancillary technology company, not do business with companies that we believe may violate one or more of the eight priorities of the Cole Memos.

 

FinCEN guidance expanded on the “know your customer” guidelines and clarified how financial institutions can provide services to cannabis-related businesses consistent with their BSA obligations and stated:

 

In assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.

 

While we are not by definition considered a “financial institution,” we do and will continue to follow the above protocols of knowing our customers, validating each cannabis-related business through our due diligence review of the vendor itself, as well as verifying each vender’s current licensure with the respective state regulatory agency. This monitoring will be done at the onset of the business relationship as well as periodically throughout the business relationship.

 

Our Compliance Strategy

 

We have established business and compliance protocols that we monitor regularly to assure compliance with state-specific laws and regulations. We submitted our business and compliance plan as part of our Colorado Department of Revenue Marijuana Enforcement Division Vendor Registration Application, and on September 2, 2014, were approved as a registered vendor by the state of Colorado.

 

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We closely monitor evolving state and local laws, rules, and regulations and banking regulations. We design our products in accordance with state and local regulations and banking requirements. We seek to offer services only to companies that are professionally operated and properly licensed in accordance with state and local laws. Changes in such laws, rules, and regulations, or the recall of any state or local legislation, could have a material adverse effect on our business and financial condition.

 

We rely on the experience and knowledge of our two founders, Brandon C. Jennewine and Daniel J. Rogers, who have previously been owners of state-licensed cannabis-related businesses in Colorado and are familiar with Colorado’s state laws and regulatory scheme and have working experience with regulatory personnel. We also retain regulatory legal counsel who focus their practice on cannabis law to assure current knowledge of and compliance with ongoing changes in rules and regulations. In addition, we have designed technological and administrative programs and protocols to assure ongoing compliance. For BumpUp Rewards and other products for retail customers, we document that the customers are age 21 or older. Our technology will be available only in states that have cannabis-related regulated businesses.

 

We rely on our technology infrastructure and due diligence reviews to assure our own compliance with state laws, as documented in our systems. We also rely on our systems and procedures to assure that we deal with properly licensed growers, processors, and retailers, and sell to only qualified buyers meeting identification requirements. We cannot assure that our interstate activities will not attract federal regulatory scrutiny as additional states formalize their safe access to cannabis laws and we expand our business on a state-by-state basis.

 

We are working only with retailers of medical or recreational sellers that are verified, through lists provided by state or local regulatory agencies, to be in good standing and allowed to conduct business in their respective states.

 

In Colorado and Washington, an individual is required to physically provide a valid, government-issued identification to verify he is age 21 or older to access a regulated store or retailer for either medical or recreational cannabis. The retail facility is required by state rules to have on its premises specific cameras that have resolution suitable to see the identification process to ensure that the retail-cannabis facility is validating the identification. The individual verification is repeated every time a person enters a facility, irrespective of whether the individual is personally known to the operator or has previously visited the dispensary. The cost of maintaining identification compliance is borne by the state-licensed retailer and is not our expense. Our costs of maintaining our compliance systems and protocols are considered a regular operating expense that is built into our product pricing.

 

Our internal compliance review of both our operating protocols and technology and the data collected are critical aspects of our compliance effort in providing technology products to only compliant operators and persons age 21 or older in states that have enacted some form of safe-access laws to cannabis. For example, we believe that cannabis-related businesses in Colorado will continue to be compliant in not selling cannabis products to underage persons–one of the Cole Memos’ eight priorities.

 

Possible Changes to Federal View

 

Although the DOJ has stated in the Ogden Memo and Cole Memos that it is not an efficient use of limited resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis, there is no guarantee that the DOJ’s position will not change regarding the low-priority enforcement of federal laws, including the CSA, or that any future administration would not change this policy and decide to strongly enforce the federal laws.

 

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In light of the 2005 U.S. Supreme Court ruling in Gonzales v. Raich, under the commerce clause of the constitution, Congress may pass laws to criminalize the production and use of home-grown cannabis even where states have approved its use for medicinal purposes, which leads to the conclusion that the CSA may preempt state laws relating to any cannabis-related activity. Any such change in the federal enforcement program of current federal laws under the new administration could cause significant financial damage to our business. While we do not intend to harvest, distribute, or sell cannabis or products containing cannabis, we may be irreparably harmed by a change in enforcement by the federal or state governments.

 

Should the U.S. Supreme Court rule to invalidate safe access to cannabis laws in more than 32 states and the District of Columbia, our operations would be adversely affected. However, if this should occur, we will repurpose our technology to non-cannabis-related businesses. We could refocus our efforts to launch and commercialize ExchangeHemp in the industrial hemp industry, a non-cannabis-related business, and facilitate a trading platform for buyers and sellers of commercial hemp. We could also repurpose CannaTrade’s technology to facilitate the matching of buyers and sellers of commercial equipment, such as industrial lighting and other equipment for agriculture. We could also repurpose our CannaLIMS software for the pharmaceutical industry, where LIMS software is prevalent. We believe the technology for BumpUp Rewards can be repurposed and used as a loyalty program for small businesses and region-specific businesses to strengthen and support local and small businesses by targeting and marketing to local consumers.

 

The new Trump Administration, particularly Attorney General Sessions, has publicly articulated opposition to state-sanctioned cannabis use and announced a review of federal policies, practices, and regulations affecting cannabis. This may lead to less federal tolerance of individual state legalization initiatives and increased federal policing or regulation. We cannot predict the direction that this apparent federal initiative may take or its impact on the industry or us.

 

Proprietary Technology

 

Our Citizen Toke, BumpUp Rewards, and CannaLIMS products are based on proprietary software developed for us by our officers and third-party contractors. We do not believe that any of our current products, or currently foreseen future products, contain or will contain features that are patentable. Instead, we rely on a proprietary confidentiality and nondisclosure discipline to protect our products. However, if future proprietary software developed by our officers contains patentable features, we will apply for and obtain patent protection for our products.

 

Research and Development

 

We currently offer three technology products: Citizen Toke, BumpUp Rewards (as a stand-alone product and as a white-label product), and CannaLIMS. We will remain focused on developing technologies for our industry, aimed at specific solutions for industry needs, including compliance with state and local regulation. We seek product and business opportunities in order to formulate and develop technology to meet diverse regulatory requirements across all of our markets. Furthermore, we regularly investigate processes for improving our technology products and identifying new technologies to serve the industry.

 

Through our internal research and development efforts and our relationships with industry operators and organizations, we will strive to provide evolving and effective technology solutions. Our plans for our research and development activities include developing technology products that are new to the industry, updating existing technologies to keep them current with the latest laws and regulations, and adapting existing technologies to enter new states that implement cannabis laws. Going forward, we intend to increase our spending and resources for technology research and development to the extent of our limited resources.

 

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Employees

 

As of December 31, 2016, we employ only our chief executive officer and chief operations officer. We will require additional employees in the future. There is intense competition for capable, experienced personnel, and we cannot assure that we will be able to obtain new qualified employees when required. Our relations with our employee is good.

 

Corporate History

 

We were formerly known as Thermal Tennis, Inc., a publicly held Nevada corporation. Thermal Tennis was formed as a Nevada corporation on August 25, 1999, committed to the growth of tennis through its tennis management system, which included creative ways to recruit new members into tennis lessons, the implementation of more effective tennis teaching methods, better use of tournaments to create public participation and involvement, and development of additional ways to create revenue for Thermal Tennis and the tennis facility being managed. From inception to March 2013, Thermal Tennis had managed the tennis operations at one athletic club and ran one summer tennis program at a high school. After cancellation of the contract at the athletic club in March 2013, Thermal Tennis continued to pursue its business activities in limited geographical areas.

 

On August 15, 2014, Thermal Tennis entered into an Agreement and Plan of Merger to combine its business and activities with CannaSys, Inc., a privately held Colorado corporation (“CannaSys-Colorado”) focused on providing services to the cannabis industry (the “Merger”). Under the terms of the merger agreement, our wholly owned subsidiary formed to effectuate the Merger was merged with and into CannaSys-Colorado, the surviving entity, which then became our wholly owned subsidiary. By operation of the Merger, which was effective August 15, 2014, all of the CannaSys-Colorado outstanding common stock was converted into a total of 300,000 shares of our common stock, which constituted 57.70% of our total issued and outstanding common stock. Our stockholders before the merger retained an aggregate of 219,904 shares of common stock. At that time, we had no outstanding options or warrants to purchase shares of common stock.

 

In connection with the closing of the Merger and after meeting the requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Thermal Tennis changed its name to CannaSys, Inc. on November 12, 2014. We continue our operations through our wholly owned subsidiary with the same name.

 

Effective October 17, 2016: we: (i) reverse-split our outstanding common stock 20-to-one; and (ii) increased our authorized capital to 2,005,000,000 shares, consisting of: 2,000,000,000 shares of common stock and 5,000,000 shares of preferred stock (together, the “Recapitalization”)

 

 

ITEM 1A. RISK FACTORS

 

An investment in our securities involves a high degree of risk. You should carefully consider the following risk factors, together with the other information about these risks contained in this report, as well as the other information contained in this report generally, before deciding to buy our securities. Any of the risks we describe below could adversely affect our business, financial condition, operating results, or prospects. The market prices for our securities could decline if one or more of these risks and uncertainties develop into actual events and you could lose all or part of your investment. Additional risks and uncertainties that we do not yet know of, or that we currently think are immaterial, may also impair our business operations. You should also refer to the other information contained in this report, including our financial statements and the related notes.

 

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Risks Related to our Business

 

We are dependent on our banking and merchant relationships.

 

We are dependent on the banking industry to support the financial functions of our products and services. Similarly, important components of our products and services depend on merchant accounts and relationships, which in turn depend on banking functions. Federal and federally insured state banks currently do not serve those who grow and sell cannabis products on the stated ground that growing and selling cannabis is illegal under federal law. We cannot assure that our strategies and techniques for designing our products and services, which do not include cannabis, will operate effectively and efficiently and not be adversely impacted by the continuing refusal of banks to serve those who grow and sell cannabis products. A change in banking regulations or a change in the position of the banking industry to permit banks to serve those who grow and sell cannabis products may increase competition for us, facilitate new entrants into the industry offering products or services similar to those that we offer, or otherwise adversely affect our results of operations.

 

We do not sell cannabis or products that contain cannabis, so we do not consider our company to be part of the cannabis industry that would be restricted from using federal and federally insured banks. However, because of “canna” in our name and the fact that our revenue is generated largely from companies licensed as operators in the cannabis industry, banks have and may continue to consider us to be part of the cannabis industry that is subject to banking restrictions. Recently a small number of community banks and credit unions in Colorado have started offering limited banking services to components of the cannabis industry in compliance with the FinCEN guidelines. Although we are perceived by some banks to be part of the regulated cannabis industry, our financial operations have not been hampered by banking restrictions. To date, we have not had to rely on cash transactions and have active banking services to receive payments and to pay vendors.

 

Although we do not grow or sell cannabis products, our general connection with the cannabis industry may hamper our efforts to do business or establish collaborative relationships with others that may fear disruption or increased regulatory scrutiny of their own activities.

 

We have recently established strategic alliances that we may be unable to integrate into a cohesive and effective business.

 

We have recently established several strategic alliances with other firms that we believe have developed, or have the potential to develop, complementary products and services. We have not yet had sufficient time or experience to integrate these components into a cohesive and effective business, and we may be unable to do so. Our efforts may be further complicated by additional relationships not now identified. We have now abandoned or deemphasized earlier strategic relationships and may determine to abandon or deemphasize one or more of the strategic relationships we now believe to be important; in which case, we may be unable to recover related costs previously incurred.  

 

The conduct of third parties may jeopardize our business or legal compliance.

 

We cannot assure that our systems, protocols, and practices will prevent unauthorized or illegal activities by customers or retailers with whom or which we do business. Our success will depend on our ability to operate consistent with the regulatory and licensing requirements of each state in which we provide products and services, which in turn may depend on our ability to determine the residences of our customers, the licenses held by retailers with which we do business, and the compliance by our customers and retailers with the regulations applicable to them. We cannot assure that the conduct of third parties will not place our legal status or business in jeopardy and, therefore, expose us to legal sanctions and costs, which would adversely affect our results of operations.

 

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Our proprietary data systems may be compromised by hackers.

 

Citizen Toke, BumpUp Rewards, CannaLIMS, and other products and services that we may develop in the future, will be based on proprietary software and customer-specific data that we protect by routine measures such as password protection, confidentiality and nondisclosure agreements with employees, and similar measures. Any unauthorized access to our software or data could materially disrupt our business and result in financial loss and damages to our business reputation.

 

Our operations would be adversely affected if we operate in states with undefined regulatory oversight or if regulations change.

 

We are exposed to regulatory uncertainties resulting from significant differences between the regulatory regimes of various states and uncertainties in states with undefined regulatory regimes. Regulations have only recently been adopted and are likely to change, perhaps becoming more restrictive, as states gather regulatory experience. There is little interpretative guidance or staff experience at state regulatory agencies to provide operating guidance. We conduct business exclusively in states that have enacted formal regulatory regimes and codified laws and ordinances in which licensed cannabis-related businesses are allowed to operate. However, we cannot assure that we, or our customers, will be able to ascertain or comply with all applicable requirements.

 

Because each state and local jurisdiction may have significant differences in its cannabis-related laws and regulations, we cannot assure that even with the advice of legal counsel familiar with the cannabis laws and regulatory program of a particular state, we will be able to comply with applicable laws and regulations.

 

Any change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. We expect that the disparity between federal and state cannabis legalization and regulation will continue. While we do not intend to harvest, distribute, or sell cannabis or products containing cannabis, we may be irreparably harmed by a change in enforcement by the federal or state governments.

 

Differences and uncertainties in various state and local laws and ordinances may adversely affect our ability to comply with the laws of each jurisdiction in which we may do business.

 

We cannot ensure that our systems, protocols, and practices will be timely updated and modified to ensure compliance with the various, diverse, and ever-changing laws and regulatory schemes of the various states and local principalities in which we intend to operate, and failure to do so would materially and adversely affect our financial results and business operations and reputation.

 

New laws and regulations may be passed that would outlaw our activities.

 

Due to the rapidly changing rules and regulations in various markets, it is possible that our activities could be prohibited in one or more markets or that federal guidelines could be issued that would have a material adverse effect on our strategy and offerings. In addition, it is possible that the U.S. Department of Justice will decide to pursue enforcement actions against producers, sellers, and any person providing ancillary services within the cannabis industry. The new Trump Administration, particularly Attorney General Sessions, has announced opposition to legalized cannabis use and the desire to revise and strengthen federal regulatory and enforcement policies and practices. We cannot predict the outcome of any such review or the result of regulatory or enforcement policies or practices that may result. Our business may be adversely affected.

 

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The apparent current growing public opinion in support of legalization may turn in support of criminalization.

 

While public polls continue to trend in support of legalization and decriminalization throughout the country, we cannot guarantee that this trend will continue and that the support will not wane among the public.

 

We are a development-stage company with limited revenues.

 

We are a development-stage company with limited revenue and do not expect to generate significant revenue unless and until our product portfolio, or part of it, is commercialized. We will need to raise additional capital to fund our operations, and we cannot assure that we will be successful in doing so.

 

We have received a going concern opinion from our auditors.

 

We have an accumulated deficit and have had negative cash flows from our operations. Accordingly, we have received a report from our independent auditors in connection with our audited financial statements that includes an explanatory paragraph describing their substantial doubt about our ability to continue as a going concern. This may negatively impact our ability to obtain additional funding or funding from external sources on terms attractive to us.

 

Our future success is largely dependent on our current management.

 

Our business was built by the vision, dedication, and expertise of our founders Brandon C. Jennewine and Daniel J. Rogers, and our chief executive officer, Michael A. Tew, is responsible for our day-to-day operations and creative development. Although as noted below, Messrs. Jennewine and Rogers resigned from their respective executive officer positions, they continue to serve on our board of directors and assist with our business operations as consultants. Our success is dependent upon the continued efforts of these people. If it became necessary to replace them, it is unlikely new management could be found that would have the same level of knowledge and dedication to our success. The loss of the services of these professionals, especially in the development of future proprietary software, patents, or applications, would adversely affect our business.

 

Our growth strategy may not be successful.

 

We intend to expand our operations and marketing base, in large part by establishing and expanding strategic alliances. Our operations are subject to all of the risks inherent in the growth of a new business enterprise, particularly one that operates in an emerging and highly competitive industry. The timing and related expenses of expansion may cause our revenues, if any, to fluctuate. The likelihood of our success must be considered in the light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with the growth of a business and the reliance on strategic alliances with others, including uncertainty as to implementation of our strategies and capabilities, market acceptance of our products and services, our operating and marketing methods, expenses, and competition. We may not be successful in our proposed expanded business activities.

 

We are operating in developing markets, and our products may not be accepted in these markets.

 

We have conducted limited marketing activities to date. Thus, we have relatively little information on which to estimate our levels of sales, the amount of revenue we will generate, and our operating and other expenses. We cannot assure that we will be successful in our efforts to directly market our products or to develop markets in the manner we contemplate.

 

26


 

There are economic and general risks relating to our business.

 

The success of our activities is subject to risks inherent in business generally, including demand for products and services, general economic conditions, changes in taxes and tax laws, and changes in governmental regulations and policies.

 

Our industry is subject to rapid technological changes that, if we are unable to match or surpass, will adversely affect our competitive position.

 

Because of the rapid technological development that regularly occurs in the financial payment industry, we must continually devote substantial resources to developing and improving our technology and introducing new product offerings. These efforts and expenditures are necessary to establish market share and, ultimately, to generate revenues. If another company offers better products or technologies, a competitive position or market window opportunity may be lost, and therefore, our revenues or revenue potential may be adversely affected.

 

Our competitive position, business, and prospects will be impaired if our intellectual property rights do not provide us with the anticipated market protection.

 

We will rely on our proprietary intellectual property rights to support our competitive position and protect us from unauthorized use of our intellectual property. We believe that our intellectual property rights are valid, enforceable, and valuable. However, third parties may make claims of invalidity respecting our proprietary software and intellectual property, and such claims could give rise to material costs for defense and divert resources away from our other activities. Our proprietary intellectual property is not protected by patents. If we determine to seek and ultimately obtain patents and our patents or patent applications are shown not to be as broad as currently believed or are otherwise challenged such that some or all of the protection is lost, we may suffer adverse effects from the loss of competitive advantage and our ability to offer products and technologies. As a result, there would likely be an adverse impact on our business prospects.

 

We are subject to outside influences beyond our control, including new legislation, that could adversely affect our licensing and implementation activities and have an adverse impact on the execution of our business plan or associated intellectual properties.

 

Our licensing and implementation activities are subject to numerous risks from outside influences, including new legislation, regulations, and rules related to obtaining or enforcing patents. As an example, the legalization of the right to grow, harvest, and sell cannabis and cannabis-related products is recent, and it is uncertain as to how the industry that is developing around this new legislation will ultimately evolve. If our product offerings are not properly positioned for this developing industry, it could have an adverse impact on our future financial position and hinder our ability to execute our business plan.

 

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Risks Related to our Common Stock

 

Any investment in our shares is considered to be a high-risk investment and is subject to restrictions on marketability because our common stock is considered a “penny stock.”

 

Our common stock trades on the OTCQB securities market under the symbol “MJTK.” The OTCQB is a decentralized market regulated by the Financial Industry Regulatory Authority in which securities are traded via an electronic quotation system that serves more than 3,000 companies, but provides significantly less liquidity than national market systems such as the NYSE MKT. On the OTCQB, securities are traded by a network of brokers or dealers that carry inventories of securities to facilitate the buy and sell orders of investors, rather than providing the order matchmaking service seen in specialist exchanges. OTCQB securities include national, regional, and foreign equity issues. Companies traded on the OTCQB must be current in their reports filed with the SEC and other regulatory authorities.

 

Our common stock is subject to Rules 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers that sell our common stock to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 (or $300,000 together with their spouses)). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction before the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and the ability of our stockholders to sell their shares of common stock.

 

Additionally, our common stock is subject to the SEC regulations for “penny stock.” Penny stock includes any equity security that is not listed on a national exchange and has a market price of less than $5.00 per share, subject to certain exceptions. The regulations require that before any nonexempt buy/sell transaction in a penny stock, a disclosure schedule set forth by the SEC relating to the penny stock market must be delivered to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for the common stock. The regulations also require that monthly statements disclosing recent price information for the penny stock and information of the limited market for penny stocks be sent to holders of penny stock. These requirements adversely affect the market liquidity of our common stock.

 

Our indemnification of our directors and officers may limit the rights of our stockholders.

 

While our board of directors and officers are generally accountable to our stockholders and us, the liability of our directors and officers to all parties is limited in certain respects under applicable state law and our articles of incorporation and bylaws, as in effect. Further, we have agreed or may agree to indemnify our directors and officers against liabilities not attributable to certain limited circumstances. This limitation of liability and indemnity may limit rights that our stockholders would otherwise have to seek redress against our directors and officers.

 

Stockholders may suffer substantial dilution related to issued stock options and warrants, convertible notes, and stock grants.

 

As of April 7, 2017, we had a number of agreements or obligations for the possible issuance of common stock that may result in dilution to investors. These include:

 

  215,000 shares required for issuance upon the exercise of warrants; and  

 

  946.7 million shares required for issuance under our outstanding convertible notes.  

 

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The common stock to be issued on conversion of our convertible notes will be at discounts ranging from 30% to 55% to the lowest daily volume-weighted average price of our common stock for the number of consecutive trading days under the term of the respective debt instruments. Additionally, the sale, or even the possibility of the sale, of the shares of common stock underlying these commitments could have an adverse effect on the market price for our securities or on our ability to obtain future financing.

 

Additional issuances of common stock, stock options, warrants, convertible notes, and stock grants will cause additional substantial dilution to our stockholders.

 

Given our limited cash, liquidity, and revenues, it is likely that in the future, as in the past, we will put shares to Kodiak Capital Group, LLC, under our equity purchase agreement or issue additional warrants, stock grants, and convertible debt to finance our future business operations and acquisitions and strategic relationships. The issuance of additional shares of common stock, the exercise of warrants, and the conversion of debt to stock could cause additional dilution to our stockholders and could have further adverse effects on the market price for our securities or on our ability to obtain future financing.

 

After our Recapitalization, the amount of our authorized common stock greatly exceeds our issued and outstanding shares, and investors may suffer significant dilution if authorized common stock is issued.

 

Our Recapitalization increased our authorized common stock to two billion shares and reduced our issued and outstanding stock to 3.4 million shares. The formula for calculating the shares to be issued in connection with conversions of our existing convertible notes—and any future convertible notes—is based on the market price of our common stock. Therefore, there effectively is no limitation on the number of shares of common stock that may be issued in connection with conversions. Since December 31, 2016, we have issued 697.2 million shares of common stock in connection with conversions pursuant to these notes. As such, holders of our common stock will experience substantial dilution of their interests to the extent that our convertible notes are converted and shares of our common stock are issued. In addition, the trading prices for our securities following the reverse-stock-split may not mathematically reflect the calculated results of the reverse-stock-split, so that a 20-to-one reverse-stock-split of our stock may not result in a 20-fold increase in the trading price for the common stock. Frequently, stocks do not trade at their pre-reverse-split equivalent trading price following a reverse split. Therefore, the reverse split could also result in significant reduction in the value of the stock owned by our stockholders.

 

The large increase in the amount of authorized common stock may result in management implementing anti-takeover procedures by issuing new securities.

 

The greatly increased proportion of unissued authorized shares to issued shares could, under certain circumstances, have an anti-takeover effect, for example, by permitting issuances that would dilute the stock ownership of a person seeking to effect a change in the composition of our board of directors or contemplating a tender offer or other transaction for the combination of our company with another entity. Although, we have no current plans to issue additional stock for this purpose, management could use the additional shares that are now available to resist or frustrate a third-party transaction. Generally, no stockholder approval would be necessary for the issuance of all or any portion of the additional shares of common stock unless required by law or any rules or regulations to which we are subject.

 

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Depending upon the consideration per share for any subsequent issuance of common stock, such issuance could have a dilutive effect on those stockholders who paid a higher consideration per share for their stock. Also, future issuances of common stock will increase the number of outstanding shares, thereby decreasing the percentage ownership—for voting, distributions, and all other purposes—represented by existing shares of common stock. The availability for issuance of the additional shares of common stock may be viewed as having the effect of discouraging an unsolicited attempt by another person or entity to acquire control of us. Although our board has no present intention of doing so, our authorized but unissued common stock could be issued in one or more transactions that would make a takeover of us more difficult or costly and, therefore, less likely. Holders of our common stock do not have any preemptive rights to acquire any additional securities issued by us.

 

Our shares of common stock are thinly traded, so stockholders may be unable to sell at or near ask prices or at all if they need to sell shares to raise money or otherwise desire to liquidate their shares.

 

Our common stock is traded in very low volumes, reflecting the fact that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or nonexistent. In addition to the adverse impact of our limited financial and management resources and our development stage, this situation may be attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or nonexistent, as compared to a seasoned issuer, which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot assure stockholders that a broader or more active public trading market for our common shares will develop or be sustained or that current trading levels will be sustained. We cannot control or materially affect the trading market in our stock.

 

Even if we were to generate profits, we do not currently intend to pay dividends on our common stock in the foreseeable future, and consequently, our stockholders’ ability to achieve a return on their investment will depend on appreciation in the price of our common stock.

 

We have never generated a profit or declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future even if we generate a profit. Consequently, our stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

Our stockholders may not recoup all or any portion of their investment upon our dissolution.

 

In the event of a liquidation, dissolution, or winding-up of our company, whether voluntary or involuntary, our net remaining proceeds and/or assets, after paying all of our debts and liabilities, will be distributed to the holders of common stock on a pro-rata basis. We cannot assure that we will have available assets to pay to the holders of common stock any amounts upon such a liquidation, dissolution, or winding-up of our company. In this event, our stockholders could lose some or all of their investment.

 

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

 

ITEM 2. PROPERTIES

 

Our corporate headquarters are located at 1350 17th Street, Suite 150, Denver, CO 80202. Our offices are rented on a month-to-month basis with no long-term commitment, and our rent is scalable on a per-desk or per-workstation basis. Currently, we pay $350 per month for rent.

 

 

ITEM 3. LEGAL PROCEEDINGS

 

There are no claims, actions, suits, proceedings, or investigations currently pending or, to our knowledge, threatened by or against us or respecting our operations or assets or by or against any of our officers, directors, or affiliates.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Price Range of Common Stock and Dividend Policy

 

Since December 2, 2014, our common stock has been quoted on the OTCQB tier of the OTC Markets Group under the trading symbol “MJTK.” Before that date, we were listed on the OTC Bulletin Board under the trading symbol “TTNS.”

 

Since inception, there has been sporadic trading activity in our common stock and the price fluctuations have been volatile. Currently, there is no established trading market for our common stock. Management does not expect any established trading market to develop unless and until we have material operations. In any event, we cannot assure that any market for our common stock will develop or be maintained. If a public market develops in the future, the sale of “unregistered” and “restricted” shares of common stock pursuant to Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), by members of management or others may have a substantial adverse impact on any such market.

 

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The following table sets forth the range of low and high closing sale prices for our common stock, as adjusted to give retroactive effect to a 20-to-one reverse split in October 2016, for the each of the periods indicated as reported and summarized by the OTCQB:

 

 

Low

 

High

 

 

 

 

2017:

 

 

 

First Quarter

$0.0018

 

$0.0144

 

 

 

 

2016:

 

 

 

Fourth Quarter

0.0017

 

0.278

Third Quarter

0.03

 

0.32

Second Quarter

0.10

 

7.00

First Quarter

3.00

 

6.20

 

 

 

 

2015:

 

 

 

Fourth Quarter

5.20

 

8.00

Third Quarter

4.60

 

8.00

Second Quarter

20.00

 

33.00

First Quarter

30.00

 

40.00

 

On April 7, 2017, the closing price per share of our common stock on the OTCQB was $0.0071. We had approximately 82 stockholders of record of our common stock. As of April 7, 2017, we had 1,053,279,877 shares of our common stock issued and outstanding.

 

Holders of shares of common stock are entitled to share pro rata in dividends and distributions respecting the common stock when, as, and if declared by the board of directors out of funds legally available therefor. We have not paid any dividends on our common stock and intend to retain earnings, if any, to finance the development and expansion of our business. Future dividend policy is subject to the discretion of the board of directors and will depend upon a number of factors, including future revenues, capital requirements, overall financial condition, and such other factors as our board of directors deems relevant.

 

Recent Sales of Unregistered Securities

 

During December 2016, we issued 1,953,125 shares of restricted common for services. The shares were valued at the closing stock price on the date of grant, for total noncash expense of $5,431.

 

The issuances of the shares to the above parties were made in reliance on the exemption from registration provided in Section 4(a)(2) of the Securities Act for transactions not involving any public offering. The parties confirmed the foregoing and acknowledged, in writing, that the securities must be acquired and held for investment. All certificates evidencing the shares issued bear or will bear a restrictive legend. No underwriter participated in the offer and sale of these securities, and no commission or other remuneration was paid or given directly or indirectly in connection therewith.

 

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable to smaller reporting companies.

 

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our audited consolidated financial statements and notes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report.

 

This report contains statements that may be considered forward-looking statements, such as statements relating to our anticipated revenues, gross margin and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity, and financing sources. This forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include those relating to our liquidity requirements, the continued growth of the software industry, the success of our product development, marketing and sales activities, vigorous competition in the software industry, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, the inherent uncertainty and costs of prolonged arbitration or litigation, and changes in federal or state tax laws or the administration of such laws.

 

Introduction

 

We create, develop, and commercialize innovative solutions for the expanding medical and recreational cannabis community. Our solutions enhance customer service and provider efficiency, including customer loyalty software applications; create producer and retailer opportunities through the distribution of our own retail brands; and assist with marketing and branding for product companies. We do not grow, distribute, or sell cannabis or products containing cannabis.

 

We began our cannabis industry activity with the organization of a predecessor privately held entity in late 2013 to create, develop, and commercialize innovative solutions to solve customer service and provider problems, create producer and retailer opportunities, build retail customer loyalty, and streamline the connections among the producer, seller, and consumer/patient segments for the growing medical and recreational cannabis community. Since organization, we have focused on raising capital, creating new products, building marketing and distribution capability and channels, and pursuing complementary strategic alliances and acquisitions.

 

In August 2014, Cannasys, Inc., then called Thermal Tennis, Inc., acquired our predecessor engaged in cannabis industry-related activities as noted above in a transaction recognized as a reverse acquisition of the company by the predecessor private company. This discussion relates to the financial statements of the privately held predecessor entity for all periods before the reverse acquisition.

 

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Results of Operations for the Year Ended December 31, 2016,

Compared to the Year Ended December 31, 2015

 

Revenue and Costs of Goods Sold

 

Our revenue was $66,849 and $119,325 for the years ended December 31, 2016 and 2015, respectively, a decrease of $52,476 or 43.9%. The decrease is largely attributed to a decrease in revenue from software development. Revenue has been generated through a combination of software development and consulting services related to custom-built software. We generate the majority of our revenue from custom software development related to CannaLIMS, ongoing recurring contracts for BumpUp Rewards, and custom development related to BumpUp Rewards white-label applications. For the year ended December 31, 2016, we did not generate a material amount of revenue from our strategic relationships.  

 

Our cost of goods sold was $24,260 and $47,823 for the years ended December 31, 2016 and 2015, respectively.

 

Operating Expenses

 

Stock-based compensation expense was $697,523 and $904,125 for the years ended December 31, 2016 and 2015, respectively, representing a decrease of $206,602, or 22.8%, in 2016. Stock-based compensation expense is from warrants issued to officers, consultants, and other service providers. In the current year, fewer warrants were issued, thereby decreasing our expense.

 

Professional fees were $369,212 and $207,892 for the years ended December 31, 2016 and 2015, respectively, representing an increase of $161,320, or 77.5%, in 2016. The increase in 2016, as compared to 2015, can be largely attributed to increased legal and audit fees related to increased transactions, fundraising, and reporting activities.

 

Salary and wage expense was $230,176 and $491,223 for the years ended December 31, 2016 and 2015, respectively, a decrease of $261,047, or 53.1%, in 2016. The decrease in 2016, as compared to 2015, is due to a reduction in salaried employees in the beginning of 2016.

 

General and administrative expense was $347,514 and $231,033 for the years ended December 31, 2016 and 2015, respectively, an increase of $116,481, or 50.4%, in 2016. The increase in 2016, as compared to 2015, can be attributed to increased consulting and other outside service expense.

 

Other Income and Expense

 

For the year ended December 31, 2016, we had total other expense of $3,245,770, compared to $2,095,085 for the year ended December 31, 2015. For the year ended December 31, 2016, we recorded interest expense of $46,094, compared to $6,344 for the prior year, and an impairment loss on investment of $1,049,475, compared to $1,846,515 for the prior year. In addition, as a result of convertible promissory notes, we recorded interest expense on debt discount of $612,679 in 2016, compared to $85,250 for the prior year, and a loss on the issuance of convertible debt of $1,214,985, compared to $152,866 for the prior year.

 

Net Loss

 

For the year ended December 31, 2016, we had a net loss of $4,847,606, as compared to a net loss of $3,857,856 in the prior year, an increase of $989,750, or 25.6%, in 2016. This increase is the direct result of the additional expense attributable to the issuance of convertible notes.

 

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Liquidity and Capital Resources

 

During the year ended December 31, 2016, we used cash of $457,380 in operating activities, as compared to $750,750 for the year ended December 31, 2015. We did not use cash in investing activities during the year ended December 31, 2016, as compared to $154,250 used in investing activities during the year ended December 31, 2015. Financing activities provided cash of $456,750 during the year ended December 31, 2016, as compared to $387,000 for the year ended December 31, 2015.

 

Our current business expenses average approximately $30,000 per month, excluding capital expenditures specific to new product launches. We continue to focus on reducing our monthly business expenses through cost reductions and operational streamlining. Currently, we do not have enough cash on hand to sustain our business operations and, alongside expected revenue, we expect to access external capital resources in the near future. At the moment, we are seeing increased adoption across our business lines, but we cannot guarantee this will continue.

 

We anticipate also accessing the capital markets in order to fund future research and development, as well as expand product offerings to include future versions of products and possible acquisitions of ancillary products and services. To the extent that funding is available, we have budgeted $550,000 for capital expenditures and other costs during the next 12 months, consisting of $200,000 for enhanced software development and marketing for AFN, $250,000 for debt retirement (and, if necessary, to provide for refinancing or extensions of our existing debt, including principal and any interest due under the terms of our current financing agreements with our capital partners), and $100,000 for legal, audit and accounting expenses. We may seek additional debt financing, although we cannot guarantee what structures our sources of financing may choose in the future, and there is no guarantee we will be able to secure additional funding. In addition, the vast majority of our debt is convertible into common stock, in which case we will not have to retire it; the investors are able to convert the debt into our shares. If we were to retire all of our outstanding debt, including the convertible promissory notes, and pay the maximum potential interest due, we would need to budget approximately $350,000.

 

We anticipate that we will fund a portion of these costs from proceeds from projected revenues, as well as from the sale of common stock to Kodiak Capital Group, LLC under our equity purchase agreement and other potential sources. It is possible that additional external cash will be required during the next 12 months, particularly if we seek to develop new products, need to fund new strategic relationships, or enter new markets not now anticipated or if projected revenues are not realized.

 

Our efforts are focused on increasing revenue while we explore external funding alternatives as our current cash is insufficient to fund operations for the next 12 months. Although our independent auditors have expressed substantial doubt about our ability to continue as a going concern, we feel that our revenue potential is sufficient for our business to continue as a going concern. However, in order to expand our product offerings, we expect that we will require additional investments and revenue.

 

As we continue to develop new products and identify specific commercialization opportunities, we will focus on those product markets and opportunities for which we might be able to get external funding through joint venture agreements, strategic partnerships, or other direct investments.

 

Off Balance Sheet Arrangements

 

As of December 31, 2016, there were no off balance sheet arrangements.

 

35


 

Critical Accounting Policies

 

We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. The list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the notes to our December 31, 2016, financial statements. Note that our preparation of the financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. We cannot assure that actual results will not differ from those estimates.

 

Stock-based Compensation

 

We account for equity-based transactions with nonemployees under the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 505-50, Equity-Based Payments to Non-Employees . ASC 505-50 establishes that equity-based payment transactions with non-employees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The fair value of common stock issued for payments to nonemployees is measured at the market price on the date of grant. The fair value of equity instruments, other than common stock, is estimated using the Black-Scholes option valuation model. In general, we recognize the fair value of the equity instruments issued as deferred stock compensation and amortize the cost over the term of the contract.

 

We account for employee stock-based compensation in accordance with the guidance of ASC 718, Compensation—Stock Compensation , which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The fair value of the equity instrument is charged directly to compensation expense and credited to additional paid-in capital over the period during which services are rendered.  

 

Revenue Recognition and Cost of Goods Sold

 

We follow ASC 605-10-S99-1, Revenue Recognition , for revenue recognition. We will recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the product has been shipped or the services have been rendered to the customer; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured.

 

During the fiscal year 2016, we generated revenue from: (1) customized software development (software developed for customers on a custom-made basis); and (2) software licensing (licensing existing portfolio of software products to customers either for a one-time fee or on a recurring monthly-fee basis).

 

We allocated cost of goods sold for both forms of revenue on a pro rata basis through either direct outsourcing of development resources or direct costs associated with our employees or contractors.  

 

36


 

Income Taxes

 

We follow ASC 740-10-30, Income Taxes-Initial Measurement , which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Income in the period that includes the enactment date.

 

We adopted ASC 740-10-25, Income Taxes—Recognition . ASC 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-25, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740-10-25 also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods and requires increased disclosures. We had no material adjustments to our liabilities for unrecognized income tax benefits according to the provisions of ASC 740-10-25.

 

Recently Issued Accounting Pronouncements

 

In May 2014, August 2015, April 2016, and May 2016, the FASB issued Accounting Standard Update (ASU) 2014-09— Revenue from Contracts with Customers (Topic 606) , ASU 2015-14— Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , ASU 2016-10— Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , and ASU 2016-12— Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients to guide accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. These updates also require entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. This standard may be applied to the process of assessing the impact, if any, on our financial statements.

 

In September 2015, the FASB issued ASU 2015-16— Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments . Topic 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The adoption of ASU 2015-16 is not expected to have a material effect on our financial statements.

 

37


 

In November 2015, the FASB issued ASU 2015-17— Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes . The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We do not anticipate the adoption of this ASU will have a significant impact on our financial position, results of operations, or cash flows.

 

In February 2016, the FASB issued ASU 2016-02— Leases (Topic 842) . The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the effect this standard will have on our financial statements.

 

In June 2016, the FASB issued ASU 2016-15— Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB’s Emerging Issues Task Force) . The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including interim periods within those fiscal years. An entity that elects early adoption must adopt all of the amendments in the same period. The guidance requires application using a retrospective transition method. We are currently evaluating the effects, if any, that the adoption of this guidance will have on our cash flows.

 

We have implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to provide the information required by this item.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our consolidated financial statements, including the Report of Independent Registered Public Accounting Firm on our consolidated financial statements, are included beginning on page F-1 of this report, immediately following the signature page.

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There are not and have not been any disagreements between us and our accountants on any matter of accounting principles, practices, or financial statements disclosure.

 

 

 

38


ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer (whom we refer to in this periodic report as our Certifying Officer) as appropriate to allow for timely decisions regarding required disclosure. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management evaluated, with the participation of our Certifying Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2016, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officer concluded that, as of December 31, 2016, our disclosure controls and procedures were not effective to provide reasonable assurance as of December 31, 2016, because certain deficiencies involving internal controls constituted material weaknesses, as discussed below. The material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management does not believe that the material weaknesses had any effect on the accuracy of our financial statements for the current reporting period.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. We have assessed the effectiveness of those internal controls as of December 31, 2016, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control—Integrated Framework (2013) as a basis for our assessment.

 

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance respecting financial statement preparation and presentation. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

 

A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects our ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America, such that there is more than a remote likelihood that a material misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected.

 

Based on our evaluation of internal control over financial reporting, our management concluded that our internal control over financial reporting was not effective as of December 31, 2016.

 

As of December 31, 2016, management identified the following material weaknesses:

 

  Control Environment —We did not maintain an effective control environment for internal control over financial reporting.  

 

  Segregation of Duties —As a result of limited resources and staff, we did not maintain proper segregation of incompatible duties. The effect of the lack of segregation of duties potentially affects multiple processes and procedures.  

 

39


 

  Entity Level Controls —We failed to maintain certain entity-level controls as defined by the 2013 framework issued by COSO. Specifically, our lack of staff does not allow us to effectively maintain a sufficient number of adequately trained personnel necessary to anticipate and identify risks critical to financial reporting. There is a risk that a material misstatement of the financial statements could be caused, or at least not be detected in a timely manner, due to lack of adequate staff with such expertise.  

 

  Access to Cash —One executive had the ability to transfer from our bank accounts.  

 

These weaknesses are continuing. Management and the board of directors are aware of these weaknesses that result because of limited resources and staff. Management has begun the process of formally documenting our key processes as a starting point for improved internal control over financial reporting. Efforts to fully implement the processes we have designed have been put on hold due to limited resources, but we anticipate a renewed focus on this effort in the near future. Due to our limited financial and managerial resources, we cannot assure when we will be able to implement effective internal controls over financial reporting.

 

This annual report does not include an attestation report of our company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

 

Inherent Limitations on Effectiveness of Controls

 

Internal control over financial reporting has inherent limitations that include the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance respecting financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the fourth quarter of fiscal year 2016 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

 

ITEM 9B. OTHER INFORMATION

 

 

None.

 

 

40


 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Executives and Directors

 

The following table sets forth the names and ages of our current directors and executive officers:

 

Name

Age

Director

    Since    

Position

 

 

 

 

Michael A. Tew

37

2015

Chief Executive Officer, Chief Financial Officer, Director

Brandon C. Jennewine

44

2014

Chairman

Daniel J. Rogers

43

2014

Director

Patrick J. Burke

26

--

Chief Operating Officer

 

Michael A. Tew

 

Michael A. Tew became our chief executive officer, chief financial officer, secretary, and a member of our board of directors effective July 1, 2015. Mr. Tew has over 14 years’ experience in corporate finance, venture capital, business management, and capital markets. From 1999 until September 2003, Mr. Tew was an analyst and Vice President at Bear, Stearns & Co., Inc. In September 2003, Mr. Tew co-founded CapitalHQ, LLC, New York, New York, an advisory and consulting firm for high-level executives. In April 2008, Mr. Tew co-founded SPAC Research Partners, LLC, Palo Alto, CA, an advisory firm providing research and transaction support for special purpose acquisition companies. Mr. Tew managed the company through December 2009. From January 2008 to his current employment with us, Mr. Tew was founder and principal of Sand Hill, LLC, initially in San Francisco and then in New York, New York. Sand Hill is a consultancy advising family offices, private equity organizations, and entrepreneurs on value-creating transactions in private and public markets. In 1999 and 2000, Mr. Tew attended an independent, collaborative European business management program that included studies at Groupe HEC business school (Paris, France), Bocconi University (Milan, Italy), and Wirtschaftsuniverstat Wien (Vienna University of Economics and Business, Vienna, Austria). Mr. Tew graduated with a bachelor degree in finance and international business from New York University in 2001 and in 2014 obtained an executive MBA in finance and management from New York University.

 

Brandon C. Jennewine

 

Brandon Jennewine, with Daniel J. Rogers, founded our company in 2014. Effective July 1, 2015, Mr. Jennewine resigned as our chief executive officer and now serves as our chairman of our board of directors. He is currently working as an independent IT consultant in software architecture and development. Mr. Jennewine has over 20 years’ experience as an architect and developer with leadership roles in technology companies. In July 2009, he co-founded with Daniel J. Rogers, Greenwerkz, LLC, later converted to Greenwerkz, Inc., a cannabis dispensary located in Denver, Colorado, having three retail locations and two production facilities. Mr. Jennewine helped orchestrate exist of the four Greenwerkz partners through a buyout by the sole remaining partner in February 2014, while simultaneously starting CannaSys-Colorado and managing, as chief executive officer, TK Health, LLC, an information technology consultancy based in Castle Rock, Colorado. TK Health, LLC, was formed in March 2010 to provide custom software programming for the e-healthcare and finance sectors. Prior to the cannabis business, he worked primarily in solutions in the e-prescribing, medical, and financial segments, acting as a software architect for SureScripts, LLC, an e-prescribing network based in Alexandria, Virginia, from July 2007 to February 2010, and as chief technology officer for Liver Research Institute, working under a grant from Roche Pharmaceuticals, from 2005 to 2006. Mr. Jennewine graduated with a bachelor of science in electrical engineering from Colorado State University.

 

41


 

Daniel J. Rogers

 

Daniel J. Rogers, an original founder of our company, now serves as a consultant and a member of our board of directors. Mr. Rogers has 12 years’ banking experience with a specialization in business development risk management. Mr. Rogers currently serves as Chief Operating Officer for Chestnut Tree Hill Farm, a medical cannabis license holder in the state of Florida. Mr. Rogers began serving on the board of directors of Grow Condos, Inc., on October 21, 2014. Grow Condos, a publicly traded company, is a real estate purchaser, developer, and manager of specific-use industrial properties providing “condominium” style, turn-key grow facilities to support cannabis farmers. In July 2009, he co-founded with Brandon C. Jennewine, Greenwerkz, Inc., where he was chief financial officer and managing member. Until March 2014, Mr. Rogers also served as Chairman of the Banking/Finance Subcommittee for Medical Marijuana Industry Group, Denver, CO, a government relations organization, that he and Mr. Jennewine helped form in 2010. Mr. Rogers obtained his bachelor’s degree in finance in 1997 from Fort Lewis College, Durango, Colorado, and later completed NationsBank / Bank of America’s Management Associate Program, a six-month training program for corporate risk management. Mr. Rogers later served as a vice-president for Bank of America’s Global Corporate & Investment Bank Commercial Real Estate Group located in Denver, Colorado, from 1998 to 2005, and later served as finance manager for Panattoni Development Company in Denver, Colorado, and Toronto, Ontario, Canada, from 2005 until February 2009.

 

Patrick J. Burke

 

Patrick G. Burke began serving as our chief operating officer on November 1, 2016. Since January 2015, Mr. Burke has been a team leader for a market research group at the Penn State Fund for Innovation. From May 2015 to May 2016, he was associated with Buhv Designs, Denver, CO, in website design, business development, and technology implementation analysis. For approximately the last year, he also has been working on digital marketing strategies, market plans, and market research for personal proprietary marketing opportunities. Mr. Burke earned an MBA in May 2016 in marketing, entrepreneurship, and leadership from Penn State Smeal College of Business and a BS in chemical engineering from the University of Colorado College of Engineering and Applied Science.

 

Our executive officers and directors or their affiliates do not beneficially own any equity securities or rights to acquire any of our securities, except as otherwise described in this report, and no persons have been involved in any transaction with us or any of our directors, executive officers, or affiliates that is required to be disclosed pursuant to the rules and regulations of the Securities and Exchange Commission, other than the transactions that have been described in this report or in any prior reports filed by us with the Securities and Exchange Commission.

 

None of our officers and directors has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or is or has been a party to any judicial or administrative proceeding during the past five years, except for matters that were dismissed without sanction or settlement, that resulted in a judgment, decree, or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws.

 

Committees of the Board

 

We currently do not have nominating, compensation, or audit committees or committees performing similar functions nor do we have a written nominating, compensation, or audit committee charter. Our board of directors believes that it is not necessary to have these committees, at this time, because the directors can adequately perform the functions of such committees.

 

42


 

Compliance with Section 16(a)

 

Section 16(a) of the Exchange Act requires our directors, executive officers, and persons that own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our equity securities. Officers, directors, and greater than 10% stockholders are required to furnish us with copies of all Section 16(a) forms they file.

 

Based solely upon a review of Forms 3, 4, and 5 and amendments thereto filed with the Securities and Exchange Commission during or respecting the last fiscal year ended December 31, 2016, no person that, at any time during the most recent fiscal year, was a director, officer, beneficial owner of more than 10% of any class of our equity securities, or known to be subject to Section 16 of the Exchange Act, failed to file, on a timely basis, reports required by Section 16(a) of the Exchange Act, except our chief operating officer failed to file a Form 3 in February 2017.

 

Code of Ethics

 

We have adopted a code of ethics that applies to all of our employees, including our executive officers, a copy of which is included as an exhibit to this report.

 

Corporate Governance

 

We promote accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with the Securities and Exchange Commission and in other public communications we make; and strive to be compliant with applicable governmental laws, rules, and regulations.

 

In lieu of an audit committee, our board of directors is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results, and effectiveness of the annual audit of our financial statements and other services provided by our independent public accountants. The board of directors reviews our internal accounting controls, practices, and policies.

 

Audit Committee Financial Expert

 

We do not have a board member that qualifies as an “audit committee financial expert” as defined in Item 407(D)(5) of Regulation S-K, nor do we have a board member that qualifies as “independent” as the term is used in Item 7(d)(3)(iv)(B) of Schedule 14A under the Exchange Act and as defined by Rule 4200(a)(14) of the FINRA Rules.

 

We believe that our directors are capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. Our directors do not believe that it is necessary to have an audit committee because management believes that the board of directors can adequately perform the functions of an audit committee. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the stage of our development and the fact that we have not generated any positive cash flows from operations to date.

 

43


 

Shareholder Proposals

 

We do not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The board of directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Currently, we do not have any specific or minimum criteria for the election of nominees to the board of directors, and we do not have any specific process or procedure for evaluating such nominees. The board of directors will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment.

 

A shareholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our President at our corporate address.

 

We held our first annual meeting of stockholders in 2016 and plant to host an annual meeting in 2017.  

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

2016 Summary Compensation Table

 

The following table sets forth, for each of our last two completed fiscal years, the dollar value of all cash and noncash compensation earned by any person who was our principal executive officer during the preceding fiscal year, our two most highly compensated other executive officers who were serving in such capacities as of the end of the preceding fiscal year, and each of our two other highest compensated executive officers earning more than $100,000 during the last fiscal year (“Named Executive Officers”):

 

Name and Principal Position

Year

Ended

Dec. 31

Salary

($)

Bonus

($)

Stock

Award(s)

($)

Option

Awards

($)

Warrant Awards

Non

Equity

Incentive

Plan

Compen-

sation

Change in

Pension

Value and

Non-

Qualified

Deferred

Compen-

sation

Earnings

($)

All Other

Compen-

sation

($) (1)

Total ($)

(a)

(b)

(c)

(d)

(e)

(f)

 

(g)

(h)

(i)

(j)

Michael A. Tew (2)

2016

$117,017

$--

$--

$--

$  --

$--

$--

$11,076

$128,093

Chief Executive Officer

2015

70,000

--

--

--

612,500

--

--

4,012

686,512

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brandon C. Jennewine (3)

2016

--

--

--

--

--

--

--

--

--

Chief Operations Officer

2015

85,577

--

--

--

175,000

--

--

3,519

264,096

 

 

 

 

 

 

 

 

 

 

 

Patrick J. Burke (4)

2016

5,000

--

--

--

--

--

--

--

5,000

Chief Operating Officer

 

 

 

 

 

 

 

 

 

 

(1)   Comprised of health insurance premiums. 

(2)   Mr. Tew became our chief executive officer on July 1, 2015. 

(3)   Mr. Jennewine was our chief executive officer from August 2014 to July 1, 2015. He served as our chief operations officer from July 1, 2015, through November 1, 2016. 

(4)   Mr. Burke became our chief operating officer on November 1, 2016.  

 

Stock Option Plan

 

We have not adopted a stock option plan.

 

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Employment Agreements

 

We have entered into employment letter agreements with the following employees:

 

  Michael A. Tew –On July 10, 2015, we entered into a one-year employment agreement effective July 1, 2015, with Michael A. Tew, our chief executive officer, chief financial officer, and a director. Under the agreement, we pay Mr. Tew a base salary of $168,000 for the initial one-year term, plus a bonus as determined by our board of directors, and provide medical insurance benefits. On December 31, 2015, Mr. Tew’s employment agreement was amended to cancel the stock grants that were issued under his employment agreement, and in exchange therefor, we granted to Mr. Tew warrants to purchase 150,000 shares of our common stock, of which a warrant to purchase 75,000 shares was immediately exercisable and a warrant to purchase 75,000 shares becomes exercisable quarterly in 12,500 increments over six quarters commencing March 31, 2016.  

 

  Brandon C. Jennewine –On July 10, 2015, we entered into a one-year employment agreement effective July 1, 2015, with our former chief executive officer, Brandon C. Jennewine, to become our chief technology officer and chief operations officer. Mr. Jennewine continues to serve as the chairman of our board of directors. Under the agreement, we pay Mr. Jennewine a base salary of $120,000 for the initial one-year term, plus a bonus as determined by our board of directors, and provide medical insurance benefits. On December 31, 2015, Mr. Jennewine’s employment agreement was amended to cancel the stock grants that were issued under his employment agreement, and in exchange therefor, we granted to Mr. Jennewine a warrant to purchase 25,000 shares of our common stock. On March 22, 2016, Mr. Jennewine resigned as our chief technology officer, but continues to serve as chairman of our board of directors.  

 

  Patrick J. Burke —On November 1, 2016, we entered into an agreement to hire Patrick G. Burke to serve as our Chief Operating Officer for a term of six months, unless mutually extended by the parties. Mr. Burke’s compensation will consist of $5,000 per month and 150,000 shares of common stock, to be issued as follows: 50,000 shares at signing, 50,000 shares on January 1, 2017, and 50,000 shares on March 1, 2017.  

 

We reimburse employees for their out-of-pocket costs in connection with their activities on our behalf.

 

Director Compensation

 

We currently do not have compensation agreements with any of our directors who are not employees; however:

 

  On December 24, 2015, we issued to David H. Wollins a warrant to purchase 7,500 shares of our common stock at $1.00 per share, vesting in equal amounts over four quarters, commencing March 31, 2016. Mr. Wollins is also a director of MHB, Inc. On March 22, 2016, Mr. Wollins resigned from our board of directors. Under our exchange agreement with MHB, it has the right to designate one member of our board.  

 

  On December 24, 2015, we issued to Daniel J. Rogers a warrant to purchase 12,500 shares of our common stock at $1.00 per share as director compensation.    

 

 

45


 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth certain information, as of April 7, 2017, respecting the beneficial ownership of our outstanding common stock by: (i) any holder of more than 5%; (ii) each of the Named Executive Officers and directors; and (iii) our directors and Named Executive Officers as a group, based on 1,053,279,877 shares of common stock outstanding. Except as otherwise indicated, each stockholder listed below has sole voting and investment power over the shares beneficially owned:

 

 

 

 

 

 

 

 

Name and Address

 

Nature of

 

 

 

 

of Beneficial Owner (1)(2)

 

Ownership

 

Amount

 

Percent (3)

 

 

 

 

 

 

 

Principal Stockholder:

 

 

 

 

 

 

Kodiak Capital Group, LLC

 

Common Stock

 

72,716,275

 

6.9%

260 Newport Center Drive

 

 

 

 

 

 

Newport Beach, CA 92660

 

 

 

 

 

 

 

 

 

 

 

 

 

F-squared Enterprises, LLC

 

Common Stock (4)

 

75,750

 

*%

Brandon C. Jennewine

 

Warrants (4)

 

25,000

 

*

 

 

 

 

100,750

 

*

 

 

 

 

 

 

 

Directors:

 

 

 

 

 

 

Brandon C. Jennewine

 

Common Stock (4)

 

75,750

 

*%

 

 

Warrants (4)

 

25,000

 

*

 

 

 

 

100,750

 

*

 

 

 

 

 

 

 

Daniel J. Rogers

 

Common Stock

 

20,000

 

*

 

 

Warrants

 

12,500

 

*

 

 

 

 

32,500

 

*

 

 

 

 

 

 

 

Michael A. Tew

 

Warrants

 

150,000

 

*

 

 

 

 

 

 

 

All Executive Officers

 

 

 

 

 

 

and Directors as a

 

Common Stock

 

195,750

 

*

Group (4 persons)

 

Warrants

 

187,500

 

*

 

 

 

 

383,250

 

*

______________________

*   Less than 1%. 

(1)   All ownership is direct unless otherwise indicated.  

(2)   Unless otherwise indicated, address for all stockholders is 1350 17th Street, Suite 150, Denver, CO 80202.  

(3)   Calculations of total percentages of ownership outstanding for each person or group assume the exercise of all derivative securities owned by the individual or group to which the percentage relates, pursuant to Rule 13d-3(d)(1)(i).  

(4)   These securities are beneficially owned by Brandon C. Jennewine, the sole owner of F-squared Enterprises, LLC.   

 

Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person by reason of such acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date.

 

46


 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Unless otherwise indicated, the terms of the following transactions between related parties were not determined as a result of arm’s-length negotiations.

 

Effective July 1, 2015, we hired Michael A. Tew as our new chief executive officer, secretary, and interim chief financial officer. Mr. Tew was also appointed to serve as a member of our board of directors.

 

Effective July 1, 2015, Brandon C. Jennewine resigned as our chief executive officer and was hired to serve as our chief technical officer and chief operations officer. He resigned from these positions on March 22, 2016, and will continue to be the chairman of our board of directors.

 

Effective July 1, 2015, Daniel J. Rogers resigned as our chief financial officer, secretary, and treasurer. Mr. Rogers continues to serve on our board of directors.

 

On November 10, 2015, we agreed to issue 500,000 shares of our common stock for 10 million shares of MHB, Inc. common stock, equivalent to approximately 49% of its outstanding common stock after the transaction. In connection with the exchange David H. Wollins, a founding member of MHB, became a member of our board of directors and Michael A. Tew became a member of the board of directors of MHB. However, Mr. Wollins resigned from our board of directors on March 22, 2016. MHB has the right to designate another member to our board of directors. We are advised that subsequent to this transaction, MHB transferred the shares we issued to it to its several stockholders. As a result, MHB advises us that none of its stockholders owns, beneficially or of record, 5% or more of our outstanding common stock.

 

Effective December 24, 2015, we cancelled the restricted stock grant previously issued to Daniel J. Rogers, and replaced it with a warrant to purchase 12,500 shares of our common stock.

 

Effective December 24, 2015, we issued to David H. Wollins a warrant to purchase 7,500 shares of our common stock, vesting in equal amounts in a four-quarter period.

 

Effective December 24, 2015, we entered into Amendment No. 1 to Employment Agreement of Michael A. Tew, our chief executive officer. The amendment terminated Mr. Tew’s right to receive restricted stock unit grants and cancelled the stock grants previously issued to him. As a replacement, we issued to Mr. Tew a fully vested warrant to purchase 75,000 shares of our common stock. In addition, we issued to Mr. Tew a warrant to purchase 75,000 shares of our common stock vesting in equal amounts over a six-quarter period.

 

On December 31, 2015, we entered into Amendment No. 1 to Employment Agreement of Brandon Jennewine, our chief technical officer, effective December 24, 2015. The amendment terminated Mr. Jennewine’s right to receive restricted stock unit grants and cancelled the stock grants previously issued to him. As a replacement, we issued to Mr. Jennewine a warrant to purchase 25,000 shares of our common stock.

 

On March 22, 2016, Brandon C. Jennewine resigned as chief technology officer, so his employment agreement with us terminated on that date. Mr. Jennewine remains on the board of directors.

 

On March 22, 2016, David H. Wollins resigned as a director, effective immediately upon acceptance by the board of directors.

 

47


 

Effective May 31, 2016, we entered into a Stockholders’ Agreement with MHB, Inc., to restrict the transfer of the common stock of Mile High Consulting and Branding, Inc., by the stockholders and to provide for the management and governance of its business operations. We own 51% of the common stock and MHB owns 49% of the common stock of Mile High Consulting and Branding, Inc.

 

On July 27, 2016, we entered into a Share Exchange Agreement to exchange 1,515,000 pre-reverse-split shares of our common stock owned by F-Squared Enterprises, LLC, for 1,515,000 shares of our Series A Preferred Stock. Brandon C. Jennewine, our director, is the sole member of F-Squared Enterprises, LLC. In connection with our Recapitalization and as provided in the terms of the Series A Preferred Stock, upon October 17, 2016, the effective date of the Recapitalization, the Series A Preferred Stock was automatically converted into 75,750 shares of common stock.

 

Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval, or ratification of transactions with our executive officers, directors, and significant stockholders. We intend to establish formal policies and procedures in the future, once we have sufficient resources and have appointed additional directors, so that such transactions will be subject to the review, approval, or ratification of our board of directors, or an appropriate committee thereof. Our directors will continue to approve any related-party transaction.

 

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Audit Fees

 

For our fiscal year ended December 31, 2016, we incurred fees of $45,000 for professional services rendered for the audit and reviews of our consolidated financial statements. For our fiscal year ended December 31, 2015, we incurred fees of $39,400 for professional services rendered for the audit and reviews of our consolidated financial statements.

 

Audit Related Fees

 

For our fiscal years ended December 31, 2016 and 2015, we did not incur any audit-related fees.

 

Tax Fees

 

For our fiscal years ended December 31, 2016 and 2015, we were not billed for professional services rendered for tax compliance, tax advice, and tax planning.

 

All Other Fees

 

We did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended December 31, 2016 and 2015.

 

Audit and Non-Audit Service Preapproval Policy

 

In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, our board of directors has adopted an informal approval policy that it believes will result in an effective and efficient procedure to preapprove services performed by the independent registered public accounting firm.

 

48


 

Audit Services . Audit services include the annual financial statement audit (including quarterly reviews) and other procedures required to be performed by the independent registered public accounting firm to be able to form an opinion on our consolidated financial statements. The board of directors preapproves specified annual audit services engagement terms and fees and other specified audit fees. All other audit services must be specifically preapproved by the board of directors. The board of directors monitors the audit services engagement and may approve, if necessary, any changes in terms, conditions, and fees resulting from changes in audit scope or other items.

 

Audit-Related Services . Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements, which historically have been provided to us by the independent registered public accounting firm and are consistent with the Securities and Exchange Commission’s rules on auditor independence. The board of directors preapproves specified audit-related services within preapproved fee levels. All other audit-related services must be preapproved by the board of directors.

 

Tax Services . The board of directors preapproves specified tax services that it believes would not impair the independence of the independent registered public accounting firm and that are consistent with Securities and Exchange Commission’s rules and guidance. The board of directors must specifically approve all other tax services.

 

All Other Services . Other services are services provided by the independent registered public accounting firm that do not fall within the established audit, audit-related, and tax services categories. The board of directors preapproves specified other services that do not fall within any of the specified prohibited categories of services.

 

Procedures . All proposals for services to be provided by the independent registered public accounting firm, which must include a detailed description of the services to be rendered and the amount of corresponding fees, are submitted to the board of directors and the Chief Financial Officer. The Chief Financial Officer authorizes services that have been preapproved by the board of directors. The Chief Financial Officer submits requests or applications to provide services that have not been preapproved by board of directors, which must include an affirmation by the Chief Financial Officer and the independent registered public accounting firm that the request or application is consistent with the Securities and Exchange Commission’s rules on auditor independence, to board of directors for approval.

 

All of the professional services rendered by principal accountants for the audit of our annual financial statements that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for last two fiscal years were approved by our board of directors.

 

 

49


 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

The following documents are filed as part of this report or incorporated herein by reference.

 

1.   Financial Statements . See the following beginning at page F-1:  

 

 

Page

 

 

Report of Independent Registered Public Accounting Firm

F-2

Balance Sheets as of December 31, 2016 and 2015 Statements of Operations for the Years Ended

F-3

December 31, 2016 and 2015 Statements of Cash Flows for the Years Ended

F-4

December 31, 2016 and 2015 Statement of Stockholders’ Equity for the Years

F-5

Statement of Stockholders’ Equity for the Years Ended December 31, 2016 and 2015

F-6

Notes to the Financial Statements

F-7

 

2.   Supplemental Schedules . The supplemental schedules have been omitted because they are not applicable or the required information is otherwise included in the accompanying consolidated financial statements and the notes thereto.  

 

3.   Exhibits . The following exhibits are included as part of this report:  

 

Exhibit

Number*

 

 

Title of Document

 

 

Location

 

 

 

 

 

Item 2

 

Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession

 

 

2.01

 

Agreement and Plan of Merger

 

Incorporated by reference from the Current Report on Form 8-K/A filed August 28, 2014

 

 

 

 

 

Item 3

 

Articles of Incorporation and Bylaws

 

 

3.01

 

Amended and Restated Articles of Incorporation, filed November 12, 2014

 

Incorporated by reference from a Current Report on Form 8-K filed November 12, 2014

 

 

 

 

 

3.02

 

Bylaws

 

Incorporated by reference from the Registration Statement on Form S1 filed May 13, 2008

 

 

 

 

 

3.03

 

Certificate of Designation

 

Incorporated by reference from current report on Form 8-K filed August 2, 2016

 

 

 

 

 

3.04

 

Certificate of Amendment filed September 22, 2016

 

Incorporated by reference from Definitive Information Statement on Schedule 14C filed September 6, 2016

 

 

50


 

 

 

 

 

Exhibit

Number*

 

 

Title of Document

 

 

Location

Item 4

 

Instruments Defining the Rights of Security Holders, including indentures

 

 

4.01

 

Specimen Common Stock Certificate of Registrant

 

Incorporated by reference from the Registration Statement on Form S1 filed May 13, 2008

 

 

 

 

 

Item 10

 

Material Contracts

 

 

10.05

 

License Agreement between Loyl.Me LLC and CannaSys, LLC dated February 9, 2015

 

Incorporated by reference from the Current Report on Form 8-K filed February 12, 2015

 

 

 

 

 

10.06

 

License Agreement between Loyl.Me LLC and CannaSys, LLC dated February 12, 2015

 

Incorporated by reference from the Current Report on Form 8-K filed February 12, 2015

 

 

 

 

 

10.08

 

Revised employment letter agreement of Dan Rogers dated January 30, 2015**

 

Incorporated by reference from the Annual Report on Form 10-K for the year ended December 31, 2014, filed March 30, 2015

 

 

 

 

 

10.09

 

Employment Agreement between CannaSys, Inc. and Michael A. Tew (executive), effective July 1, 2015**

 

Incorporated by reference from the Current Report on Form 8-K filed July 15, 2015

 

 

 

 

 

10.11

 

Grant of Restricted Stock between CannaSys, Inc. and Michael A. Tew, effective July 1, 2015**

 

Incorporated by reference from the Current Report on Form 8-K filed July 15, 2015

 

 

 

 

 

10.12

 

Grant of Restricted Stock between CannaSys, Inc. and Brandon C. Jennewine, effective July 1, 2015**

 

Incorporated by reference from the Current Report on Form 8-K filed July 15, 2015

 

 

 

 

 

10.13

 

Securities Purchase Agreement between CannaSys, LLC and EMA Financial, LLC dated October 14, 2015

 

Incorporated by reference from the Current Report on Form 8-K filed October 23, 2015

 

 

 

 

 

10.14

 

10% Convertible Note between CannaSys, Inc. and EMA Financial, LLC dated October 14, 2015

 

Incorporated by reference from the Current Report on Form 8-K filed October 23, 2015

 

 

 

 

 

10.15

 

Share Exchange Agreement between MHB, Inc. and CannaSys, LLC, including Exhibit A-Gross Revenue Assignment, dated November 3, 2015

 

Incorporated by reference from the Current Report on Form 8-K/A filed November 17, 2015

 

 

 

 

 

10.16

 

Marketing and Alliance Agreement between Green Capital Ventures, Inc. and CannaSys, Inc., dated as of November 11, 2015, including exhibits

 

Incorporated by reference from the Current Report on Form 8-K filed November 23, 2015

 

 

51


 

 

 

 

 

Exhibit

Number*

 

 

Title of Document

 

 

Location

10.17

 

10% Convertible Note between CannaSys, Inc. and Tangiers Investment Group, LLC, dated November 18, 2015

 

Incorporated by reference from the Current Report on Form 8-K filed November 24, 2015

 

 

 

 

 

10.18

 

10% Convertible Note between CannaSys, Inc. and Auctus Fund, LLC, dated December 3, 2015

 

Incorporated by reference from the Current Report on Form 8-K filed December 9, 2015

 

 

 

 

 

10.19

 

Securities Purchase Agreement between CannaSys, Inc. and Auctus Fund, LLC, dated December 3, 2015

 

Incorporated by reference from the Current Report on Form 8-K filed December 9, 2015

 

 

 

 

 

10.20

 

12% Convertible Note between CannaSys, Inc. and Kodiak Investment Group, LLC, dated November 30, 2015

 

Incorporated by reference from the Current Report on Form 8-K filed December 22, 2015

 

 

 

 

 

10.21

 

Equity Purchase Agreement between CannaSys, Inc. and Kodiak Investment Group, LLC, dated December 15, 2015

 

Incorporated by reference from the Current Report on Form 8-K filed December 22, 2015

 

 

 

 

 

10.22

 

Registration Rights Agreement between CannaSys, Inc. and Kodiak Investment Group, LLC, dated December 15, 2015

 

Incorporated by reference from the Current Report on Form 8-K filed December 22, 2015

 

 

 

 

 

10.23

 

Convertible Promissory Note due July 15, 2016

 

Incorporated by reference from the Current Report on Form 8-K filed December 22, 2015

 

 

 

 

 

10.24

 

Technology Services Agreement between CannaSys, Inc. and National Concessions Group, Inc., dated December 20, 2015, including exhibits

 

Incorporated by reference from the Current Report on Form 8-K filed December 23, 2015

 

 

 

 

 

10.25

 

Consulting Agreement between CannaSys, Inc. and National Concessions Group, Inc., dated December 20, 2015, including Warrant

 

Incorporated by reference from the Current Report on Form 8-K filed December 23, 2015

 

 

 

 

 

10.26

 

Asset Purchase Agreement between CannaSys, Inc. and Luvbuds, LLC, and Brett Harris, entered December 17, 2015

 

Incorporated by reference from the Registration Statement on Form S-1 filed February 2, 2016

 

 

 

 

 

10.27

 

Bill of Sale, Assignment, and Assumption Agreement between CannaSys, Inc. and Luvbuds, LLC, dated December 17, 2015

 

Incorporated by reference from the Registration Statement on Form S-1 filed February 2, 2016

 

 

 

 

 

10.28

 

Amendment No. 1 to Employment Agreement between CannaSys, Inc. and Michael A. Tew, effective December 24, 2015**

 

Incorporated by reference from the Current Report on Form 8-K filed January 6, 2016

 

 

52


 

 

 

 

 

 

 

Exhibit

Number*

 

 

Title of Document

 

 

Location

10.29

 

Amendment No. 1 to Employment Agreement between CannaSys, Inc. and Brandon C. Jennewine, effective December 24, 2015**

 

Incorporated by reference from the Current Report on Form 8-K filed January 6, 2016

 

 

 

 

 

10.30

 

CannaSys, Inc. Warrant for the Purchase of 1,500,000 Shares of Common Stock, Par Value $0.001, issued to Michael A. Tew, effective December 24, 2015**

 

Incorporated by reference from the Current Report on Form 8-K filed January 6, 2016

 

 

 

 

 

10.31

 

CannaSys, Inc. Warrant for the Purchase of 1,500,000 Shares of Common Stock, Par Value $0.001, issued to Michael A. Tew, effective December 24, 2015**

 

Incorporated by reference from the Current Report on Form 8-K filed January 6, 2016

 

 

 

 

 

10.32

 

CannaSys, Inc. Warrant for the Purchase of 500,000 Shares of Common Stock, Par Value $0.001, issued to Brandon Jennewine, effective December 24, 2015**

 

Incorporated by reference from the Current Report on Form 8-K filed January 6, 2016

 

 

 

 

 

10.33

 

CannaSys, Inc. Warrant for the Purchase of 250,000 Shares of Common Stock, Par Value $0.001, issued to Daniel J. Rogers, effective December 24, 2015**

 

Incorporated by reference from the Current Report on Form 8-K filed January 6, 2016

 

 

 

 

 

10.34

 

CannaSys, Inc. Warrant for the Purchase of 150,000 Shares of Common Stock, Par Value $0.001, issued to David H. Wollins, effective December 24, 2015**

 

Incorporated by reference from the Current Report on Form 8-K filed January 6, 2016

 

 

 

 

 

10.35

 

Amendment to 10% Convertible Note and Securities Purchase Agreement dated February 9, 2016

 

Incorporated by reference from the Current Report on Form 8-K filed February 12, 2016

 

 

 

 

 

10.36

 

Securities Purchase Agreement between CannaSys, Inc., and Kodiak Capital Group, LLC, dated March 18, 2016, including exhibits

 

Incorporated by reference from the Current Report on Form 8-K filed March 25, 2016

 

 

 

 

 

10.37

 

Agreement of Termination, Compromise, Settlement and Mutual Release of Claims among CannaSys, Inc., Luvbuds, LLC, Brett Harris, and Tag Distributing LLC, doing business as Consigliere Inc. effective March 31, 2016

 

Incorporated by reference from the Current Report on Form 8-K filed April 5, 2016

 

 

 

 

 

10.38

 

Amendment No. 2 to Transaction Documents dated April 27, 2016

 

Incorporated by reference from the Current Report on Form 8-K filed April 27, 2016

 

 

53


 

 

 

 

 

 

 

Exhibit

Number*

 

 

Title of Document

 

 

Location

10.39

 

Convertible Promissory Note for $50,000 to Blackbridge Capital, LLC, dated April 27, 2016

 

Incorporated by reference from the Current Report on Form 8-K filed May 11, 2016

 

 

 

 

 

10.40

 

Assignment and Assumption Agreement between Jeff Holmes and Blackbridge Capital, LLC, dated April 27, 2016

 

Incorporated by reference from the Current Report on Form 8-K filed May 11, 2016

 

 

 

 

 

10.41

 

Loan Agreement between Jeff Holmes and CannaSys, Inc. dated April 27, 2016, with exhibits

 

Incorporated by reference from the Current Report on Form 8-K filed May 11, 2016

 

 

 

 

 

10.42

 

Amendment No. 1 to 10% Convertible Promissory Note of CannaSys, dated May 23, 2016

 

Incorporated by reference from the Current Report on Form 8-K filed May 25, 2016

 

 

 

 

 

10.43

 

Grant of Restricted Stock to Tangiers Investment Group, LLC, dated May 23, 2016

 

Incorporated by reference from the Current Report on Form 8-K filed May 25, 2016

 

 

 

 

 

10.44

 

Second Amended and Restated Promissory Note for $50,000 to Kodiak Capital Group, LLC, issued May 23, 2016

 

Incorporated by reference from the Current Report on Form 8-K filed June 9, 2016

 

 

 

 

 

10.45

 

Amendment No. 1 to Transaction Documents among CannaSys, Inc., Kodiak Capital Group, LLC, and B44, LLC, fully executed on May 25, 2016

 

Incorporated by reference from the Current Report on Form 8-K filed June 9, 2016

 

 

 

 

 

10.46

 

Securities Purchase Agreement between CannaSys, Inc. and EMA Financial, LLC, dated May 5, 2016

 

Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed August 18, 2016

 

 

 

 

 

10.47

 

12% Convertible Note in the Principal Amount of $53,500, issued May 5, 2016, to EMA Financial, LLC

 

Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed August 18, 2016

 

 

 

 

 

10.48

 

Securities Purchase Agreement between CannaSys, Inc. and Black Forest Capital, LLC, dated May 31, 2016

 

Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed August 18, 2016

 

 

 

 

 

10.49

 

Convertible Promissory Note in the Amount of $30,000 Payable to Black Forest Capital, LLC

 

Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed August 18, 2016

 

 

54


 

 

 

 

 

Exhibit

Number*

 

 

Title of Document

 

 

Location

10.50

 

Note Purchase and Assignment Agreement

 

Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed August 18, 2016

 

 

 

 

 

10.51

 

Replacement Convertible Promissory Note

 

Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed August 18, 2016

 

 

 

 

 

10.52

 

Stockholders’ Agreement among Mile High Consulting and Branding, Inc., CannaSys, Inc., and MHB, Inc. d/b/a Mile High Brands effective May 31, 2016

 

Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed August 18, 2016

 

 

 

 

 

10.53

 

First Amendment to 8% Convertible Redeemable Notes executed July 12, 2016

 

Incorporated by reference from current report on Form 8-K filed July 26, 2016

 

 

 

 

 

10.54

 

Securities Purchase Agreement between CannaSys, Inc. and Auctus Fund LLC, dated July 20, 2016

 

Incorporated by reference from current report on Form 8-K filed July 27, 2016

 

 

 

 

 

10.55

 

Convertible Promissory Note in the amount of $45,750 Payable to Auctus Fund, LLC

 

Incorporated by reference from current report on Form 8-K filed July 27, 2016

 

 

 

 

 

10.56

 

Share Exchange Agreement between CannaSys, Inc., and F-Squared Enterprises LLC, effective July 27, 2016

 

Incorporated by reference from current report on Form 8-K filed August 2, 2016

 

 

 

 

 

10.57

 

Asset Purchase Agreement, together with exhibits, between CannaSys, Inc. and Beta Killers LLC, dated August 10, 2016

 

Incorporated by reference from current report on Form 8-K filed August 16, 2016

 

 

 

 

 

10.58

 

Amendment No. 1 to Transaction Documents between CannaSys, Inc. and Kodiak Capital Group, LLC, dated August 18, 2016

 

Incorporated by reference from current report on Form 8-K filed August 24, 2016

 

 

 

 

 

10.59

 

Agreement of Termination, Compromise, Settlement, and Mutual Release of Claims between CannaSys, Inc. and National Concessions Group, Inc. effective September 30, 2016

 

Incorporated by reference from current report on Form 8-K filed October 11, 2016

 

 

 

 

 

10.60

 

Agreement of Termination between CannaSys, Inc. and Loyl.Me, LLC effective September 30, 2016

 

Incorporated by reference from current report on Form 8-K filed October 11, 2016

 

 

55


 

 

 

 

 

 

 

Exhibit

Number*

 

 

Title of Document

 

 

Location

10.61

 

Form of Securities Purchase Agreement dated as of October 31, 2016 between CannaSys, Inc. and an accredited investor

 

Incorporated by reference from current report on Form 8-K filed November 14, 2016

 

 

 

 

 

10.62

 

Form of Convertible Promissory Note between CannaSys, Inc. and an accredited investor dated October 31, 2016

 

Incorporated by reference from current report on Form 8-K filed November 14, 2016

 

 

 

 

 

10.63

 

Form of Replacement Convertible Promissory Note between CannaSys, Inc. and an accredited investor dated October 31, 2016

 

Incorporated by reference from current report on Form 8-K filed November 14, 2016

 

 

 

 

 

10.64

 

Consulting Agreement between CannaSys, Inc. and Patrick Burke dated October 31, 2016**

 

Incorporated by reference from current report on Form 8-K filed November 14, 2016

 

 

 

 

 

10.65

 

Securities Purchase Agreement between CannaSys, Inc., and Auctus Fund, LLC, dated December 7, 2016

 

 

Incorporated by reference from current report on Form 8-K filed December 16, 2016

 

 

 

 

 

10.66

 

CannaSys, Inc. 12% Convertible Redeemable Note Due December 7, 2017

 

Incorporated by reference from current report on Form 8-K filed December 16, 2016

 

 

 

 

 

10.67

 

Amendment No. 1 to Equity Purchase Agreement between CannaSys, Inc. and Kodiak Capital Group, LLC dated December 15, 2016

 

Incorporated by reference from current report on Form 8-K filed December 16, 2016

 

 

 

 

 

10.68

 

Securities Purchase Agreement between CannaSys, Inc., and Adar Bays, LLC, dated December 12, 2016

 

Incorporated by reference from current report on Form 8-K filed December 28, 2016

 

 

 

 

 

10.69

 

CannaSys, Inc. 8% Convertible Redeemable Note Due December 12, 2017

 

Incorporated by reference from current report on Form 8-K filed December 28, 2016

 

 

 

 

 

10.70

 

CannaSys, Inc. 8% Convertible Redeemable Note Due December 12, 2017, with corresponding Adar Bays, LLC Collateralized Secured Promissory Note

 

Incorporated by reference from current report on Form 8-K filed December 28, 2016

 

 

 

 

 

10.71

 

CannaSys, Inc. 8% Convertible Redeemable Note Due December 12, 2017, with corresponding Adar Bays, LLC Collateralized Secured Promissory Note

 

Incorporated by reference from current report on Form 8-K filed December 28, 2016

 

 

56


 

 

 

 

 

 

 

Exhibit

Number*

 

 

Title of Document

 

 

Location

10.72

 

Amendment to Share Exchange Agreement dated December 22, 2016, between CannaSys, Inc. and MHB, Inc.

 

Incorporated by reference from current report on Form 8-K filed December 28, 2016

 

 

 

 

 

10.73

 

Amendment No. 2 to Equity Purchase Agreement between CannaSys, Inc. and Kodiak Capital Group, LLC, dated March 2, 2017

 

Incorporated by reference from current report on Form 8-K filed March 2, 2017

 

 

 

 

 

Item 14

 

Code of Ethics

 

 

14.01

 

Code of Ethics

 

Incorporated by reference from the Annual Report on Form 10-K for the year ended December 31, 2008, filed March 30, 2009

 

 

 

 

 

Item 16

 

Letter re Change in Certifying Accountant

 

 

16.01

 

Letter from HJ & Associates to Securities and Exchange Commission regarding change in certifying accountant dated April 8, 2015

 

Incorporated by reference from the Current Report on Form 8-K filed April 8, 2015

 

 

 

 

 

Item 21

 

Subsidiaries of the Registrant

 

 

21.01

 

Schedule of Subsidiaries

 

Incorporated by reference from the Registration Statement on Form S-1 filed February 2, 2016

 

 

 

 

 

Item 31

 

Rule 13a-14(a)/15d-14(a) Certifications

 

 

31.01

 

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14

 

This filing.

 

 

 

 

 

Item 32

 

Section 1350 Certifications

 

 

32.01

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

This filing.

 

 

 

 

 

Item 101

 

Interactive Data Files***

 

 

101.INS

 

XBRL Instance Document

 

This filing.

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema

 

This filing.

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

 

This filing

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

 

This filing.

 

 

57


 

 

 

 

 

 

 

Exhibit

Number*

 

 

Title of Document

 

 

Location

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

 

This filing.

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 

This filing.

_______________________

*   All exhibits are numbered with the number preceding the decimal indicating the applicable SEC reference number in Item 601 and the number following the decimal indicating the sequence of the particular document. Omitted numbers in the sequence refer to documents previously filed as an exhibit.  

**   Identifies each management contract or compensatory plan or arrangement required to be filed as an exhibit, as required by Item 15(a)(3) of Form 10-K. 

***   Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or Annual Report for purposes of Sections 11 or 12 of the Securities Act or Section 18 of the Exchange Act and otherwise are not subject to liability. 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CANNASYS, INC . (Registrant)

 

 

 

 

 

 

 

 

 

Dated: April 14, 2017

By:

/s/ Michael A. Tew

 

 

Michael A. Tew

 

 

Chief Executive Officer and

 

 

Chief Financial Officer

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

/s/ Michael A. Tew

Dated: April 14, 2017

Michael A. Tew, Director

 

Chief Executive Officer and

 

Chief Financial Officer

 

 

 

 

 

/s/ Brandon C. Jennewine

Dated: April 14, 2017

Brandon C. Jennewine, Director

 

 

 

 

 

/s/ Daniel J. Rogers

Dated: April 14, 2017

Daniel J. Rogers, Director

 

 

 

58


 

CANNASYS, INC.

 

 

INDEX TO FINANCIAL STATEMENTS

 

 

 

 

 

Page

 

 

Report of Independent Registered Public Accounting Firm

F-2

 

 

Balance Sheets as of December 31, 2016 and 2015

F-3

 

 

Statements of Operations for the years ended December 31, 2016 and 2015

F-4

 

 

Statements of Cash Flows for the years ended December 31, 2016 and 2015

F-5

 

 

Statements of Stockholders’ Equity for the years ended December 31, 2016 and 2015

F-6

 

 

Notes to the Financial Statements

F-7

 

 

F- 1


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders of Cannasys, Inc.:

 

We have audited the accompanying balance sheets of Cannasys, Inc. (“the Company”) as of December 31, 2016 and 2015 and the related statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audit.  

 

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinions.  

 

In our opinion, the financial statement referred to above present fairly, in all material respects, the financial position of Cannasys, Inc., as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles in the United States of America.

 

The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company's internal control over financial reporting.  Accordingly, we express no such opinion.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company’s significant operating losses raise substantial doubt about its ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ BF Borgers CPA PC

BF Borgers CPA PC
Lakewood, CO
April 14, 2017

 

 

 

F- 2


 

 

CANNASYS, INC.

Balance Sheets

 

December 31,

 

2016

 

2015

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash

$

7,090

 

$

7,720

Accounts receivable

 

-

 

 

4,550

Total Current Assets

 

7,090

 

 

12,270

Property and equipment, net depreciation of $0 and $3,225, respectively

 

-

 

 

5,178

Software, net of amortization of $40,264 and $0, respectively

 

180,736

 

 

-

Software license

 

-

 

 

255,000

Available for sale securities

 

32,500

 

 

32,500

Equity investment in MHB, Inc., net of impairment of $1,049,475

 

 

 

 

 

and $1,846,515, respectively

 

-

 

 

1,049,475

Deposit

 

1,500

 

 

-

Total Assets

$

221,826

 

$

1,354,423

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

$

462,320

 

$

123,676

Accrued expenses

 

130,091

 

 

51,274

Notes payable

 

27,000

 

 

200,000

Convertible notes payable, net of discount of $87,908

 

 

 

 

 

and $122,084, respectively

 

353,740

 

 

152,966

Total Current Liabilities

 

973,151

 

 

527,916

 

 

 

 

 

 

Total Liabilities

 

973,151

 

 

527,916

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized,

 

 

 

 

 

no shares issued

 

-

 

 

-

Common stock, $0.001 par value, 2,000,000,000 shares

 

 

 

 

 

authorized, 355,734,404 and 1,058,802 shares issued and

 

 

 

 

 

outstanding, respectively

 

355,734

 

 

1,059

Additional paid-in capital

 

9,357,233

 

 

6,442,134

Accumulated deficit

 

(10,464,292)

 

 

(5,616,686)

Total Stockholders’ Equity

 

(751,325)

 

 

826,507

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

$

221,826

 

$

1,354,423

 

 

The accompanying notes are an integral part of these financial statements.

 

F- 3


 

CANNASYS, INC.

Statements of Operations

 

 

 

For the Years Ended December 31,

 

2016

 

2015

 

 

 

 

 

 

Sales revenue

$

66,849

 

$

119,325

Cost of goods sold

 

24,260

 

 

47,823

Gross Margin

 

42,589

 

 

71,502

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

Stock-based compensation expense

 

697,523

 

 

904,125

Professional fees

 

369,212

 

 

207,892

Salary and wages expense

 

230,176

 

 

491,223

General and administrative

 

347,514

 

 

231,033

Total Operating Expenses

 

1,644,425

 

 

1,834,273

 

 

 

 

 

 

Loss from Operations

 

(1,601,836)

 

 

(1,762,771)

 

 

 

 

 

 

Other expense:

 

 

 

 

 

Interest expense

 

(46,094)

 

 

(6,344)

Interest expense – debt discount and loan financing fees

 

(612,679)

 

 

(85,250)

Penalties

 

(78,771)

 

 

-

Impairment loss on investment

 

(1,049,475)

 

 

(1,846,515)

Loss on issuance of convertible debt

 

(1,214,985)

 

 

(152,966)

Gain on forgiveness of debt

 

15,000

 

 

-

Loss on fixed asset and intangible assets

 

(258,766)

 

 

-

Loss on investment

 

-

 

 

(4,010)

Total other expense

 

(3,245,770)

 

 

(2,095,085)

 

 

 

 

 

 

Loss before provision for income taxes

 

(4,847,606)

 

 

(3,857,856)

Provision for income taxes

 

-

 

 

-

 

 

 

 

 

 

Net loss

$

(4,847,606)

 

$

(3,857,856)

 

 

 

 

 

 

Basic and diluted loss per common share

$

(0.22)

 

$

(0.31)

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

21,993,441

 

 

12,563,717

 

 

The accompanying notes are an integral part of these financial statements.

 

F- 4


 

CANNASYS, INC.

Statements of Stockholders’ Equity

 

Shares

 

Amount

 

Additional Paid-in Capital

 

Accumulated Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

552,188

 

$     552

 

$2,258,016

 

$(1,758,830)

 

$   499,738

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for licensing

6,615

 

7

 

108,243

 

-

 

108,250

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for investment

500,000

 

500

 

2,899,500

 

-

 

2,900,000

 

 

 

 

 

 

 

 

 

 

Issuance of warrants

-

 

-

 

904,125

 

-

 

904,125

 

 

 

 

 

 

 

 

 

 

Beneficial conversion feature on convertible debt

-

 

-

 

272,250

 

-

 

272,250

 

 

 

 

 

 

 

 

 

 

Net loss for the year ended December 31, 2015

-

 

-

 

-

 

(3,857,856)

 

(3,857,856)

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

1,058,803

 

1,059

 

6,442,134

 

(5,616,686)

 

826,507

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for services

1,995,655

 

1,995

 

126,936

 

-

 

128,931

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for debt conversion

353,106,142

 

353,106

 

266,407

 

-

 

619,513

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for warrants

8,804

 

9

 

(9)

 

-

 

-

 

 

 

 

 

 

 

 

 

 

Cancellation of issuance

(485,000)

 

(485)

 

485

 

-

 

-

 

 

 

 

 

 

 

 

 

 

Beneficial conversion feature

 

 

 

 

 

 

 

 

 

on convertible debt and warrants

-

 

-

 

2,300,330

 

-

 

2,300,330

 

 

 

 

 

 

 

 

 

 

Stock issued for asset acquisition

50,000

 

50

 

220,950

 

-

 

221,000

 

 

 

 

 

 

 

 

 

 

Net loss for the year ended December 31, 2016

-

 

-

 

-

 

(4,847,606)

 

(4,847,606)

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

355,734,404

 

$355,734

 

$9,357,233

 

$(10,464,292)

 

$  (751,325)

 

The accompanying notes are an integral part of these financial statements.

 

 

 

F- 5


 

CANNASYS, INC.

Statements of Cash Flows

 

For the years ended December 31,

 

2016

 

2015

 

 

 

 

 

 

Cash flow from operating activities

 

 

 

 

 

Net loss

$

(4,847,606)

 

$

(3,857,856)

Adjustments to reconcile net loss to net cash

 

 

 

 

 

used in operating activities:

 

 

 

 

 

Depreciation

 

41,676

 

 

2,810

Stock-based compensation

 

697,253

 

 

904,125

Amortization of debt discount

 

612,679

 

 

85,250

Impairment loss on investment

 

1,049,475

 

 

1,846,515

Penalties

 

78,771

 

 

 

Loss on issuance of convertible debt

 

1,214,985

 

 

152,966

Loss on disposal of fixed and intangible assets

 

258,766

 

 

-

Loss on investment

 

-

 

 

4,010

Gain on forgiveness of debt

 

(15,000)

 

 

-

Change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

4,550

 

 

(2,326)

Prepaids and other assets

 

(1,500)

 

 

15,330

Related-party payable

 

-

 

 

(1,320)

Accounts payable

 

353,644

 

 

102,542

Accrued expenses

 

94,927

 

 

(2,796)

Net cash used in operating activities

 

(457,380)

 

 

(750,750)

 

 

 

 

 

 

Cash flows used in investing activities:

 

 

 

 

 

Purchase of software license

 

-

 

 

(121,750)

Purchase of available for sale securities

 

-

 

 

(32,500)

Net cash used in investing activities

 

-

 

 

(154,250)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from notes payable

 

456,750

 

 

387,000

Net cash provided by financing activities

 

456,750

 

 

387,000

 

 

 

 

 

 

Net decrease in cash

 

(630)

 

 

(518,000)

Cash at beginning of the year

 

7,720

 

 

525,720

Cash at end of the year

$

7,090

 

$

7,720

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

Interest paid

$

-

 

$

-

Income taxes paid

$

-

 

$

-

Supplemental disclosure of non-cash activities

 

 

 

 

 

Common stock issued for software license

$

-

 

$

108,250

Common stock issued for investment

$

221,000

 

$

2,900,000

Issuance of convertible notes payable

$

619,513

 

$

272,250

 

 

The accompanying notes are an integral part of these financial statements.

 

 

F- 6


 

CANNASYS, INC.

Notes to the Financial Statements

December 31, 2016

 

 

 

NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Organization

We were organized as a Nevada corporation on August 25, 1999. On August 15, 2014, we entered into an Agreement and Plan of Merger to combine our business and activities with CannaSys, Inc., a privately held Colorado corporation focused on providing services to the cannabis industry (“CannaSys-Colorado”), into a single entity (the “Merger”). CannaSys-Colorado was originally formed on October 4, 2013, as a limited liability company, and converted to a corporation on June 26, 2014. Under the terms of the merger agreement, our wholly owned subsidiary formed to effectuate the Merger was merged with and into CannaSys-Colorado, the surviving entity, which then became our wholly owned subsidiary.

 

Due to the CannaSys-Colorado shareholders controlling us after the Merger, CannaSys-Colorado was considered the accounting acquirer. The transaction was therefore recognized as a reverse acquisition of us by CannaSys-Colorado.

 

In connection with the closing of the Merger and after meeting the requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), on November 12, 2014, we filed amended and restated articles of incorporation with the Nevada Secretary of State that: (i) changed our name to CannaSys, Inc.; (ii) increased our authorized capital stock to 80,000,000 shares, consisting of 75,000,000 shares of common stock and 5,000,000 shares of preferred stock; (iii) authorized 5,000,000 shares of preferred stock; and (iv) made other modernizing, nonmaterial changes to our articles of incorporation. Changing our corporate name to CannaSys, Inc. was a condition to the Merger transaction. The name change better reflects the nature of our principal business operations and it became effective in the OTC market on December 2, 2014, when FINRA announced the name change. We also received a new CUSIP number and our trading symbol was changed to “MJTK.”

 

On October 17, 2016, we completed a recapitalization of our company, consisting of a 20-to-one reverse split and an increase of authorized capitalization. Our amended and restated articles of incorporation authorize us to issue 2,500,000,000 shares of capital stock, consisting of 2,000,000,000 shares of common stock, par value $0.001, and 5,000,000 shares of preferred stock, par value $0.001. This recapitalization triggered the automatic conversion of 1,515,000 shares of Series A Preferred Stock to 75,750 shares of common stock.

 

Nature of Business

We provide technology services in the ancillary space of the cannabis industry. We do not produce, sell, or handle in any manner cannabis products. As the current cannabis industry grows and gains momentum around the country, technology needs for the industry have been largely underserved. Our focus on this niche element of the industry creates many efficient and profitable tools for both industry owners and consumers.

 

Since inception, we have developed, refined, and introduced branded products, membership loyalty programs, text-message-based platforms for customer engagement, and laboratory management systems into the cannabis industry. To support marketing and delivery of our principal products and to access other products and services, we are expanding a network of strategic alliances within the industry to build an array of product and service offerings and to increase use of our distribution channels. Most of our active strategic relationships were only recently initiated and are yet to generate revenue.

 

We seek funding to launch our integrated cannabis-industry product and service suite. Our primary business objectives are to generate stable revenues and cash flows through the development of vertically integrated distribution centers and to collect and monetize cannabis consumer data.

 

F- 7


 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

Use of Estimates

The preparation of financial statements in accordance with GAAP permits management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Concentrations of Credit Risk

We maintain our cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. We continually monitor our banking relationships and consequently have not experienced any losses in our accounts. We believe we are not exposed to any significant credit risk on cash.

 

Cash and Cash Equivalents

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents for the year ended December 31, 2016 or 2015.

 

Accounts Receivable

Revenues that have been recognized but not yet received are recorded as accounts receivable. Losses on receivables will be recognized when it is more likely than not that a receivable will not be collected. An allowance for estimated uncollectible amounts will be recognized to reduce the amount of receivables to its net realizable value. The need for an allowance for uncollectible amounts is evaluated quarterly. We have not deemed it necessary to establish an allowance for doubtful accounts as of December 31, 2016 and 2015.

 

Reclassifications

Certain reclassifications have been made to the prior-year financial information to conform to the presentation used in the financial statements for the year ended December 31, 2016.

 

Fair Value of Financial Instruments

We follow Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 825-10-50-10, Financial Instruments—Overall—Disclosure, for disclosures about fair value of our financial instruments and ASC 820-10-35-37, Fair Value Measurement—Overall—Subsequent Measure—Fair Value Hierarchy, to measure the fair value of our financial instruments. ASC 820-10-35-37 establishes a framework for measuring fair value GAAP and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10-35-37 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by ASC 820-10-35-37 are described below:

 

Level 1:

 

Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.

 

 

 

 

 

 

Level 2:

 

Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

 

 

 

Level 3:

 

Pricing inputs that are generally observable inputs and not corroborated by market data.

 

F- 8


 

The carrying amount of our financial assets and liabilities, such as cash, prepaid expenses, and accrued expenses, approximate their fair value because of the short maturity of those instruments. Our notes payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to us for similar financial arrangements at December 31, 2016.

 

The following table presents assets and liabilities that are measured and recognized at fair value on a recurring basis:

 

Description

Level 1

 

Level 2

 

Level 3

 

Total Gains and (Losses)

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

$

-

 

$

-

 

$

32,500

 

$

-

Total

$

-

 

$

-

 

$

32,500

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

$

-

 

$

-

 

$

32,500

 

$

-

Total

$

-

 

$

-

 

$

32,500

 

$

-

 

Fixed Assets

Fixed assets are carried at the lower of cost or net realizable value. Normal maintenance and repairs are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets of three years.

 

Revenue Recognition

We follow ASC 605-10-S99-1, Revenue Recognition , for revenue recognition. We will recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the product has been shipped or the services have been rendered to the customer; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured.

 

During the fiscal year 2016, we generated several types of revenue, including:

 

(1)   Customized software development, in which we developed software for customers on a bespoke basis. 

 

(2)   Software licensing, in which we licensed our existing portfolio of software products to customers on either a one-time fee or recurring monthly fee basis. 

 

We allocated cost of goods sold for both forms of revenue on a pro-rata basis either through direct outsourcing of development resources or through direct costs associated with our employees or contractors.  

 

Earnings (Loss) per Common Share

Net income (loss) per common share is computed pursuant to ASC 260-10-45, Earnings per Share—Overall—Other Presentation Matters . Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period. The weighted average number of common shares outstanding and potentially outstanding common shares assumes that we incorporated as of the beginning of the first period presented

 

.

 

F- 9


 

Our diluted loss per share is the same as the basic loss per share for the years ended December 31, 2016 and 2015, as the inclusion of any potential shares would have had an antidilutive effect due to our generating a loss.

 

Stock-based Compensation

We account for equity-based transactions with nonemployees under the provisions of ASC 505-50, Equity-Based Payments to Non-Employees . ASC 505-50 establishes that equity-based payment transactions with nonemployees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The fair value of common stock issued for payments to nonemployees is measured at the market price on the date of grant. The fair value of equity instruments, other than common stock, is estimated using the Black-Scholes option valuation model. In general, we recognize the fair value of the equity instruments issued as deferred stock compensation and amortize the cost over the term of the contract.

 

We account for employee stock-based compensation in accordance with the guidance of ASC 718, Compensation—Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The fair value of the equity instrument is charged directly to compensation expense and credited to additional paid-in capital over the period during which services are rendered.

 

Valuation of Intangibles and Long-Lived Assets

We test intangibles and long-lived assets for recoverability when changes in circumstances indicate the carrying value may not be recoverable, for example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, and significant negative industry or economic trends. We evaluate recoverability of an asset by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset. If the comparison indicates that the carrying value of an asset is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value.

 

Income Taxes

We follow ASC 740-10-30, Income Taxes—Overall—Initial Measurement , which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Income in the period that includes the enactment date.

 

We adopted ASC 740-10-25, Income Taxes—Overall—Recognition , with regards to uncertainty income taxes. ASC 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-25, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740-10-25 also provides guidance on derecognition, classification, interest, penalties on income taxes, and accounting in interim periods and requires increased disclosures. We had no material adjustments to our liabilities for unrecognized income tax benefits according to the provisions of ASC 740-10-25.

 

F- 10


 

Recently Issued Accounting Pronouncements

In May 2014, August 2015, April 2016, and May 2016, the FASB issued Accounting Standard Update (ASU) 2014-09— Revenue from Contracts with Customers (Topic 606) , ASU 2015-14— Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , ASU 2016-10— Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , and ASU 2016-12— Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients to guide accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. These updates also require entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. This standard may be applied to the process of assessing the impact, if any, on our financial statements.

 

In September 2015, the FASB issued ASU 2015-16— Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. Topic 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The adoption of ASU 2015-16 is not expected to have a material effect on our financial statements.

 

In November 2015, the FASB issued ASU 2015-17— Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes . The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We do not anticipate the adoption of this ASU will have a significant impact on our financial position, results of operations, or cash flows.

 

In February 2016, the FASB issued ASU 2016-02— Leases (Topic 842) . The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC 840, Leases (FAS 13) . ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the effect this standard will have on our financial statements.

 

In June 2016, the FASB issued ASU 2016-15— Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB’s Emerging Issues Task Force) . The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including interim periods within those fiscal years. An entity that elects early adoption must adopt all of the amendments in the same period. The guidance requires application using a retrospective transition method. We are currently evaluating the effects, if any, that the adoption of this guidance will have on our cash flows.

 

We have implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.

 

F- 11


 

NOTE 3—GOING CONCERN

 

As reflected in the accompanying financial statements, we have an accumulated deficit of $10,464,292 at December 31, 2016, had a net loss of $4,847,606, and used net cash of $457,380 in operating activities for year ended December 31, 2016. These factors raise substantial doubt about our ability to continue as a going concern. The financial statements have been prepared assuming that we will continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

While we are attempting to increase operations and revenues, our cash position may not be significant enough to support our daily operations. Management intends to raise additional funds by way of debt and equity financing. Management believes that the actions presently being taken to further implement our business plan and generate increased revenues provide the opportunity for us to continue as a going concern. While we believe in the viability of our strategy to generate increased revenues and in our ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to further implement our business plan and generate increased revenues. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

NOTE 4—PROPERTY AND EQUIPMENT

 

Furniture, fixtures, and equipment, stated at cost, less accumulated depreciation consisted of the following at December 31:

 

 

 

2016

 

2015

 

 

 

 

 

Furniture, fixtures, and equipment

 

$   8,403

 

$   8,403

Less: accumulated depreciation

 

(4,637)

 

(3,225)

Loss on disposal

 

(3,766)

 

-

Fixed assets, net

 

$          -

 

$   5,178

 

During the year ended December 31, 2016, we disposed of $8,403 of office furniture we were no longer using, resulting in a loss on disposal of $3,766.

 

Depreciation Expense

Depreciation expense for the years ended December 31, 2016 and 2015, was $1,412 and $2,810, respectively.

 

Software, stated at cost, less accumulated amortization consisted of the following at December 31:

 

 

2016

 

2015

Software

$221,000

 

$                     -

Less: accumulated amortization

(40,264)

 

-

Fixed assets, net

$180,736

 

$                     -

 

Amortization Expense

Amortization expense for the software for the years ended December 31, 2016 and 2015, was $40,264 and $0, respectively.

 

F- 12


 

NOTE 5—SOFTWARE LICENSE

 

Effective February 12, 2015, we entered into an exclusive licensing agreement with Loyl.Me LLC, an established provider of automated marketing and customer relationship management software. The licensing agreement allowed us the opportunity for perpetual and exclusive rights and ability to provide the cannabis community a convenient, cost-effective, and streamlined technology branded as “BumpUp Rewards.” The term of the agreement was perpetual; therefore, no amortization was recognized. A t December 31, 2015, we performed an impairment test for the value of the license as required by ASC 350, Intangibles—Goodwill and Other, and determined there had been no impairment to the value of the software license as recorded on the balance sheet. The agreement required nine installment payments of $25,000 each to be paid with a combination of cash and stock and 8% of revenue from the use of the licensed technology. As of October 3, 2016, we had paid $255,000 in cash and stock towards the total cost of the license. On October 3, 2016, we entered into an agreement to terminate the license agreement as it was no longer a core part of our daily business operations. Because of the termination, the software license is fully impaired resulting in a loss of $255,000. In addition, a remaining payable was forgiven resulting in a gain on forgiveness of debt of $15,000.  

 

NOTE 6 AVAILABLE FOR SALE SECURITIES

 

On December 10, 2015, we acquired a 1.083% interest in Duby, LLC for $32,500. Duby is a social media application focused on cannabis consumers. As part of the acquisition, Duby plans to assist in the promotion of our products and services on its platform. We purchased the interest in Duby as part of ongoing negotiations for the joint marketing and promotion of our respective products. The purchase is being accounted for according to ASC 320, Debt and Equity Securities , as available-for-sale securities and has been recorded at cost. As Duby is not a public company with active trading by which the investment could be valued at December 31, 2016, we performed an impairment analysis and determined that as of December 31, 2016, there had been no impairment to the value of the purchased interest in Duby based on subsequent financings undertaken by Duby with third parties that substantiated the reported valuation.

 

NOTE 7—INVESTMENT IN MHB

 

On November 10, 2015, we entered into an agreement to exchange 500,000 shares of our common stock for 10 million shares of MHB, Inc., doing business as Mile High Brands (“MHB”). The shares were valued at $5.80 per share, the closing stock price on the date of grant, for a total of $2,900,000. Through this transaction, we acquired 49% of the issued and outstanding common shares of MHB. MHB is a lifestyle branding agency focused on the regulated cannabis industry. Its clients include celebrities and product companies that wish to access the rapidly growing cannabis marketplace. The purchase is being accounted for according to ASC 320, Debt and Equity Securities , under the equity method of accounting. A t December 31, 2015, we performed an impairment analysis of our investment in MHB. We used a perpetuity-based valuation model to determine a discounted cash flow and terminal value for MHB’s business. Based on this analysis, it was determined that the value of the investment was impaired and that the current fair value is $1,049,475. We recorded an impairment loss on investment of $1,846,515 as of December 31, 2015. A t December 31, 2016, we performed another impairment analysis using the same methodology. Based on this analysis, we determined that the value of the investment was once again impaired and that the current fair value is $0. We recorded an impairment loss on investment of $1,049,475 as of December 31, 2016.

 

On December 22, 2016, we entered into an amendment to share exchange agreement, under which: (a) MHB cancelled 9,985,000 MHB shares issued to us under the exchange agreement; (b) we cancelled 485,000 of our post-split shares issued to MHB under the exchange agreement; (c) the Gross Revenue Assignment between the parties was terminated and section 2.04 of the exchange agreement was deleted in its entirety; and (d) the parties confirmed that the $7,500 payment from MHB to us was for fees as originally contemplated under the exchange agreement. As amended, each party now owns 15,000 shares of the other party’s common stock.

 

F- 13


 

NOTE 8—ASSET PURCHASE

 

On August 10, 2016, we entered into an Asset Purchase Agreement and a General Assignment and Bill of Sale, with Beta Killers LLC, a Colorado limited liability company, whereby we acquired all of the assets comprising the current version of the Citizen Toke application, including all Intellectual Property (as defined in the agreement), code, and other intangibles and related documentation associated with Citizen Toke. The purchase price was 1,000,000 shares of common stock. The shares were valued at $0.22 per share, the closing price on the date of purchase, for a total purchase price of $221,000. The software is being amortized over its estimated useful life of three years.

 

NOTE 9—COMMITMENTS AND CONTINGENCIES

 

Operating Lease

We currently sublease office space in Denver, Colorado. We signed a month-to-month lease starting January 1, 2016. Current lease payments are based on number of desks being occupied not to exceed $1,500 per month. The sublease required a deposit of $1,500, which was paid on January 25, 2016.

 

NOTE 10—RELATED-PARTY TRANSACTIONS

 

Refer to Note 14 for warrants issued.

 

NOTE 11–NOTE PAYABLE

 

On April 27, 2016, we issued a promissory note for $27,000 with an investor in conjunction with assignment of his note dated June 26, 2015, to another investor (Note 12). The note included a $25,000 cash payment and a $2,000 original issue discount. The note is unsecured, accrues interest at 1% per annum, and is due and payable on October 26, 2016. In connection with the execution of the promissory note, we also issued a warrant to purchase 5,000 shares of common stock (Note 14). As of December 31, 2016, this note remains outstanding and has accrued interest of $182.

 

NOTE 12—NOTES PAYABLE IN DEFAULT

 

During the year ended December 31, 2015, we issued four unsecured promissory notes to two accredited investors for a total of $200,000 in a private placement of our securities. The notes accrue interest at 1% per annum and were due and payable on March 1, 2016. On April 27, 2016, one of the investors entered into a Note Purchase and Assignment Agreement whereby he assigned his full interest in one of the notes for $50,000 to another investor. On May 23, 2016, one of the investors entered into a Note Purchase and Assignment Agreement whereby it assigned its full interest in one of the notes for $50,000 to another investor. On May 31, 2016, one of the investors entered into a Note Purchase and Assignment Agreement whereby it assigned its full interest in one of the notes for $50,000 to another investor. On October 24, 2016, one of the investors entered into a Note Purchase and Assignment Agreement, whereby it assigned its full interest in the final note for $50,000 to another investor. As of December 31, 2016, all $200,000 has been assigned to another investor.

 

On January 13, 2016, we issued a promissory note for $75,000 to an investor. The note is unsecured, accrues interest at 1% per annum, and is due and payable on June 30, 2016. In connection with the execution of the promissory note, we also issued a warrant to purchase 11,250 shares of common stock. On October 24, 2016, the investor entered into a Note Purchase and Assignment Agreement with Black Forest Capital, LLC, whereby it assigned its full interest in the note for $75,000.

 

F- 14


 

NOTE 13—CONVERTIBLE NOTES PAYABLE

 

The following is a summary of outstanding convertible promissory notes as of December 31, 2015:

 

Note Holder

Issue Date

Maturity Date

Stated Interest Rate

Principal Balance Outstanding

 

 

 

 

 

EMA Financial, LLC

10/14/2015

10/14/2016

10%

$    30,800

Tangiers Investment Group, LLC

11/18/2015

11/19/2016

10%

60,000

Kodiak Capital Group, LLC

11/30/2015

12/01/2016

12%

50,000

Auctus Fund, LLC

12/03/2015

09/03/2016

10%

49,250

Adar Bays, LLC

12/10/2015

12/10/2016

8%

35,000

Kodiak Capital Group, LLC

12/15/2015

07/15/2016

0%

50,000

 

 

 

 

275,050

Less debt discount

 

 

 

(122,084)

 

 

 

 

$  152,966

 

The following is a summary of outstanding convertible promissory notes as of December 31, 2016:

 

Note Holder

Issue Date

Maturity Date

Stated Interest Rate

Principal Balance Outstanding

 

 

 

 

 

 

 

EMA Financial, LLC

10/14/2015

10/14/2016

12%

$                   -

(1)

Tangiers Investment Group, LLC

11/18/2015

11/19/2016

10%

2,216

(2)

Kodiak Capital Group, LLC

11/30/2015

12/01/2016

12%

44,687

(3)

Auctus Fund, LLC

12/03/2015

09/03/2016

10%

-

(4)

Kodiak Capital Group, LLC

12/15/2015

7/15/2016

0%

50,000

 

Adar Bays, LLC

12/16/2015

12/16/2016

8%

-

(5)

Colonial Stock Transfer

01/14/2016

01/14/2017

10%

7,507

(6)

Blackbridge Capital, LLC

04/27/2016

10/27/2016

1%

4,500

(7)

EMA Financial, LLC

05/05/2016

05/05/2017

12%

32,883

(8)

Black Forest Capital, LLC

05/31/2016

05/31/2017

8%

-

(9)

Black Forest Capital, LLC

05/31/2016

05/31/2017

2%

-

(10)

Adar Bays, LLC

07/12/2016

04/12/2017

8%

-

(11)

Auctus Fund, LLC

07/20/2016

04/20/2017

10%

45,750

 

Microcap Equity   

10/13/2016

10/13/2017

12%

-

(12)

Microcap Equity   

10/21/2016

10/21/2017

12%

7,400

 

Black Forest Capital, LLC

10/24/2016

04/24/2017

8%

78,600

(13)

Black Forest Capital, LLC

11/04/2016

11/04/2017

8%

27,500

 

Auctus Fund, LLC

12/07/2016

09/07/2017

12%

40,750

 

Adar Bays, LLC

12/12/2016

12/12/2017

8%

14,855

(14)

Black Forest Capital, LLC

12/14/2016

12/14/2017

8%

27,500

 

Adar Bays, LLC

12/20/2016

12/12/2017

8%

57,500

 

 

 

 

 

$441,648

 

Less debt discount:

 

 

 

(87,908)

 

Convertible notes payable, net of discount:

 

 

 

$353,740

 

_______________

(1)  Converted $33,300 of principal to common stock.

(2)  Converted $57,784 of principal to common stock.

(3)  Converted $5,313 of principal to common stock.

(4)  Converted $49,250 of principal to common stock.

(5)  Converted $35,000 of principal to common stock.

(6)  Converted $2,400 of principal to common stock.

(7)  Converted $45,500 of principal to common stock.

(8)  Converted $20,617 of principal to common stock.

 

F- 15


(9)  Converted $30,000 of principal to common stock.

(10)  Converted $50,000 of principal to common stock.

(11)  Converted $35,000 of principal to common stock

(12)  Converted $50,000 of principal to common stock

(13)  Converted $48,900 of principal to common stock

(14)  Converted $60,156 of principal to common stock

 

Accrued interest on the above notes was $23,700 and $6,210 as of December 31, 2016, and December 31, 2015, respectively.

 

Debt discount expense including original issue discounts for the years ended December 31, 2016 and 2015, was $612,679 and $85,250, respectively. Carrying value of all convertible notes, net of debt discounts, as of December 31, 2016 and 2015, is $353,740 and $152,966, respectively.

 

Based on the fair value of the embedded conversion options on the day of issuance, a loss of $1,214,985 and $152,966 for the years ended December, 2016 and 2015, respectively, was recorded in the statement of operations.

 

NOTE 14—STOCK WARRANTS

 

The warrants issued by us are classified as equity. The fair value of the warrants calculated at the time of grant was recorded as an increase to additional paid-in-capital.

 

On December 20, 2015, pursuant to the terms of an arrangement with National Concessions Group, Inc., we agreed to issue warrants to purchase 2,500 shares of our common stock per quarter, at a price per share equal to the trailing 60-day volume weighted average price per share of our common stock, every quarter during the six quarters the services were to be provided. As of December 31, 2015, we had issued one warrant for 2,500 shares, with an aggregate fair value of $16,000 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $6.40, 0.8% risk free rate, 848.1% volatility, and expected life of the warrant of 1.4 years. In connection with a termination agreement dated September 28, 2016, with National Concessions, the warrants were cancelled with no additional vesting.

 

On December 24, 2015, we issued a warrant to purchase 150,000 shares of common stock to our chief executive officer. As of December 31, 2015, the warrant had vested for 87,500 shares, with an aggregate fair value of $612,500. As of December 31, 2016, the warrant vested for another 50,000 shares, with an aggregate fair value of $350,000. The aggregate fair value is based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $7.00, 1.33% risk free rate, 842% volatility, and expected life of the warrant of three years.

 

On December 24, 2015, we issued a warrant to purchase 25,000 shares of common stock to one of our directors. The aggregate fair value of the warrant totaled $175,000 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $7.00, 1.33% risk free rate, 842% volatility, and expected life of the warrant of three years.

 

On December 24, 2015, we issued a warrant to purchase 12,500 shares of common stock to one of our directors. The aggregate fair value of the warrant totaled $87,500 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $7.00, 1.33% risk free rate, 842% volatility, and expected life of the warrant of three years.

 

On December 24, 2015, we issued a warrant to purchase 7,500 shares of common stock to a former director. As of December 31, 2015, the warrant had vested for 1,875 shares. The aggregate fair value of the vested warrant totaled $13,125 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $7.00, 1.33% risk free rate, 842% volatility, and expected life of the warrant of three years. On March 22, 2016, we accepted the resignation of Mr. Wollins resulting in the cancellation of the warrant for the remaining 5,625 shares.

 

F- 16


 

On January 13, 2016, pursuant to the terms of a promissory note with an accredited investor, we issued a warrant to purchase 11,250 shares of common stock. The aggregate fair value of the warrant totaled $69,750 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $6.20, 1.15% risk free rate, 600% volatility, and expected life of the warrant of three years. On February 10, 2016, B44 exercised its right to a cashless conversion of its warrant, for which it received 8,804 shares of common stock.

 

On January 21, 2016, we issued a warrant to purchase 15,625 shares of common stock to an investor. The aggregate fair value of the warrant totaled $71,875 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $8.00, stock price of $4.60, 2.02% risk free rate, 600% volatility, and expected life of the warrant of 10 years.

 

On January 24, 2016, pursuant to the terms of a consulting agreement, we issued a warrant to purchase 5,000 shares of common stock to an investor, with an exercise price of $4.60 per share, that expires January 23, 2017. The aggregate fair value of the warrant totaled $28,967 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $4.60, stock price of $5.80, 0.47% risk free rate, 638% volatility, and expected life of the warrant of one year.

 

On April 28, 2016, pursuant to the terms of a promissory note with an investor, we issued a warrant to purchase 5,000 shares of common stock. The aggregate fair value of the warrant totaled $27,000 based on the Black-Scholes-Merton pricing model using the following estimates: exercise price of $1.00, stock price of $5.40, 0.91% risk free rate, 1,177% volatility, and expected life of the warrant of 2.68 years.

 

A summary of the outstanding warrants as of December 31, 2015 and 2016, is as follows:

 

 

Shares Available to

Purchase with

Warrants

 

Weighted

Average

Price

 

Weighted

Average

Fair Value

 

 

 

 

 

 

Outstanding, December 31, 2015

210,000

 

$1.00

 

$7.00

 

 

 

 

 

 

Issued

36,875

 

5.60

 

5.40

Exercised

(11,250)

 

-

 

-

Cancelled

(20,625)

 

-

 

-

Expired

-

 

-

 

-

Outstanding, December 31, 2016

215,000

 

$1.60

 

$6.80

 

 

 

 

 

 

Exercisable, December 31, 2016

202,500

 

$1.80

 

$6.60

 

Range of

Exercise Prices

 

Number Outstanding

12/31/2016

 

Weighted

Average Remaining

Contractual Life

 

Weighted Average

Exercise Price

$1.00 - $8.00

 

215,000

 

2.5 years

 

$1.80

 

NOTE 15—STOCKHOLDERS’ EQUITY (DEFICIT)

 

Common Stock

On February 9, 2015, we issued 1,250 shares of common stock per the terms of the licensing agreement with Loyl.Me LLC. The shares were valued at $40.00 per share, the closing stock price on the date of grant, for total noncash stock compensation expense of $50,000.

 

On April 10, 2015, we issued 281 shares of common stock per the terms of the licensing agreement with Loyl.Me. The shares were valued at $29.36 per share, the closing stock price on the date of grant, for total noncash stock compensation expense of $8,250.

 

F- 17


 

On July 10, 2015, we issued 1,202 shares of common stock per the terms of the licensing agreement with Loyl.Me. The shares were valued at $20.80 per share, the closing stock price on the date of grant, for total noncash stock compensation expense of $25,000.

 

On October 10, 2015, we authorized the issuance of 3,882 shares of common stock per the terms of the licensing agreement with Loyl.Me. The shares were valued at $6.44 per share, the closing stock price on the date of grant, for total noncash stock compensation expense of $25,000.

 

Pursuant to our November 10, 2015, agreement, on January 14, 2016, we issued 500,000 shares of our common stock in exchange for 10 million shares of MHB, Inc. The shares were valued at $5.80 per share, the closing stock price on the date of grant, for a total of $2,900,000. On December 22, 2016, we cancelled 485,000 shares of our common stock previously issued to MHB under this agreement.

 

On January 14, 2016, we granted 2,500 shares of common stock to the successor-in-interest to Loyl.Me LLC, in connection with an amendment to the license agreement. The shares were valued at $5.60 per share, the closing stock price on the date of grant, for a total noncash expense of $14,000.

 

On February 8, 2016, we issued 1,250 shares of common stock in consideration for accounting services rendered. The shares were valued at $5.00 per share, the closing stock price on the date of grant, for a total noncash expense of $6,250.

 

On February 11, 2016, we issued 3,125 shares of common stock in consideration for consulting services rendered. The shares were valued at $5.00 per share, the closing stock price on the date of grant, for a total noncash expense of $15,625.

 

On March 31, 2016, we entered into an Agreement of Termination, Compromise, Settlement and Mutual Release of Claims, with LuvBuds, LLC, Brett Harris, and Tag Distributing LLC, to resolve, compromise, settle, and dispose of and any and all disputes and claims that existed or may exist among the parties. Pursuant to the terms of the agreement, Mr. Harris retained the stock grant for 15,000 shares of common stock. The shares were valued at $4.40 per share, the closing stock price on the date of grant, for a total noncash expense of $66,000.

 

On May 23, 2016, we entered into Amendment No. 1 to 10% Convertible Promissory Note to amend the terms of the 10% Convertible Promissory Note dated November 18, 2015, with an accredited investor. In consideration of the investor’s agreement not to submit a notice of conversion prior to June 10, 2016, we issued a grant of restricted stock of 5,000 shares of common stock to it. The shares were valued at $1.20 per share, the closing stock price on the date of grant, for a total noncash expense of $6,000.

 

On July 27, 2016, we entered into a Share Exchange Agreement with an entity owned by one of our directors to exchange 75,750 (1,515,000 shares of our pre-reverse-split common stock) for 1,515,000 shares of our Series A Preferred Stock. As provided in the terms of the Series A Preferred Stock, on October 17, 2016, the effective date of our recapitalization, the Series A Preferred Stock was automatically converted into 75,750 shares of common stock.

 

On August 10, 2016, pursuant to an Advisory Engagement Agreement, we issued to an employee a grant of restricted stock for 12,500 shares of our common stock, to vest over 12 months in accordance with the schedule set forth in the stock grant.

 

On August 11, 2016, we issued 6,250 shares of common stock in consideration for consulting services rendered. The shares were valued at $2.10 per share, the closing stock price on the date of grant, for a total noncash expense of $13,125.

 

During the fourth quarter of 2016 we issued 1,953,125 shares of common stock for services. The shares were valued at the closing stock price on the date of grant, for a total noncash expense of $5,431.

 

F- 18


 

The following table reflects the amounts of principal, interest, and fees converted, and the corresponding number of shares issued, in connection with outstanding convertible promissory notes during the year ended December 31, 2016:

 

Date

Note Holder

Price

Shares

Issued

Amount

Converted

 

 

 

 

 

04/29/2016

Blackbridge Capital

$  1.38

16,667

$   25,000.00

05/03/2016

EMA Financial LLC

1.50

3,500

5,250.00

05/19/2016

Blackbridge Capital, LLC

0.02

6,061

(1)

05/27/2016

Blackbridge Capital, LLC

0.02

102,273

(1)

05/27/2016

EMA Financial LLC

0.12

50,000

5,500.00

06/03/2016

Black Forest Capital. LLC

0.20

50,000

10,000.00

06/06/2016

Auctus Fund, LLC

0.22

54,703

12,034.30

06/08/2016

Blackbridge Capital, LLC

0.08

100,000

10,000.00

06/08/2016

EMA Financial LLC

0.06

63,630

3,744.63

06/09/2016

EMA Financial LLC

0.04

74,330

2,861.69

06/09/2016

Tangiers Investment Group, LLC

0.08

135,065

10,400.00

06/10/2016

Auctus Fund

0.08

53,370

4,109.67

06/10/2016

Black Forest Capital. LLC

0.06

71,429

5,000.00

06/10/2016

Blackbridge Capital, LLC

0.06

142,857

10,000.00

06/13/2016

EMA Financial LLC

0.02

100,331

2,207.27

06/14/2016

Blackbridge Capital, LLC

0.02

81,818

(2)

06/14/2016

Tangiers Investment Group, LLC

0.06

184,298

11,150.00

06/15/2016

Black Forest Capital. LLC

0.06

90,909

5,000.00

06/16/2016

Tangiers Investment Group, LLC

0.04

55,632

2,509.00

06/17/2016

Black Forest Capital. LLC

0.04

122,500

5,022.50

06/17/2016

Blackbridge Capital, LLC

0.02

101,045

(3)

06/20/2016

Adar Bays LLC

0.04

107,692

4,415.39

06/20/2016

Blackbridge Capital, LLC

0.02

62,084

(2)

06/21/2016

Black Forest Capital. LLC

0.04

122,500

5,022.50

06/22/2016

Black Forest Capital. LLC

0.04

135,000

5,535.00

06/27/2016

Blackbridge Capital, LLC

0.04

12,195

500.00

07/08/2016

Adar Bays LLC

0.04

75,000

3,075.00

07/15/2016

Kodiak Capital Group LLC

0.02

158,183

3,717.00

10/07/2016

Kodiak Capital Group LLC

0.007

163,044

   1,222.82

10/17/2016

Auctus Fund LLC

0.000

166,039

2,374.35

10/18/2016

EMA Financial LLC

0.005

179,800

934.60

10/19/2016

Black Forest Capital, LLC

0.013

174,000

2,262.00

10/20/2016

Black Forest Capital, LLC

0.013

190,770

2,480.00

10/21/2016

Black Forest Capital, LLC

0.013

210,000

2,730.00

10/21/2016

Auctus Fund LLC

0.014

174,170

2,490.63

10/21/2016

EMA Financial LLC

0.005

216,450

1,125.54

10/24/2016

Microcap Equity Group LLC

0.013

174,153

2,264.00

10/24/2016

Black Forest Capital, LLC

0.013

239,000

3,107.00

10/24/2016

Microcap Equity Group LLC

0.013

239,230

3,110.00

10/25/2016

Auctus Fund LLC

0.010

239,600

2,491.84

10/26/2016

Colonial Stock Transfer

0.012

205,128

2,400.00

10/26/2016

Black Forest Capital, LLC

0.013

259,000

3,367.00

10/26/2016

Microcap Equity Group LLC

0.013

260,153

3,382.00

10/27/2016

Adar Bays LLC

0.020

250,000

5,000.00

10/27/2016

Auctus Fund LLC

0.010

284,100

2,954.64

10/27/2016

EMA Financial LLC

0.005

293,300

1,525.16

10/27/2016

Microcap Equity Group LLC

0.013

260,153

3,382.00

10/31/2016

Black Forest Capital, LLC

0.013

311,285

4,000.00

10/31/2016

Adar Bays LLC

0.012

342,412

4,400.00

 

F- 19


 

 

 

 

 

 

 

Date

Note Holder

Price

Shares

Issued

Amount

Converted

10/31/2016

Microcap Equity Group LLC

0.012

373,913

4,300.00

10/31/2016

Kodiak Capital Group LLC

0.000

171,000

64.12

10/31/2016

EMA Financial LLC

0.005

429,213

1,974.38

11/01/2016

Auctus Fund LLC

0.009

374,500

     3,445.40

11/01/2016

Adar Bays LLC

0.011

373,913

4,300.00

11/01/2016

Microcap Equity Group LLC

0.012

414,956

4,772.00

11/02/2016

Adar Bays LLC

0.011

469,565

5,400.00

11/02/2016

EMA Financial LLC

0.004

530,500

2,153.83

11/03/2016

Black Forest Capital, LLC

0.011

370,000

3,977.50

11/03/2016

Auctus Fund LLC

0.008

374,500

3,040.94

11/03/2016

Tangiers Investment Group LLC

0.0091

1,028,681

9,397.00

11/04/2016

Microcap Equity Group LLC

0.010

512,315

5,200.00

11/04/2016

Kodiak Capital Group LLC

0.000

824,694

309.26

11/04/2016

Tangiers Investment Group, LLC

0.005

1,381,761

6,591.00

11/07/2016

Adar Bays LLC

0.010

465,116

5,000.00

11/07/2016

Adar Bays LLC

0.005

462,264

2,450.00

11/07/2016

Adar Bays LLC

0.003

664,528

3,522.00

11/08/2016

Microcap Equity Group LLC

0.000

497,767

(1)

11/08/2016

Black Forest Capital, LLC

0.003

690,000

3,657.10

11/08/2016

Adar Bays LLC

0.0053

274,151

1,203.00

11/08/2016

EMA Financial LLC

0.002

895,500

1,898.46

11/09/2016

Auctus Fund LLC

0.005

867,000

4022.88

11/09/2016

Tangiers Investment Group LLC

0.0048

1,736,268

8,282.00

11/09/2016

Adar Bays LLC

0.005

513,585

2,722.00

11/09/2106

Black Forest Capital, LLC

0.005

301,436

1,597.61

11/10/2016

Microcap Equity Group LLC

0.0053

866,037

4,590.00

11/10/2016

Adar Bays LLC

0.0053

1,028,113

5,449.00

11/11/2016

Black Forest Capital, LLC

0.0029

930,000

2,650.50

11/11/2016

Microcap Equity Group LLC

0.0028

744,489

2,121.79

11/11/2016

Tangiers Investment Group LLC

0.0026

2,502,534

6,419.00

11/14/2016

EMA Financial LLC

0.001

2,752,000

2,752.00

11/14/2016

Adar Bays LLC

0.0029

1,198,596

3,416.00

11/15/2016

Auctus Fund LLC

0.0017

1,450,000

2,436.00

11/15/2016

Black Forest Capital LLC

0.0021

1,450,000

3,045.00

11/15/2016

Adar Bays LLC

0.0021