Kaya Holdings, Inc. and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Kaya Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2017 (unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF THE BUSINESS
Organization
Kaya Holdings, Inc., f/k/a (Alternative Fuels Americas, Inc.), is a
holding company. The Company was incorporated in 1993 and has engaged in a number of businesses. Its name was changed on May
11, 2007 to NetSpace International Holdings, Inc. (“NetSpace”). NetSpace acquired 100% of Alternative Fuels
Americas, Inc, (a Florida corporation), in January 2010 in a stock-for-member interest transaction and issued 6,567,247
shares of common stock and 100,000 shares of Series C convertible preferred stock to existing shareholders. Certificate of
Amendment to the Certificate of Incorporation was filed in October 2010 changing the Company’s name from NetSpace
International Holdings, Inc. to Alternative Fuels Americas, Inc. A Certificate of Amendment to the Certificate of
Incorporation was filed in March 2015 changing the Company’s name from Alternative Fuels Americas, Inc. to Kaya
Holdings, Inc.
The Company has two subsidiaries, Alternative Fuels Americas, Inc. (a Florida
corporation) which is wholly-owned and Marijuana Holdings Americas, Inc., a Florida corporation, (“MJAI”), which
is a majority-owned, MJAI conducts opeartion in Oregon through controlling ownership interest in four Oregon
limited libilities companies, MJAI Oregon 1 LLC. , MJAI Oregon 2 LLC, MJAI Oregon 3 LLC and MJAI Oregon 4 LLC
Nature of the Business
In January 2014, KAYS incorporated a subsidiary,
Marijuana Holdings Americas, Inc. a Florida corporation (“MJAI”). Through entities controlled by MJAI, KAYS has focused
on the development of opportunities within the legal recreational and medical marijuana sectors in the United States. In March
2014, MJAI, subsidiary, applied for and was awarded its first license to operate a Medical Marijuana Dispensary (an “MMD”).
The Company developed the Kaya Shack™ brand for its retail operations and on July 3, 2014 opened its first Kaya Shack™
Medical Marijuana Dispensary in Portland, Oregon, thereby becoming the first publicly traded company to
own
and operate an
MMD.
Initial customer acceptance and media coverage was very
positive,
including
many references to KAYS as
the
“Starbucks
of Medical
Marijuana”
by
television news
stations,
news
print
publications
and
online
news
sources.
In
March
2015,
the
Company
changed
its
name to
Kaya
Holdings,
Inc. to
better
reflect
its
new
plan
of
operations.
In April 2015, KAYS commenced its own
medical marijuana grow operations for the cultivation and harvesting of legal marijuana thereby becoming the first publicly traded
U.S. company to own a majority interest in a vertically integrated legal marijuana enterprise in the United States. In October
2015, concurrent with Oregon commencing legal sales of recreational marijuana through MMDs, KAYS opened its second retail operation
in Salem, Oregon, the Kaya Shack™ Marijuana Superstore. Oregon. During 2015, the Company also consolidated its grow operations
and manufacturing operations into a single facility in Portland, Oregon.
In 2016, Oregon began the process to transition
legal marijuana sales from Oregon Health Authority (“OHA”) licensed MMDs and grow operations to Oregon Liquor Control
Commission (“OLCC”) licensed recreational marijuana retailers and producer and processing facilities. Effective January
1, 2017, all retailers of recreational marijuana were required to have a recreational marijuana sales license issued by the OLLC
for each retail outlet operated.
Accordingly, in 2016 the Company applied for
OLLC licenses for its two initial Kaya Shack™ retail outlets (Portland, Oregon and South Salem, Oregon), and also submitted
license applications for its two new locations under construction and development at that time.
In late December 2016, we received our OLCC
recreational license for the South Salem Kaya Shack™ Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License
#1) and recreational and medical sales continued without interruption from 2016 through the present at that location.
On March 21, 2017, we received our North Salem
Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #2) a 2,600-square foot Kaya Shack™ Marijuana
Superstore in North Salem, Oregon, whereupon the location opened for business with both recreational and medical sales.
On May 2, 2017, we received our OLCC recreational
license for our Portland Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #3) and after a delay of approximately
four months. During that period, we were limited to solely medical sales at the Portland location. Upon receipt of Kaya Shack™
OLCC Marijuana Retailer License #3, recreational sales recommenced at that location.
Our OLCC License for the Central Salem Kaya Shack™ Marijuana Superstore (Kaya
Shack™ OLCC Marijuana Retailer License #4) has been filed and is pending completion, inspection and final licensing. We
expect to complete construction and licensing during the second quarter of 2017 and commence recreational and medical sales
at this location as soon as possible thereafter.
NOTE 2 - LIQUIDITY AND GOING CONCERN
The Company’s consolidated financial statements as of and for the year ended
December 31, 2016 have been prepared on a going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $3,088,079 for
the three months ended March 31, 2017 and a net loss of $20,204,199 for the year ended December 31, 2016. The majority of our
net losses during the three months ended March 31, 2017 and the year ended December 31, 2016, were a result of the derivative
liabilities from the conversion of debt in those periods and from the stabilization of our stock prices
reduces the volatility factors used in the derivative calculations. At March 31, 2017 the Company has a working capital
deficiency of $6,829,879 and is totally dependent on its ability to raise capital. The Company has a plan of operations and
acknowledges that its plan of operations may not result in generating positive working capital in the near future. Even
though management believes that it will be able to successfully execute its business plan, which includes third-party
financing and capital issuance, and meet the Company’s future liquidity needs, there can be no assurances in that
regard. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might result from the outcome of this material
uncertainty. Management recognizes that the Company must generate additional funds to successfully develop its operations and
activities. Management plans include:
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the
sale of additional equity and debt securities,
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alliances
and/or partnerships with entities interested in and having the resources to support the further development of the Company’s
business plan,
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business
transactions to assure continuation of the Company’s development and operations,
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development
of a unified brand and the pursuit of licenses to operate recreational and medical marijuana facilities under the branded
name.
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NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS
OF PRESENTATION
Basis of Presentation
The accompanying consolidated financial statements
of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America
(U.S. GAAP) under the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Such estimates and assumptions impact both
assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful
lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share
based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates
of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.
Making estimates requires management to exercise
significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances
that existed at the date of the financial statements, which management considered in formulating its estimate could change in
the near term due to one or more future non-conforming events. Accordingly, actual results could differ significantly from estimates.
Risks and Uncertainties
The Company’s operations are subject
to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business
failure.
The Company has experienced, and in the future
expects to continue to experience, variability in its sales and earnings. The factors expected to contribute to this
variability include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the product,
(ii) competition inherent at other locations where product is expected to be sold (iii) general economic conditions and (iv) the
related volatility of prices pertaining to the cost of sales.
Fiscal Year
The Company’s fiscal year-end is December
31.
Principles of Consolidation
The consolidated financial statements include
the accounts of Kaya Holdings, Inc. and its subsidiary, Alternative Fuels Americas, Inc. (a Florida corporation) and Marijuana
Holdings Americas, Inc. (a Florida corporation) which is a majority owned subsidiary including all wholly owned LLC’s (MJAI
Oregon 1 LLC, MJAI Oregon 2 LLC, MJAI Oregon 3 LLC, MJAI Oregon 4 LLC). All inter-company accounts and transactions have
been eliminated in consolidation.
Non-Controlling Interest
The company owns 55% of Marijuana Holdings Americas, Inc.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost
and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments
with an original maturity of three months or less. The Company had no cash equivalents
Inventory
Inventory consists of finished goods purchased,
which are valued at the lower of cost or market value, with cost being determined on the first-in, first-out method. The
Company periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of
any anticipated changes in future demand. Total Value of Finished goods inventory as of December 31, 2016 is $83,994
and $165,331 as of March 31, 2017. No allowance as necessary as of December 31, 2016 and March 31, 2017.
Property and Equipment
Property and equipment is stated at cost,
less accumulated depreciation and is reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Depreciation of property and equipment is
provided utilizing the straight-line method over the estimated useful lives, ranging from 5-7 years of the respective assets.
Expenditures for maintenance and repairs are charged to expense as incurred.
Upon sale or retirement of property and equipment,
the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements
of operations.
Long-lived assets
The Company reviews long-lived assets and
certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its intangible assets,
management performs an analysis of the anticipated undiscounted future net cash flow of the individual assets over the remaining
amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future
cash flows.
Operating Leases
We lease our retail stores under non-cancellable
operating leases. Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions.
We recognize rent expense on a straight-line basis over the lease term, excluding contingent rent, and record the difference between
the amount charged to expense and the rent paid as a deferred rent liability.
Deferred Rent and Tenant Allowances
Deferred rent is recognized when a lease contains
fixed rent escalations. We recognize the related rent expense on a straight-line basis starting from the date of possession and
record the difference between the recognized rental expense and cash rent payable as deferred rent. Deferred rent also includes
tenant allowances received from landlords in accordance with negotiated lease terms. The tenant allowances are amortized
as a reduction to rent expense on a straight-line basis over the term of the lease starting at the date of possession.
Earnings Per Share
In accordance with ASC 260, Earnings per Share,
the Company calculates basic earnings per share by dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings per share are computed if the Company has net income; otherwise it would be antidilutive,
and would result from the conversion of a convertible note.
Income Taxes
The Company accounts for income taxes in accordance
with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes. Under
this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and
benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers
tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning
strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the
carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax
assets based on the “more likely than not” criteria of ASC 740.
ASC 740-10 requires that the Company recognize
the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount
recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized
upon ultimate settlement with the relevant tax authority.
Fair Value of Financial Instruments
The Company measures assets and liabilities
at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents
the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction
between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an
asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair
value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels
of inputs to measure fair value:
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Level
1 – Observable inputs that reflect quoted market prices in active markets for identical
assets or liabilities.
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Level
2 - Inputs reflect quoted prices for identical assets or liabilities in markets that
are not active; quoted prices for similar assets or liabilities in active markets; inputs
other than quoted prices that are observable for the assets or liabilities; or inputs
that are derived principally from or corroborated by observable market data by correlation
or other means.
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Level
3 – Unobservable inputs reflecting the Company’s assumptions incorporated
in valuation techniques used to determine fair value. These assumptions are required
to be consistent with market participant assumptions that are reasonably available.
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The carrying amounts of the Company’s financial assets and
liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses, certain notes payable
and notes payable – related party, approximate their fair values because of the short maturity of these instruments.
The Company accounts for its derivative liabilities, at fair value,
on a recurring basis under level 3. See Note 7.
Embedded Conversion Features
The Company evaluates embedded conversion
features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion
feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair
value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated
under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
Derivative Financial Instruments
The Company does not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including
stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.
For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported as charges or credits to income. For option-based simple derivative financial
instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is re-assessed at the end of each reporting period.
Beneficial Conversion Feature
For conventional convertible debt where the
rate of conversion is below market value, the Company records a "beneficial conversion feature" ("BCF") and
related debt discount.
When the Company records a BCF, the relative
fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional
paid in capital) and amortized to interest expense over the life of the debt.
Debt Issue Costs and Debt Discount
The Company may record debt issue costs and/or
debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of
cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of
the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the Company
may provide the debt holder with an original issue discount. The original issue discount would be recorded to debt
discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
Extinguishments of Liabilities
The Company accounts for extinguishments of
liabilities in accordance with ASC 860-10 (formerly SFAS 140) “Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities”. When the conditions are met for extinguishment accounting, the liabilities are derecognized
and the gain or loss on the sale is recognized.
Stock-Based Compensation - Employees
The Company accounts for its stock based compensation
in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles
of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph
718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received
for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the
fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which
it is probable that performance will occur.
If the Company is a newly formed corporation
or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement
memorandum (based on sales to third parties) (“PPM”), or weekly or monthly price observations would generally be more
appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between
the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated
on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are
as follows:
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Expected term of share options and similar
instruments: The expected life of options and similar instruments represents the period of time the option and/or warrant
are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the
expected term of share options and similar instruments represents the period of time the options and similar instruments are
expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected
exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant
to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting
term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded;
(ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option
grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term;
or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise
data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method
to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise
data to provide a reasonable basis upon which to estimate expected term.
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Expected volatility of the entity’s shares
and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic
entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate
the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting
that particular index, and how it has calculated historical volatility using that index. The Company uses the average
historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments
as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations
would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations
for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent
trading in the market.
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Expected annual rate of quarterly dividends. An
entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected
dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s
current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share
options and similar instruments.
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Risk-free
rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected
term of the share options and similar instruments.
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Generally, all forms of share-based payments, including stock option
grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value on the awards’
grant date, based on estimated number of awards that are ultimately expected to vest.
The expense resulting from share-based payments is recorded in
general and administrative expense in the statements of operations.
Stock-Based Compensation – Non Employees
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or
Services
The Company accounts for equity instruments
issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting
Standards Codification (“Sub-topic 505-50”).
Pursuant to ASC Section 505-50-30, all transactions
in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The
measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance
is complete or the date on which it is probable that performance will occur. If the Company is a newly formed corporation
or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement
memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily
price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack
of consistent trading in the market.
The fair value of share options and similar
instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions
for inputs are as follows:
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Expected term of share options and similar
instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of
share options and similar instruments represents the period of time the options and similar instruments are expected to be
outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior
into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s
expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly traded
the contractual term of the share options and similar instruments is used as the expected term of share options and similar
instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate
expected term.
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Expected volatility of the entity’s shares
and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic
entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate
the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting
that particular index, and how it has calculated historical volatility using that index. The Company uses the average
historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments
as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations
would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations
for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent
trading in the market.
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Expected annual rate of quarterly dividends. An
entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected
dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s
current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share
options and similar instruments.
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Risk-free rate(s). An entity that uses a method that
employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate
is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share
options and similar instruments.
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Pursuant to ASC paragraph 505-50-25-7, if
fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods
or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the
elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A
grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether
the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity
under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances.
Pursuant to ASC paragraph 505-50-45-1, a grantor
may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity
instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific
performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity
by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the
balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other
than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement
date for transactions that are within the scope of this Subtopic.
Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an
entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period
of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any
measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash
for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A
recognized asset, expense, or sales discount shall not be reversed if a share option and similar instrument that the counterparty
has the right to exercise expires unexercised.
Pursuant to ASC paragraph 505-50-30-S99-1,
if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity
instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are
not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should
be recorded.
Revenue Recognition
Revenue is recorded when all of the following
have occurred: (1) persuasive evidence of an arrangement exists, (2) asset is transferred to the customer without further obligation,
(3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
Cost of Sales
Cost of sales represents costs directly related to the purchase
of goods and third party testing of the Company’s products.
Related Parties
The Company follows subtopic 850-10 of the
FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the related
parties include a. affiliates of the Company; b. Entities for which investments in their equity securities would be required,
absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted
for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts
that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management of the Company;
f. other parties with which the Company may deal if one party controls or can significantly influence the management or operating
policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate
interests; and g. Other parties that can significantly influence the management or operating policies of the transacting parties
or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that
one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall
include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other
similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of
consolidated or combined financial statements is not required in those statements.
The disclosures shall include: a. the nature
of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts
were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary
to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for
each of the periods for which income statements are presented and the effects of any change in the method of establishing the
terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet
presented and, if not otherwise apparent, the terms and manner of settlement.
Contingencies
The Company follows subtopic 450-20 of the
FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the
consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one
or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings
or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material
loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent
liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally
not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. However, there is no assurance
that such matters will not materially and adversely affect the Company’s business, consolidated financial position, and
consolidated results of operations or consolidated cash flows.
Uncertain Tax Positions
The Company did not take any uncertain tax
positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for
the reporting periods ended December 31, 2016, 2015 and 2014.
Related Parties
The Company follows subtopic 850-10 of the
FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the related
parties include (i) affiliates of the Company; (ii) Entities for which investments in their equity securities would be required,
absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted
for by the equity method by the investing entity; (iii) trusts for the benefit of employees, such as pension and profit-sharing
trusts that are managed by or under the trusteeship of management; (iv) principal owners of the Company; (v) management of the
Company; (vi) other parties with which the Company may deal if one party controls or can significantly influence the management
or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its
own separate interests; and (vii) other parties that can significantly influence the management or operating policies of the transacting
parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall
include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other
similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of
consolidated or combined financial statements is not required in those statements. The disclosures shall include: (i) the nature
of the relationship(s) involved; (ii) a description of the transactions, including transactions to which no amounts or nominal
amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary
to an understanding of the effects of the transactions on the financial statements; (iii) the dollar amounts of transactions for
each of the periods for which income statements are presented and the effects of any change in the method of establishing the
terms from that used in the preceding period; and (iv) amounts due from or to related parties as of the date of each balance sheet
presented and, if not otherwise apparent, the terms and manner of settlement.
Subsequent Events
The Company follows the guidance in Section
855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate
subsequent events through the date when the financial statements are issued.
Pursuant to ASU 2010-09 of the FASB Accounting
Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed
to users, such as through filing them on EDGAR.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842).” The ASU will increase transparency and comparability among entities by recognizing lease assets and lease
liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU will require lessees to recognize
in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. The ASU is effective for annual reporting periods beginning after December 15,
2018 and interim periods within those annual periods. We do not believe the adoption of this update will have a material impact
on our financial statements.
In August 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (”ASU”) No. 2016-15, “Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU includes specific guidance
to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.
The ASU is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual
periods. The Company does not expect the adoption of this ASU to have a significant impact on the consolidated financial statements.
Management does not believe that any other
recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying
financial statements.
Re-Classifications
Certain amounts in 2016 were reclassified
to conform to the 2017 presentation. These reclassifications had no effect on consolidated net loss for the periods presented.
The fair value of the warrants on the date
of issuance and on each re-measurement date of those warrants classified as liabilities is estimated using the Black-Scholes option
pricing model using the following assumptions: contractual life according to the remaining terms of the warrants, no dividend
yield, weighted average risk-free interest rate of .87% at March 31, 2017 and weighted average volatility of 154.71%. For this
liability, the Company developed its own assumptions that do not have observable inputs or available market data to support the
fair value. This method of valuation involves using inputs such as the fair value of the Company's various classes of preferred
stock, stock price volatility, the contractual term of the warrants, risk free interest rates and dividend yields. Due to the
nature of these inputs, the valuation of the warrants is considered a Level 3 measurement. The warrant liability is recorded
in other liabilities on the Company's Consolidated Balance Sheets. The warrant liability is marked-to-market each reporting period
with the change in fair value recorded on the Consolidated Statement of Operations and Comprehensive Loss until the warrants are
exercised, expire or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument.
NOTE 5 – CONVERTIBLE DEBT
These debts have a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative
component of the obligation are initially valued and classified as a derivative liability with an offset to discounts on convertible
debt. Discounts have been amortized to interest expense over the respective term of the related note. In determining the indicated
value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging
from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share and a
conversion price ranging from $0.03 per share to $0.10 per share. The total derivative liabilities associated with these notes
are $19,750,523 at March 31, 2017 and $19,346,348 as of December 31, 2016.
See Summary Table – Page 18
Convertible
Debt Summary
|
Footnote
|
Debt
|
Debt
Classification
|
Interest
|
Due
|
Ending
|
Number
|
Type
|
Current
|
Long
Term
|
Rate
xx
|
Date
xx
|
03.31.17
|
12.31.16
|
|
|
|
|
|
|
|
|
A
|
Convertible
|
X
|
|
10.0%
|
1-Jan-17
|
$ 25,000
|
$ 25,000
|
B
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 65,700
|
$ 58,556
|
C
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 32,850
|
$ 29,278
|
D
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 209,047
|
$ 186,316
|
F
|
Convertible
|
X
|
|
8.0%
|
1-Jan-17
|
$ -
|
$ 117,113
|
G
|
Convertible
|
X
|
|
8.0%
|
1-Jan-17
|
$ -
|
$ 117,113
|
H
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ -
|
$ 55,895
|
I
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ -
|
$ 67,074
|
J
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ -
|
$ 23,442
|
K
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ -
|
$ 23,442
|
L
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 30,424
|
$ 27,116
|
M
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 131,236
|
$ 116,966
|
N
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 55,983
|
$ -
|
O
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 109,167
|
$ 100,000
|
P
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 52,767
|
$ -
|
Q
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 52,050
|
$ -
|
R
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 203,867
|
$ -
|
S
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 50,400
|
$ -
|
T
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 250,000
|
$ -
|
V
|
Convertible
|
X
|
|
8.0%
|
1-Jan-18
|
$ 25,000
|
$ -
|
W
|
Convertible
|
X
|
|
12.0%
|
1-Jan-18
|
$ 15,000
|
$ -
|
X
|
Convertible
|
X
|
|
12.0%
|
1-Jan-18
|
$ 60,000
|
$ -
|
Y
|
Convertible
|
X
|
|
12.0%
|
1-Jan-18
|
$ 50,000
|
$ -
|
Z
|
Convertible
|
X
|
|
12.0%
|
1-Jan-17
|
$ -
|
$ 25,000
|
AA
|
Convertible
|
X
|
|
6.0%
|
1-Apr-16
|
$ -
|
$ 18,500
|
BB
|
Convertible
|
X
|
|
10.0%
|
21-Sep-17
|
$ 50,000
|
$ 50,000
|
CC
|
Convertible
|
X
|
|
10.0%
|
21-Sep-17
|
$ 100,000
|
$ 100,000
|
DD
|
Convertible
|
X
|
|
10.0%
|
21-Sep-17
|
$ 50,000
|
$ 50,000
|
EE
|
Convertible
|
X
|
|
0.0%
|
31-Dec-17
|
$ 500,000
|
$ 500,000
|
LL
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 150,000
|
$ -
|
MM
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 600,000
|
$ -
|
NN
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 100,000
|
$ -
|
OO
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 500,000
|
$ -
|
PP
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
$ 500,000
|
$ -
|
Current
Convertible Debt
|
|
|
|
$ 875,000
|
$ 1,690,811
|
Long-Term Convertible
Debt
|
|
|
|
$ 3,093,490
|
$ -
|
Total
Convertible Debt
|
|
|
|
|
$ 3,968,490
|
$ 1,690,811
|
xx
Effective January 1, 2017, the interest rate on all the above referenced convertible notes having an interest rate of greater
than 8% per annum was reduced to 8% and the due date on convertible notes due prior to January 1, 2019 was extended to that
date.
FOOTNOTES FOR CONVERTIBLE DEBT SUMMARY TABLE
(1)
|
|
(A)
At
the option of the holder the convertible note may be converted into shares of the Company’s common stock at the
lesser of $0.40 or 20% discount to the market price, as defined, of the Company’s common stock. The Company is currently
in discussions with the lender on a payment schedule. The outstanding balance of this note is convertible into a variable
number of the Company’s common stock. Therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” The derivative component of the obligation are initially valued and classified as a derivative
liability with an offset to discounts on convertible debt. Discounts have being amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used
the Black Scholes Option Model with a risk-free interest rate of ranging from 0.08% to .87%, volatility ranging from 134%
of 157%, trading prices ranging from $.08 per share to $0.49 per share and a conversion price ranging from $0.05 per share
to $0.39 per share. The balance of the convertible note at March 31, 2017 including accrued interest and net of the discount
amounted to $42,140.
|
A recap of the balance of outstanding convertible debt at
March 31, 2017 is as follows:
Principal
balance
|
|
$
|
25,000
|
|
Accrued
interest
|
|
|
17,140
|
|
Balance
maturing for the period ending:
|
|
|
|
|
March
31, 2017
|
|
$
|
42,140
|
|
The Company valued the derivative liabilities
at December 31, 2016 at $25,386. The Company recognized a change in the fair value of derivative liabilities for the three months
ended March 31, 2017 of $780, which were charged to operations. In determining the indicated values at March 31, 2017, since
the debt is in default, the company used the maximum value these embedded options represent, with a trading price of $.2250, and
conversion prices of $0.18 per share.
|
|
|
|
|
|
(B),
(C), (D), (N), (O), (P), (H), (I), (J), (K), (L), (M)
On
December 31, 2015 the Company renegotiated twelve (12) convertible and non-convertible notes payable. The Total face value
of the notes issued was $888,500 the six month notes were due on December 31, 2015. The new notes are convertible after
January 1, 2016 and are convertible into the Company’s common stock at a conversion rate of $0.03 per share. The
market value of the stock at the date when the debt becomes convertible was $0.087. The debt was issued is a result of
a financing transaction and contain a beneficial conversion feature. As of December 31, 2015, the balance was $947,311.
The beneficial conversion feature in the amount of $947,311 will be expensed as interest over the term of the note (one
year). All these amended debts have a price adjustment provision. Therefore the Company accounted for these Notes under
ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation are initially valued
and classified as a derivative liability with an offset to discounts on convertible debt. Discounts have being amortized
to interest expense over the respective term of the related note. In determining the indicated value of the convertible
note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%,
volatility ranging from 155% of 221%, trading prices ranging from $.078 per share to $0.1 per share and a conversion price
ranging from $0.03 per share to $0.04 per share. The total derivative liabilities associated with these notes are $2,640,030
at December 31, 2015 and $4,718,754 at December 31, 2016, respectively.
On
January 1, 2017 the Company renegotiated twelve (12) convertible notes payable. The Total face value of the notes issued
was $788,085 the notes were due on January 1, 2017. The new notes are convertible after January 1, 2017 and are convertible
into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at the date
when the debt becomes convertible was $0.225. The debt was issued is a result of a financing transaction and contain a
beneficial conversion feature. As of March 31, 2017, the balance was $687,173. The beneficial conversion feature in the
amount of $788,085 will be expensed as interest over the term of the note (two years). As of March 31, 2017 (4) Four of
the twelve notes were converted into common stock. The face value of the converted notes was $190,575. All these amended
debts have a price adjustment provision. Therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” The derivative component of the obligation are initially valued and classified as a derivative
liability with an offset to discounts on convertible debt. Discounts have being amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used
the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from
155% of 221%, trading prices ranging from $.078 per share to $0.49 per share and a conversion price ranging from $0.03
per share per share. The total derivative liabilities associated with these (8) remaining notes are $4,802,433 at March
31, 2017.
|
(N)
On January 8, 2016 the Company received $50,000 from the issuance of
convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note
is Due in January of 2017. The derivative component of the obligation is initially valued and classified as a derivative
liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective
term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%,
trading prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.03 per share. On January 4, 2017
the note was amended and restated. The interest rate was reduced to 8% and the put date changed to January 1, 2019.
(O)
On March 31, 2016 the Company received
$100,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2017. The derivative component of the obligation is initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading
prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.03 per share. On January 4, 2017
the note was amended and restated. The interest rate was reduced to 8% and the put date changed to January 1, 2019.
(P)
On July 13, 2016 the Company received
$50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2017. The derivative component of the obligation is initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading
prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.03 per share. On January 4, 2017
the note was amended and restated. The interest rate was reduced to 8% and the put date changed to January 1, 2019.
(Q)
On August 30, 2016 the Company received
$50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2017. In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134%
of 157%, trading prices ranging from $.05 per share to $0.49 per share a conversion price of $0.03 per share. On January 4, 2017
the note was amended and restated. The interest rate was reduced to 8% and the put date changed to January 1, 2019.
(R)
On November 3, 2016 the Company
received $200,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common
shares at $0.03 per share. Note is Due in January of 2019 In determining the indicated value of the convertible note issued, the
Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging
from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share a conversion price of $0.03 per share. On January 4, 2017
the note was amended and restated. The interest rate was reduced to 8% and the put date changed to January 1, 2019.
(S)
On December 1, 2016 the Company received $50,000 from the issuance of convertible
debt. Interest is stated at 10% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in
January of 2019 In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option
Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading prices
ranging from $.05 per share to $0.49 per share and a conversion price of $0.03 per share. On January 4, 2017
the note was amended and restated. The interest rate was reduced to 8% and the put date changed to January 1, 2019.
(T)
On December 30, 2016 the Company received $250,000 from the issuance of convertible
debt. Interest is stated at 10% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in
January of 2019 In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option
Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading prices
ranging from $.05 per share to $0.49 per share and a conversion price of $0.03 per share. On January 4, 2017
the note was amended and restated. The interest rate was reduced to 8% and the put date changed to January 1, 2019.
(U)
On March 13, 2016 the Company received
$25,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares
at $0.03 per share. Note is Due in January of 2017 In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134%
of 157%, trading prices ranging from $.05 per share to $09. per share and a conversion price of $0.03 per share. The Note and
Interest was converted to common shares on September 13, 2016
(V)
On September 13, 2016 the Company
received $25,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common
shares at $0.03 per share. Note is Due in January of 2018. In determining the indicated value of the convertible note issued,
the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging
from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share a conversion price of $0.03 per share.
(W)
On October 16, 2016 the Company
received $15,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common
shares at $0.03 per share. Note is Due in January of 2018 In determining the indicated value of the convertible note issued, the
Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging
from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.04 per share.
(X)
On November 18, 2016 the Company
received $60,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common
shares at $0.03 per share. Note is Due in January of 2018 In determining the indicated value of the convertible note issued, the
Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging
from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.04 per share.
(Y)
On December 7, 2016 the Company
received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common
shares at $0.03 per share. Note is Due in January of 2018 In determining the indicated value of the convertible note issued, the
Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging
from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.04 per share.
(Z)
On October 1, 2015, the Company renegotiated
a convertible notes payable. The original note was issued March 13, 2015 and due September 30, 2015, with conversion rate of $0.06
per share. The new notes has extended the due date to January 1, 2017 and are convertible into the Company’s common stock
at a conversion rate of $0.045 per share.
(AA)
On July 27, 2015 the company issued a note
payable for $28,500 The Company agrees to pay to the Holder $28,500 plus accrued interest pursuant to the following schedule:
An initial payment of $5,000 is due no later
than December 1, 2015. This amount represents the balance of the security deposit due for the lease of Commercial/Manufacturing
Space occupied by MJAI Oregon 1, LLC, a majority-owned subsidiary of the company.
A final payment of $42,700 principal, plus
any accrued Interest at 10% is due no later than April 1, 2017. This amount represents the balance of accrued rent due for the
initial monthly lease payments from August 1, 2015 through December 31, 2016
The note is convertible after March 31, 2016
and is convertible into the Company’s common stock at a conversion rate of $0.10 per share or 20% discount to the thirty
day moving average stock price.
(BB)
On September 23, 2015 the Company received
a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate amount of $50,000 with interest
accruing at 10%. The note is convertible after September 23, 2015 and is convertible into the Company’s common stock at
a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078.
The debt issued is a result of a financing transaction and contain a beneficial conversion feature.
(CC)
On September 23, 2015 the Company received
a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest
accruing at 10%. The note is convertible after September 23, 2015 and is convertible into the Company’s common stock at
a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078.
The debt issued is a result of a financing transaction and contain a beneficial conversion feature.
(DD)
On September 23, 2015 the Company received
a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate amount of $50,000 with interest
accruing at 10%. The note is convertible after September 23, 2015 and is convertible into the Company’s common stock at
a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078.
The debt issued is a result of a financing transaction and contain a beneficial conversion feature.
(EE) and (FF)
At December 31, 2013 the Company
was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100 principal and $103,895 accrued
interest, with interest accruing at 10%. On January 2, 2014 the Company entered into a Debt Modification Agreement whereby the
total amount of the debt was reduced to $750,000 and there is no accrued interest or principal due until December 31, 2017. $500,000
of the debt is convertible into 50,000 Series C Convertible Preferred Shares of AFAI, which if converted are subject to resale
restrictions through December 31, 2017. The two-year note in the aggregate amount of $500,000 is convertible into the Company’s
preferred stock at a conversion rate of $10.00 per share of preferred. At a conversion rate of 433.9297 common shares to 1 preferred
share, this would result in a total of 21,696,485 common shares issued if all debt was converted. The market value of the stock
at the date of issuance of the debt was $0.04. The debt issued is a result of a financing transaction and contain a beneficial
conversion feature valued at $367,859 to be amortized over the life of the debt. Total amortization for the year ended December
31, 2014 was $183,929. As of December 31, 2014, the balance of the debt was $500,000. The net balance reflected on the balance
sheet is 303,213. The remaining $250,000 is not convertible. The company has imputed interest on both the convertible debt and
the non-convertible debt. The company used an interest rate of 4% for calculation purposes. The net balance of $250,000 of the
non-convertible portion is reflected on the balance sheet. Total amortization for the quarter ended March 31, 2015 was $45,982.
As of June 30, 2015, the balance of the debt was $500,000. The net balance reflected on the balance sheet is $351,945. The remaining
$250,000 is not convertible. The company has imputed interest on both the convertible debt and the non-convertible debt. The company
used an interest rate of 4% for calculation purposes. The net balance of $250,000 of the non-convertible portion is reflected
on the balance sheet. This note was modified and restated as of June 20, 2015, see Footnote 9.
(KK) On January 4, 2017 the Company received
$150,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares
at $0.04 per share. Note is Due in January of 2019. The derivative component of the obligation is initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading
prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.04 per share.
(LL) On January 20, 2017 the Company received
$600,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares
at $0.07 per share. Note is Due in January of 2019. The derivative component of the obligation is initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading
prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.07 per share.
(MM) On January 31, 2017 the Company received
$100,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares
at $0.07 per share. Note is Due in January of 2019. The derivative component of the obligation is initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading
prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.07 per share.
(NN) On February 7, 2017 the Company received
$500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares
at $0.10 per share. Note is Due in January of 2019. The derivative component of the obligation is initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading
prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.10 per share.
(MM) On February 21, 2017 the Company received
$500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares
at $0.10 per share. Note is Due in January of 2019. The derivative component of the obligation is initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading
prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.10 per share.
(GG), (HH), (II), (JJ)(KK)
Non-Convertible
Debt
A-Non-
Related Party
|
|
March
31, 2017
|
|
December
31, 2016
|
Note
GG
|
|
|
17,513
|
|
|
|
68,555
|
|
Note
HH
|
|
|
16,428
|
|
|
|
68,555
|
|
Note
II
|
|
|
62,780
|
|
|
|
65,262
|
|
Note
JJ
|
|
|
62,780
|
|
|
|
65,262
|
|
Note
KK
|
|
|
24,525
|
|
|
|
31,661
|
|
Total
Non-Convertible Debt
|
|
|
184,026
|
|
|
|
299,295
|
|
(GG) On September 8, 2015 the Company received
a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest
accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $100,000 10% promissory note due September 9, 2017 has been
fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017.
(HH) On September 9, 2015 the Company received
a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest
accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $100,000 10% promissory note due September 9, 2017 has been
fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017.
(II) On May 17, 2016 the Company received
a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest
accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 17 2018 has been fully
repaid or the start of the Acceleration Period as defined in “The Note” or May 17, 2018.
(JJ) On May 9, 2016 the Company received a
total of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest
accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9, 2018 has been fully
repaid or the start of the Acceleration Period as defined in “The Note” or May 9, 2018
(KK) On September 16, 2016 the Company received a total of $31,661 to be used for equipment
in exchange for a two year note in the aggregate amount of $31,661 with interest accruing at 18% per year and a 10% loan fee.
The note is due September of 2018 with monthly payments of principal and interest.
B-Related
Party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
payable - Stockholder, 0%, Due December 31, 2017 (1)
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
(1)
|
|
At December 31, 2013 the Company was indebted to an affiliated
shareholder of the Company for $840,955, which consisted of $737,100 principal and $103,895 accrued interest, with interest
accruing at 10%. On January 2, 2014 the Company entered into a Debt Modification Agreement whereby the total amount
of the debt was reduced to $750,000 and there is no accrued interest or principal due until December 31, 2017. $500,000 of
the debt is convertible into 50,000 Series C Convertible Preferred Shares, which if converted are subject to resale
restrictions through December 31, 2015. The two-year note in the aggregate amount of $500,000 is convertible into the
Company’s preferred stock at a conversion rate of $10.00 per share of preferred. At a conversion rate of 433.9297
common shares to 1 preferred share, this would result in a total of 21,696,485 common shares issued if all debt was
converted. The market value of the stock at the date of issuance of the debt was $0.04. The debt issued is a result of a
financing transaction and contain a beneficial conversion feature valued at $500,000 to be amortized over the life of the
debt. Total amortization for the quarter ended March 31, 2017 was $49,727. As of March 31, 2017, the balance of the
convertible debt was $500,000. The net balance reflected on the balance sheet is $348,635. The remaining $250,000 is not
convertible. The company has imputed interest on both the convertible debt and the non-convertible debt. The company used
an interest rate of 4% for calculation purposes. The net balance of $250,000 of the non-convertible portion is reflected
on the balance sheet.
|
NOTE 6 – STOCKHOLDERS’ EQUITY
The Company has 10,000,000 shares of preferred
stock authorized with a par value of $0.001, of which 100,000 shares have been designated as Series C convertible preferred stock
(“Series C” or “Series C preferred stock”). The Board has the authority to issue the shares in one or
more series and to fix the designations, preferences, powers and other rights, as it deems appropriate
Each share of Series C has 433.9297 votes
on any matters submitted to a vote of the stockholders of the Company and is entitled to dividends equal to the dividends of 433.9297
shares of common stock. Each share of Series C preferred stock is convertible at any time at the option of the holder into 433.9297
shares of common stock.
The Company has 500,000,000 shares of common
stock authorized with a par value of $0.001. Each share of common stock has one vote per share for the election of directors and
all other items submitted to a vote of stockholders. The common stock does not have cumulative voting rights, preemptive, redemption
or conversion rights.
In February of 2017 the Company issued 6,352,500
restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company.
As a conversion of four (4) Notes Payable with a total value of $190,575 the Notes Payable were due January 1, 2019.
NOTE 7- DERIVATIVE LIABILITIES
The Company identified conversion features
embedded within convertible debt and issued in 2013 and subsequent periods. The Company has determined that the features associated
with the embedded conversion option, in the form a ratchet provision, should be accounted for at fair value, as a derivative liability,
as the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion
transactions.
Additionally, due to a recognition of tainting,
due to shares not being held in reserve in 2014 all convertible notes are considered to have a derivative liability, therefore
the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.06%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion
price ranging from $0.03 per share to $0.10 per share.
As a result of the application of ASC No.
815, the fair value of the ratchet feature related to convertible debt and warrants is summarized as follow:
Balance
as of December 31, 2016
|
|
$
|
19,346,348
|
|
Initial Derivative
Value
|
|
|
14,578,005
|
|
Change in Derivative
Values
|
|
|
(12.695,683
|
)
|
Conversion
of debt
|
|
|
(1,478,147
|
)
|
|
|
|
|
|
Balance as of March
31, 2017
|
|
$
|
19,750,523
|
|
The fair value at the commitment and re-measurement
dates for the Company’s derivative liabilities were based upon the following management assumptions as March 31, 2017:
The Company recorded the debt discount to
the extent of the gross proceeds raised, and expensed immediately the remaining fair value of the derivative liability, as it
exceeded the gross proceeds of the note.
The Company recorded a derivative expense
of $14,578,005 and $129,340 for the three months ended March 31, 2017 and 2016 respectively
The Company recorded a change in the value
of embedded derivative liabilities income/(expense) of $ (12,695,683) and $1,431,107 for the three months ended March 31, 2017
and 2016, respectively
NOTE 8 – RELATED PARTY TRANSACTIONS
The Company has agreements covering certain
of its management personnel. Such agreements provide for minimum compensation levels and are subject to annual adjustment.
The Company’s Chief Executive Officer
holds 50,000 shares of its Series C preferred stock. These shares can be converted into 21,696,485 shares of the Company’s
common stock at his option.
The Company’s largest stockholder has
from time to time provided unsecured loans to the Company, See Note 4 for the detail of the convertible and non-convertible debt
with a face value of $750,000
NOTE 9– DEBT EXTINGUISHMENT
On January 1, 2017 the Company renegotiated twelve (12) convertible notes payable.
The Total face value of the notes issued was $788,085 and the notes are due on January 1, 2019. The face value plus accrued
interest due of $62,533 resulting in new face amount due of $788,085. The new notes are convertible after January 1, 2017 and
are convertible into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock
at the date when the debt becomes convertible was $0.225. The debt was issued is a result of a financing transaction and
contain a beneficial conversion feature. As of March 31, 2017, the balance was $687,173. The beneficial conversion feature in
the amount of $788,085 will be expensed as interest over the term of the note (two years). As of March 31, 2017 (4) Four
of the twelve notes were converted into common stock. The face value of the converted notes was $190,575. All these amended
debts have a price adjustment provision. Therefore the Company accounted for these Notes under ASC Topic 815-15
“Embedded Derivative.” The derivative component of the obligation are initially valued and classified as a
derivative liability with an offset to discounts on convertible debt. Discounts have being amortized to interest expense over
the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used
the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 155% of
221%, trading prices ranging from $.078 per share to $0.49 per share and a conversion price ranging from $0.03 per share per
share. The total derivative liabilities associated with these (8) remaining notes are $4,802,433 at March 31, 2017.
NOTE 11 – RELATED PARTY TRANSACTIONS
The Company has agreements covering certain
of its management personnel. Such agreements provide for minimum compensation levels and are subject to annual adjustment.
The Company’s Chief Executive Officer
holds 50,000 shares of its Series C preferred stock. These shares can be converted into 21,696,485 shares of the Company’s
common stock at his option.
The Company’s largest stockholder has
from time to time provided unsecured loans to the Company. See Note 4 for the detail of the convertible and non-convertible debt
with a face value of $750,000.
NOTE 13 – WARRANTS
On September 8, 2015 the Company received
a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest
accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $100K, 10% promissory note due September 9, 2017 has been fully
repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017.
On September 9, 2015 the Company received
a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest
accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $100K, 10% promissory note due September 9, 2017 has been fully
repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017.
On May 9, 2016 the Company received a total
of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing
at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable shares of
the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years
commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9, 2018 has been fully repaid or
the start of the Acceleration Period as defined in “The Note” or May 9, 2018.
On May 17, 2016 the Company received a total
of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing
at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable shares of
the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years
commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 17 2018 has been fully repaid or
the start of the Acceleration Period as defined in “The Note” or May 17, 2018.
Warrants
issued to Non-Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
Weighted
|
|
|
|
|
Average
|
Average
|
|
|
|
Warrants
|
Exercise
|
Contract
|
|
|
|
Issued
|
Price
|
Terms
Years
|
Balance
as of December 31, 2016
|
11,065,540
|
0.0316297
|
1.79
|
Granted
|
|
|
-
|
-
|
-
|
Exercised
|
|
|
-
|
-
|
-
|
Expired
|
|
|
-
|
-
|
-
|
Balance
as of March 31, 2017
|
11,065,540
|
0.0316297
|
1.29
|
NOTE 14 – COMMITMENTS AND CONTINGENCIES
The
Company is, from time to time involved in litigation in the normal course of business. While it is not possible at this time to
establish the ultimate amount of liability with respect to contingent liabilities, including those related to legal proceedings,
management is of the opinion that the aggregate amount of any such liabilities, for which provision has not been made, will not
have a material adverse effect on the Company’s financial position.
NOTE 15– SUBSEQUENT EVENTS
In April of 2017, MJAI 1 LLC was licensed
to sell legal recreational marijuana from its location in the city of Portland, Oregon
In April 2017, the Company purchased four
vehicles for $58,396
In May 2017, the Company entered into a financing
agreement with an institutional investor to provide up to $5,800,000 in convertible debt, of which $500,000 was received from
the issuance of such convertible debt contemporaneously with execution of the financing agreement. Interest is stated at 8%, which
accrues until maturity on January 1, 2020. The Note and interest is convertible into common stock at $0.05 per share.