Annual Report (10-k)

Date : 04/19/2019 @ 5:12PM
Source : Edgar (US Regulatory)
Stock : Kaya Holdings, Inc. (QB) (KAYS)
Quote : 0.0588  -0.0027 (-4.39%) @ 9:45PM

Annual Report (10-k)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2018

 

Commission File No. 333-177532

 

KAYA HOLDINGS, INC.  

(Exact name of registrant as specified in its charter)

   

 

Delaware   90-0898007
(State of other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

888 S. Andrews Avenue

Suite 302

Ft. Lauderdale, Florida 33316

(Address of principal executive offices)

 

(954)-892-6911

(Registrant’s telephone number, including area code)

 

Securities registered under Section 12(b) of the Exchange Act: None

 

Securities registered under Section 12(g) of the Exchange Act: None

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] Yes [ ] No

 

 
 

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definition of “large accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

[ ] Large accelerated filer [ ] Accelerated filer

 

[X] Non-accelerated filer [X] Smaller reporting company

 

[X] emerging growth company

  

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

 

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $20,983,182 as of June 30, 2018, based on the closing price on such date of $0.1433 of the Company’s common stock on the OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 173,598,080 shares of common stock outstanding as of April 15, 2019.

 

DOCUMENTS INCORPORATED BY REFERENCE: No documents are incorporated by reference into this Annual Report on Form 10-K except those Exhibits so incorporated as set forth in the list of Exhibits set forth in Item 15 of this Annual Report on Form 10-K.

 

 

 
 

 

KAYA HOLDINGS, INC.

 

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2017

TABLE OF CONTENTS  

    Page
Part I    
Item 1. Business.
Item 1A. Risk Factors. 34
Item 1 B. Unresolved Staff Comments. 39
Item 2. Properties.  39
Item 3. Legal Proceedings.  39
Item 4. Mine Safety Disclosures.  40
     
Part II    
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters. 41
Item 6. Selected Financial Data. 43
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation. 43
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 47
Item 8. Financial Statements and Supplementary Data.  47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  47
Item 9A. Controls and Procedures. 47
Item 9B. Other Information.  49
     
Part III    
Item 10. Directors, Executive Officers and Corporate Governance. 49
Item 11. Executive Compensation. 50
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.  52
Item 13. Certain Relationships and Related Transactions, and Director Independence.  53
Item 14. Principal Accountant Fees and Services. 54
   
Part IV    
Item 15. Exhibits, Financial Statement Schedules. 55
     
Signatures    57

 

 

 
 

 

 

As used in this Annual Report on Form 10-K (the “ Annual Report ”), the terms “ KAYS ,” “ the Company ,” “ we ,” “ us ” and “ our ” refer to Kaya Holdings, Inc. and its owned and controlled subsidiaries, unless the context indicates otherwise.

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Information contained in this Annual Report contains “ forward-looking statements ” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “ Securities Act ”) and Section 21E of the Securities Exchange Act of 1934, as amended (the ‘ Exchange Act ”). These forward-looking statements are contained principally in the sections titled “Item 1. Business,” “Item 1A. Risk Factors,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and are generally identifiable by use of the words “ may ,” “ will ,” “ should ,” “ expect ,” “ anticipate ,” “ estimate ,” “ believe ,” “ intend ” or “ project ” or the negative of these words or other variations on these words or comparable terminology.

 

The forward-looking statements herein represent our expectations, beliefs, plans, intentions or strategies concerning future events. Our forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Moreover, our forward-looking statements are subject to various known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.

 

Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

 

 
 

 

PART I

 

Item 1. Business.

 

Overview

 

Kaya Holdings, Inc., a Delaware corporation, is a vertically integrated legal marijuana enterprise, which cultivates, produces and retails legal medical and recreational cannabis in Oregon using its proprietary Kaya Shack™ brand. The Company currently operates a its chain of four retail Kaya Shack™ retail outlets (including three Kaya Shack™ Marijuana Superstores) in Oregon, has developed its own proprietary Kaya Farms™ strains of cannabis, which it grows and produces (together with edibles and other cannabis derivatives) at its Eugene, Oregon Sunstone Farms legal recreational and medical marijuana production and processing manufacturing facility, which it acquired in October 2018. The Company also owns a 26-acre parcel in Lebanon, Linn County, Oregon, which it purchased in August 2017 on which it intends to construct a cultivation and production facility. We filed for zoning and land use approval in early 2018, and after numerous regulatory challenges and delays, we finally received zoning and land use approval in January, 2019 to build an 85,000-square foot Kaya Farms™ greenhouse grow and production facility. The Company maintains a genetics library of over 30 strains of cannabis it has developed and has also formulated various edibles, cannabis derivatives and marijuana cigarettes under the “Kaya” brand name.

 

All of the Company’s operations are licensed by the Oregon Liquor Control Commission (the “ OLCC ’), which has jurisdiction over legal medical and recreational cannabis grow, production and retail operations. The Company originally commenced operations in Oregon in July 2014, operating medical marijuana dispensaries (“ MMDs ”) when only medical marijuana sales had been legalized. However, this afforded the Company to be in position to rapidly move into the grow, production and retailing of recreational marijuana when legalization of recreational cannabis sales followed shortly thereafter in October 2015.

 

As Oregon has recently placed a moratorium on licensing additional legal marijuana retail outlets, the Company is exploring opportunities to expand its operations beyond Oregon by replicating its Kaya Shack™ brand retail outlets through franchising in other states where recreational cannabis use is legal or expected to become legal in the near term, as well as in Canada, where it is legal nationwide.

 

Corporate Information

 

Our corporate office is located at 888 South Andrews Avenue, Suite 302, Fort Lauderdale, Florida, 33316. Our telephone number is website is www.kayaholdings.com. Information contained on our website does not constitute part of this Annual Report.

 

Market Overview

 

According to research firm Cowen & Co., legal cannabis sales in the U.S. are expected to reach $75 billion by 2030. The industry research firm Arcview, estimates a $22.6 billion legal cannabis market in North America by 2021, with 87% of all sales occurring in the United States. The Arcview forecast assumes a 27% compound annual growth rate, an assumption supported by current rates of growth, while reliant on additional states passing both recreational and medical cannabis laws.

 

Thirty-three states and the District of Columbia have legalized medical marijuana in some capacity. Additionally, ten states (Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington State) and the District of Colombia have approved the implementation of legal recreational marijuana use. The Marijuana Business Factbook 2017, published by industry news source Marijuana Business Daily, estimates that the legal marijuana sector will grow more than 300% from sales of $1.8 billion to $17.1 billion in 2021. The firm estimates that the economic impact of the legal cannabis industry will exceed $70 billion, placing it almost on par with nutraceuticals and ahead of movie tickets and retail ice cream. According to the Factbook, “to get another idea of just how big the marijuana industry has become, look to employment numbers. The cannabis sector now employs between 165,000-230,000 full and part-time workers….to put this in perspective, there are now more marijuana industry workers than there are bakers or massage therapists in the United States”.

 

 

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The Kaya Shack™ Brand

 

 

Kaya Holdings operates the Kaya Shack™ brand of legal medical and recreational retail marijuana retail stores.

 

Kaya Holdings operates four recreational marijuana retail outlets and medical marijuana dispensaries in Oregon under the Kaya Shack™ brand.

Dubbed by the mainstream press as the “Starbucks of Marijuana” after our first outlet opened in July 2014, our operating concept is simple: to deliver a consistent customer experience (quality products, fair prices and superior customer service) to a broad and diverse base of customers. Kaya Shack™ meets the quality needs of the “marijuana enthusiast”, the comfort and atmosphere of all including “soccer moms” and the price sensitivities of casual smokers.

 

The Kaya Shack™ brand communicates positive thinking and joy, with signs adorning the walls that read “It’s a Good Day to have a Good Day,” “Some of our Happiest Days Haven’t Even Happened Yet,” and our signature “Be Kind.”

 

Kaya Shack™ retail outlets are open 7 days a week- Monday through Saturday from 8:00 am to 10:00 pm, and Sunday 8:00 AM to 9:00 PM. Operations follow an operational manual that details procedures for 18 areas of operation including safety, compliance, store opening, store closing, merchandising, handling of cash, inventory control, product intake, store appearance and employee conduct.

 

In compliance with regulations, all marijuana and marijuana infused products sold through our stores are quality tested by independent labs to assure adherence to strict quality and OLCC regulations.

 

The Company is exploring opportunities to expand its operations beyond Oregon by replicating its Kaya Shack™ brand retail outlets through franchising in other states where recreational cannabis use is legal or expected to become legal in the near term, as well as in Canada, where it is legal nationwide. KAYS also is targeting opening corporate owned marijuana production and processing facilities to support the envisioned franchised outlets, and to both maintain quality control and offer customers a consistent customer experience while reducing costs of goods to franchisees.

 

 

 

 

 

 

 

 

  

 

 

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Kaya Shack™ Retail Outlets

 

 

 

 

 

 

 

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All stores feature a check out stand wrapped to feature the Company’s proprietary brand of pre-rolls, Kaya Buddies. The Buddies program is an exciting and popular pre-roll offering, featuring a wide selection (15-15 strains of pre-rolls) and featuring our special Kaya Saying in each Buddies tube. A glass display case showcases at least 25 strains of marijuana flower, which the stores serve to customers “deli style”, weighing straight from the jar to the customer’s take-out tube. An additional display case with a varied selection of oils, concentrates and topicals rounds out the cannabis product display. The stores also feature standing display cases with cannabis intended glassware under the Company’s brand Really Happy Glass, as well as a rack of proprietary t-shirt designs marketed under the Company brand Kaya Gear. The store also has a hospitality area that offers free water, coffee, tea and hot cocoa. As required by law, all products containing marijuana are either behind locked glass or behind the counter and out of customer reach. 

 

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I. Kaya Shack™ , 1719 SE Hawthorne Blvd., Portland, Oregon.

 

 

 

 

 

 

 

 

 

 

 

Our first Kaya Shack™ OLCC licensed marijuana store (located in the heart of the trendy Hawthorne district in southeast Portland, the “Greenwich Village” of the West Coast) opened for business July 03, 2014. The store is located next door to a cell phone repair shop, and near to Devil’s Dill restaurant and No Fun pub. There are also a McMenamins restaurant, tattoo parlor, convenience store, hair/nail salon and a soccer sports bar. The area around the shop is mixed use (commercial and residential) and has a footprint of approximately 700 square feet and is the model for the Company’s small urban shops.

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II. Kaya Shack ™ Marijuana Superstore, South Salem, Oregon.

 

  

 

 

  

Our second Kaya Shack™ OLCC licensed marijuana store (located in South Salem, Oregon) opened for business on October 17, 2015. The store is located in a strip mall alongside a Caesar’s Pizza, Aaron’s furniture, a convenience store, a tanning salon, and a nail salon. The plaza also has a Subway, a sports bar and a laundromat. The area around the shop is primarily commercial with residential complexes under construction and has a footprint of approximately 2,100 square feet and was our first Kaya Shack TM Marijuana Superstore.

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III. Kaya Shack™ Marijuana Superstore, North Salem, Oregon .

 

 

 

 

 

 

 

 

 

 

 

 

    

Our third Kaya Shack™ (located in North Salem, Oregon) commenced operations on March 21, 2017. The store is located in a strip mall alongside a Starbucks Coffee, laundromat, an Applebee’s restaurant and medical offices. The area around the shop is primarily commercial and has a footprint of approximately 2,600 square feet and utilizes the Kaya Shack™ Marijuana Superstore model.

 

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IV. Kaya Shack™ Marijuana Superstore, Central Salem, Oregon.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

Our fourth Kaya Shack™ (located in Central Salem, Oregon) opened for business February 15, 2018. The store is located in a strip mall directly behind Carl Jr. and Popeye’s Chicken restaurants and alongside a microbrewery sports bar, laundromat, and Hawaiian sandwich shop. The area around the shop is primarily commercial with residential complexes ready to open Summer 2018. It has a footprint of approximately 3100 square feet and utilizes the Kaya Shack™ Marijuana Superstore model.

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Plan to Sell Kaya Shack™ Retail Marijuana Store Franchises in Canada

 

 

On March 12, 2019 the Company announced that it had hired the Toronto based law firm of Garfinkle Biderman LLP to prepare the legal infrastructure required to enable the Company to sell Kaya Shack™ franchises in Canada. The Company has since concluded negotiations with its selected Canadian based franchise sales consultancy group and has hosted a group of prospective franchisees. The Company is currently working with its consulting group to map out Canadian provinces and development plans that consider the current and pending availability of cannabis retail licenses. Kaya Holdings will continue to announce details of its Canadian expansion effort as developments unfold.

 

 

 

 

 

 

 

 

 

Kaya Shack™ Car Fleet and Home Delivery

 

 

The Company is licensed by the OLCC for home delivery for all four stores. The Company is interested in developing its delivery service and has a fleet of 4 Kaya Cars (wrapped Fiat 500s featuring the Company’s branding logos and colors and outfitted with safes and security) at the ready, and once the support software enabling compliant delivery is released Kaya Shack™ will commence with its home delivery service. We expect delivery to extend our visibility, assist in building brand awareness, and allow the Company to service a broader geographic territory. The Company has developed the website www.kayadelivers.com to advance the growth of its delivery service.

 

To make use of the cars while the Company waits to launch delivery service, the cars are currently used for promotional purposes at community fairs and roving billboards.

 

 

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Kaya Farms™

 

 

Lebanon, Linn County, Oregon Marijuana Grow and Manufacturing Complex

 

 

In early 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. Since that time KAYS has operated various grow facilities to feed the Kaya Shack Supply Chain, and in August 2017, KAYS acquired its first property for a large scale facility- a 26-acre parcel in Lebanon, Linn County, Oregon, where we intend to develop an 85,000-square foot Kaya Farms™ Farm and greenhouse facility

 

 

Management believes that the acquisition and development of the property will position the Company for future growth and expansion, including increased Marijuana Canopy production to the maximum extent allowed by law through use of both greenhouse and outdoor grows, as well as expansion of its production capabilities with brands in oils, vape cartridges, concentrates, a selection of edibles, and infused creams and lotions. When Federal Prohibition of marijuana ends and national and international cannabis trade can begin, we believe that Oregon is uniquely positioned to become America’s “pot basket” due to its superior climate and state history involving generations of Oregonian Cannabis Growers; ideal weather + extensive generational knowledge = superior, lower cost cannabis products for export.

 

We filed for zoning and land use approval in early 2018, and after numerous regulatory challenges and delays, we finally received zoning and land use approval in early 2019 to build on the property. We are presently in the final planning stages and are awaiting the culmination of the OLCC licensing process to begin construction. Under present laws the property can easily deliver 6-8,000 pounds of cannabis each year; if future regulations permit we believe that we can expand that capability to approximately 80-100,000 pounds of cannabis each year.

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Kaya Farms Indoor Marijuana Grow, Processing & Cannaceutical Production Facility

   

On October 23, 2018 KAYS announced that it had concluded the purchase of the Eugene, Oregon based Sunstone Farms grow and manufacturing facility, which is licensed by the OLCC for both the production (growing) of medical and recreational marijuana flower and the processing of cannabis concentrates/extracts/edibles. The purchase includes a 12,000 square foot building housing an indoor grow facility, as well as equipment for growing and extraction activity. The facility can produce in excess of 800 pounds cannabis flower annually as currently outfitted, as well as a substantial amount of manufactured extracts and related cannabis products.

The purchase price of $1.3 million for the OLCC licensed marijuana production and processing facility, consisting of the building and equipment was paid for by the issuance of 12 million shares of KAYS restricted stock to the seller at closing. The shares carry a lock-up-restriction that allows for their staged eligibility for resale over a 61-month period from the date of the purchase of the facility by KAYS.

Additionally, the seller purchased 2.5 million restricted shares for $250,000 in cash in a private transaction with the Company. The proceeds from the sale of those shares were and are being used for acquisition related expenses, transitional operating costs and facility capital improvements with respect to the production and processing facility we purchased.

KAYS intends to utilize the processing facilities to grow their own top-shelf, connoisseur-grade marijuana flower, produce various brands of oils, edibles, concentrates and extracts, and develop medical grade laboratory facilities for the production of a proprietary Kaya Cannaceuticals™ line of both CBD and CBD/THC products for the health, skincare and medical industries.

Pursuant to an interim Management Agreement entered into between the parties, the Company has assumed operations of the 12,000-square foot facility pending transfer of the licenses by the OLCC to the Company, upon completion of a satisfactory compliance review. As part of planned expansion and renovations for the facility, KAYS began site improvements and has begun supplying its four Kaya Shack™ retail outlets with Kaya Farms™ cannabis and cannabis products from the facility

Acquisition of the Eugene, Oregon facility has enabled the Company to recommence its Kaya Farms™ cannabis grow, processing and manufacturing operations. Please see the following pages for copies of testing results and pictures of various aspects of production. 

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Kaya Farms™ - Cannabis and Cannabis Products

Kaya Buddie™ Strain Specific Cannabis Cigarettes  

In 2016 the Company introduced a signature line of strain-specific connoisseur-grade, pre-rolled cannabis cigarettes branded as “Kaya Buddies™”. Kaya Buddies™ cannabis cigarettes have been very well received by medical patients and recreational users, with the Company selling over 100,000 Kaya Buddies™ since launching the brand in January 2016. The brand, marketed under the tagline “Buds with Benefits”, features over 50 different strains of connoisseur-grade, high quality cannabis and proprietary specialty blends. Many cannabis retailers produce prerolls, but none that we know of offer strain specific preroll made from the buds of the flower.

 

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Potential Expansion

 

 

We believe that revenues and profitability will be enhanced through the opening, directly or through franchisees or licensees, of additional retail outlets utilizing the Kaya Shack™ brand and model in our chain, as well as economies of scale achieved by being a multi-location retail chain and being vertically integrated with grow and manufacturing operations. Ultimately, we believe that we can successfully enter other markets as they open up by applying our “brand” retail chain and vertically integrated grow and manufacture model to other states that legalize recreational marijuana use.

  

As Oregon has recently placed a moratorium on licensing additional legal marijuana retail outlets, the Company is exploring opportunities to expand its operations beyond Oregon by replicating its Kaya Shack™ brand retail outlets through franchising in other states where recreational cannabis use is legal or expected to become legal in the near term, as well as in Canada, where it has recently been legalized nationwide.

 

Growth Strategy

 

The Company has established a well-defined strategy for entering and maintaining a strong presence in the legal marijuana sector. The cornerstones of this strategy include:

 

  · All operations are to be conducted in accordance with State and Local Laws and Federal Enforcement Policies and Priorities as it relates to Marijuana (as outlined in the Justice Department's Cole Memo dated August 29, 2013, US Attorney General Jeff Sessions Memo dated January 4, 2018, and subsequent commentary from US Attorney for the District of Oregon Billy Williams).

 

·   The Company will seek to operate in a vertically integrated manner (grow, process and sell) wherever permitted by law. In states or countries where vertical integration is not permitted, the Company plans to determine which of the permitted activities offers the most potential for growth and value creation.

 

·   The Company will seek to engage, sponsor or lead local advocacy and lobbying groups that have a significant impact on the evolution and character of laws and the regulations under which legal marijuana operations are implemented in select markets.

 

·   The Company shall work with law enforcement and government officials to insure compliance with all regulations.

Marketing and Sales

  

The Company will only market its legal marijuana as in compliance with applicable state law.

 

The Company employs a marketing campaign consisting of four cornerstones:

 

  · Promoting and establishing the Kaya Shack™ brand.

 

  · A positive and active online presence.

 

  · Daily specials and promotions.

 

  · Quirky and fun holiday specials.

 

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Our core strategic marketing objectives include:

 

    Establishing and Enhancing the Kaya Shack™ Brand – positioning the Company’s brand to have positive and value related associations with all prospective and existing customers.

 

    Operating Cooperatively - cooperation, as a strategy, helps develop a network of suppliers and marketing channels able to promote Kaya Shack™.

 

    Delivering Value - customer value is achieved when the perceived value of what we sell along with the value of the experience we deliver exceeds the price we charge.

 

    Driving Customer Traffic - the only two ways to increase store income is to sell more to our existing customers and attract new customers. Programs are in place to accomplish both tasks.

 

Government Regulation

 

We are subject to general business regulations and laws, as well as regulations and laws directly applicable to our operations. As we continue to expand the scope of our operations, the application of existing laws and regulations could include matters such as pricing, advertising, consumer protection, quality of products, and intellectual property ownership. In addition, we will also be subject to new laws and regulations directly applicable to our activities.

 

Any existing or new legislation applicable to us could expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations, which could hinder or prevent the growth of our business.

 

Federal, state and local laws and regulations governing legal recreational and medical marijuana use are broad in scope and are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance. In addition, violations of these laws or allegations of such violations could disrupt our planned business and adversely affect our financial condition and results of operations. In addition, it is possible that additional or revised federal, state and local laws and regulations may be enacted in the future governing the legal marijuana industry. There can be no assurance that we will be able to comply with any such laws and regulations and its failure to do so could significantly harm our business, financial condition and results of operations.  

Competition

  

The legal marijuana sector is rapidly growing and the Company faces significant competition in the operation of retail outlets, MMDs and grow facilities. Many of these competitors will have far greater experience, more extensive industry contacts and greater financial resources than the Company. There can be no assurance that we can adequately compete to succeed in our business plan.

  

Employees

 

As of the date of this Annual Report, our Oregon operations have a total of 15-20 part-time store employees including budtenders, trimmers, growers, and 6 full-time employees, consisting of 3 store managers, a Vice President of Marketing and Brand development, the Senior Vice President of Cannabis Operations and a Vice President of Cultivation. Additionally, we engage several consultants to assist with daily duties and business plan implementation and execution. Additional employees will be hired and other consultants engaged in the future as our business expands. 

 

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Item 1A. Risk Factors.

 

We have a limited operating history with our current business .

 

The Company was incorporated in 1993 and has engaged in a number of businesses as both a private and as a publicly held company, including the online sale of specialty foods, online marketing and website development.

 

KAYS’s legal marijuana business, which it has focused on since 2014, only commenced generating more than a limited level of revenues subsequent to the commencement of legal recreational marijuana sales in Oregon on October 1, 2015. Accordingly, our operations continue to be subject to all the problems, expenses, difficulties, complications and delays encountered in an early stage business. There can be no assurance that the Company will generate significant revenues or operate at a profit.

 

The Company will require additional financing to become commercially viable.

 

The Company’s current legal marijuana operations can be capital intensive.

 

During the years ended December 31, 2018 and 2017, we raised approximately $1,375,000 and $3,150,000, respectively, through a series of private debt and equity offerings to finance operations.

 

The Company incurred net income of $4,747,297 and a net loss of $14,881,793 for the years ended December 31, 2018 and 2017, respectively.

 

All of the net income for the year ended December 31, 2018 and the majority of the net loss for the year ended December 31, 2017 were not actual operating gains/losses but were a result of the derivative liabilities from the conversion of debt from the stabilization of our stock prices the reduces the volatility factors used in the derivative calculations. 

 

At December 31, 2018, we had a total stockholders' deficit of $ 39,924,912 and a working capital deficiency of $23,651,967. There can be no assurance that the Company will become commercially viable without additional financing, the availability and terms of which are uncertain. If the Company cannot secure necessary capital when needed on commercially reasonable terms, its business, condition (financial and otherwise) and commercial viability may be harmed. Although management believes that it will be able to successfully execute its business plan, which includes third party financing and the raising of capital to meet the Company’s future liquidity needs, there can be no assurances in this regard. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

 

We currently rely on certain key individuals, and the loss of one of these key individuals could have an adverse effect on the Company.

 

Our success depends to a certain degree upon certain key members of our management and certain key consultants to the company. These individuals are a significant factor in our growth and success. The loss of the services of such members of management could have a material adverse effect on our Company.

 

The Company’s success will be dependent in part upon its ability to attract qualified personnel and consultants.

 

The Company’s success will be dependent in part upon its ability to attract qualified creative marketing, sales and development professionals. The inability to do so on favorable terms may harm the Company’s proposed business.

 

KAYS must effectively meet the challenges of managing expanding operations.

 

The Company’s business plan anticipates that operations will undergo expansion in 2019 and beyond. This expansion will require the Company manage a larger and more complex organization, which could place a significant strain on our managerial, operational and financial resources. Management may not succeed with these efforts. Failure to expand in an efficient manner could cause expenses to be greater than anticipated, revenues to grow more slowly than expected and could otherwise have an adverse effect on the business, financial condition and results of operations.

 

Marijuana remains illegal in the United States under federal law .

 

Notwithstanding its legalization for recreational and/or medical use by a growing number of states, the growing, transport, possession or selling of marijuana continues to be illegal under federal law. Although the Obama administration had made a policy decision to allow implementation of state laws legalizing recreational and/or medical marijuana use and not to federally prosecute anyone operating under state law, the continuance of that policy is not assured under the Trump administration and could change at any time, which might render our marijuana operations illegal and adversely affecting KAYS’s business, financial condition and results of operations.

 

The marketing and market acceptance of marijuana may not be as rapid as KAYS expects.

 

The market for legal marijuana is quickly evolving, and activity in the sector is expanding rapidly. Demand and market acceptance for legal marijuana are subject to uncertainty and risk, as changes in the price and possible adverse political efforts could influence and denigrate demand. KAYS cannot predict whether, or how fast, this market will grow or how long it can be sustained. If the market for legal marijuana develops more slowly than expected or becomes saturated with competitors, KAYS’s operating results could be adversely impacted.

 

KAYS’s marijuana activities are part of an emerging industry.

 

The Company intends to implement an aggressive plan of growth to enter the legal recreational and medical marijuana industry. The legal marijuana industry is new and emerging, and has yet to fully define competitive, operational, financial and other parameters for successful operations. By pursuing a growth strategy to enter a new and emerging industry, the Company’s operations may be adversely impacted as the industry’s competitive, operational, financial and other parameters take shape. Given the fluidity of the industry, the Company may make errors in implementing its business plan, thereby limiting some or all of its ability to perform in accordance with its expectations.

 

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Our business could be affected by changes in governmental regulation.

 

Federal, state and local laws and regulations governing legal recreational and medical marijuana use are broad in scope and are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance. In addition, violations of these laws or allegations of such violations could disrupt KAYS’s planned business and adversely affect our financial condition and results of operations. In addition, it is possible that additional or revised federal, state and local laws and regulations may be enacted in the future governing the legal marijuana industry. There can be no assurance that KAYS will be able to comply with any such laws and regulations and its failure to do so could significantly harm our business, financial condition and results of operations.

 

Our business will be subject to other operating risks which may adversely affect the Company’s financial condition.

 

Our planned operations will be subject to risks normally incidental to manufacturing operations which may result in work stoppages and/or damage to property. This may be caused by:

 

  · breakdown of the equipment;

 

  · labor disputes;

 

  · imposition of new government regulations;

 

  · sabotage by operational personnel; 

 

  · cost overruns; and

 

  · fire, flood, or other acts of God.

We will likely face significant competition.

 

The legal marijuana industry is in its early stages and is attracting significant attention from both small and large entrants into the industry. KAYS expects to encounter significant competition as it implements its business strategy. The ability of KAYS to effectively compete could be hindered by a lack of funds, poor positioning, management error, and other factors. The inability to effectively compete could adversely affect our business, financial condition and results of operations.

 

Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act `Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial office and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

·   pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company

 

·   provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and/or directors of the Company; and

 

·   provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

We do not have a sufficient number of employees to segregate responsibilities and may be unable to afford increasing our staff or engaging outside consultants or professionals to overcome our lack of employees. During the course of our testing, we may identity other deficiencies that we may not be able to timely remediate. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“ Sarbanes Oxley ). Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock, if a market ever develops, could drop significantly

35

 

The Jumpstart our Business Startups Act of 2012 (the “Jobs Act”) has reduced the information that the Company is required to disclose.

 

Under the Jobs Act, the information that the Company will be required to disclose has been reduced in a number of ways.

  

As a company that had gross revenues of less than $1 billion during the Company’s last fiscal year, the Company is an “ emerging growth company ,” as defined in the Jobs Act (an “ EGC ”). The Company will retain that status until the earliest of (a) the last day of the fiscal year which the Company has total annual gross revenues of $1,000,000,000 (as indexed for inflation in the manner set forth in the Jobs Act) or more; (b) the last day of the fiscal year of following the fifth anniversary of the date of the first sale of the common stock pursuant to an effective registration statement under the Securities Act; (c) the date on which the Company has, during the previous three year period, issued more than $1,000,000,000 in non-convertible debt; or (d) the date on which the Company is deemed to be a “ large accelerated filer ,” as defined in Rule 12b-2 under the Exchange Act or any successor thereto. As an EGC, the Company is relieved from the following:

 

 

·

  The Company is excluded from Section 404(b) of Sarbanes-Oxley, which otherwise would have required the Company’s auditors to attest to and report on the Company’s internal control over financial reporting. The Jobs Act also amended Section 103(a)(3) of Sarbanes-Oxley to provide that (i) any new rules that may be adopted by the PCAOB requiring mandatory audit firm rotation or changes to the auditor’s report to include auditor discussion and analysis (each of which is currently under consideration by the PCAOB) shall not apply to an audit of an EGC; and (ii) any other future rules adopted by the PCAOB will not apply to the Company’s audits unless the SEC determines otherwise.

 

·   The Jobs Act amended Section 7(a) of the Securities Act to provide that the Company need not present more than two years of audited financial statements in an initial public offering registration statement and in any other registration statement, need not present selected financial data pursuant to Item 301 of Regulation S-K for any period prior to the earliest audited period presented in connection with such initial public offering. In addition, the Company is not required to comply with any new or revised financial accounting standard until such date as a private company (i.e., a company that is not an “ issuer ” as defined by Section 2(a) of Sarbanes-Oxley) is required to comply with such new or revised accounting standard. Corresponding changes have been made to the Exchange Act, which relates to periodic reporting requirements, which would be applicable if the Company were required to comply with them.

 

·   As long as the Company is an EGC, the Company may comply with Item 402 of Regulation S-K, which requires extensive quantitative and qualitative disclosure regarding executive compensation, by disclosing the more limited information required of a “ smaller reporting company .”

 

·   In the event that the Company registers the common stock under the Exchange Act, the Jobs Act will also exempt the Company from the following additional compensation-related disclosure provisions that were imposed on U.S. public companies pursuant to the Dodd-Frank Act:

 

(i)   the advisory vote on executive compensation required by Section 14A(a) of the Exchange Act;

 

(ii)   the requirements of Section 14A(b) of the Exchange Act relating to shareholder advisory notes on “golden parachute” compensation;

 

(iii)   the requirements of Section 14(i) of the Exchange Act as to disclosure relating to the relationship between executive compensation and our financial performance; and

 

(iv)   the requirement of Section 953(b)(1) of the Dodd-Frank Act, which requires disclosureas to the relationship between the compensation of the Company’s chief executive officer and median employee pay.

The costs of being a public company could result in us being unable to continue as a going concern.

 

As a public company, we are required to comply with numerous financial reporting and legal requirements, including those pertaining to audits and internal control. The costs of this compliance could be significant. If our revenues do not increase and/or we cannot satisfy many of these costs through the issuance of our shares, we may be unable to satisfy these costs in the normal course of business that would result in our being unable to continue as a going concern.

 

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Management and the Board of Directors may be indemnified.

 

The Certificate of Incorporation and Bylaws of KAYS provide for indemnification of directors and officers at the expense of the respective corporation and limit their liability. This may result in a major cost to the corporation and hurt the interests of stockholders because corporate resources may be expended for the benefit of directors and officers. The Company has been advised that, in the opinion of the Securities and Exchange Commission, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

The market for the KAYS Shares is extremely limited and sporadic

 

KAYS’s common stock is quoted on the OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc. The market KAYS’s for common stock is limited and sporadic. Trading in stock quoted on the OTCQB is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of KAYS’s common stock for reasons unrelated to operating performance. Moreover, the trading of securities in the OTCQB is often more sporadic than the trading of securities listed on a quotation system like NASDAQ, or a stock exchange like the New York Stock Exchange.

 

KAYS’s common stock is a penny stock. Trading of KAYS’s common stock may be restricted by the penny stock regulations adopted by the Securities and Exchange Commission (the “SEC”) and FINRA’s sales practice requirements, which may limit a stockholder’s ability to buy and sell our common stock.

 

KAYS’s common stock is a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny stock ” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. KAYS’s common stock is covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The term “ accredited investor ” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in, and limit the marketability of, KAYS’s common stock.

 

In addition to the penny stock rules promulgated by the SEC, FINRA (the Financial Industry Regulatory Authority) has adopted rules that require when recommending an investment to a customer, a broker- dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low -priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA’s requirements make it more difficult for broker-dealers to recommend that their customers buy KAYS’s common stock, which may limit investor ability to buy and sell KAYS’s common stock.

 

The market for penny stocks has experienced numerous frauds and abuses that could adversely impact KAYS’s common stock.  

 

Company management believes that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:

 

· control of the market for the security by one or a few broker-dealers that are often related to a promoter

or issuer;

 

·   manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;

 

·   boiler room practices involving high pressure sales tactics and unrealistic price projections by sales persons;

 

·   excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and

 

·   wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

 

37

 

The board of directors of KAYS has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stockholders and with the ability to adversely affect common stockholder voting power and rights upon liquidation.

 

KAYS’s Certificate of Incorporation allows us to issue shares of preferred stock without any vote or further action by our stockholders. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders of preferred stock the rights to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.

 

The ability of our principal stockholders, including our CEO, to control our business may limit or eliminate minority stockholders’ ability to influence corporate affairs.

 

The principal stockholder of KAYS holds 22,996,833 shares of common stock and $500K in principal amount of convertible promissory notes which are convertible into 50,000 shares of Series C Convertible Stock. Additionally, our CEO owns 6,300,144 shares of common stock and 50,000 shares of Series C Convertible Preferred Stock. These preferred shares notes can be converted into a total of 43,329,970 shares of KAYS common stock which, added to the common shares of KAYS held by both parties gives them approximately 32.5% of votes on matters presented to stockholders. Accordingly, they are in a position to significantly influence membership of our board of directors as well as all other matters requiring stockholder approval. The interests of our principal stockholders may differ from the interests of other stockholders with respect to the issuance of shares, business transactions with or sales to other companies, selection of other officers and directors and other business decisions. The minority stockholders have no way of overriding decisions made by our principal stockholders. This level of control may also have an adverse impact on the market value of our shares because our principal stockholders may institute or undertake transactions, policies or programs that result in losses and/or may not take any steps to increase our visibility in the financial community and/or may sell sufficient numbers of shares to significantly decrease our price per share.

 

We do not expect to pay cash dividends in the foreseeable future.

 

KAYS has not paid cash dividends on its shares of common stock and does not intend to do so at any time in the foreseeable future. The future payment of dividends depends upon future earnings, capital requirements, financial requirements and other factors that the companies’ boards of directors will consider. Since they do not anticipate paying cash dividends on the common stock, return on investment, if any, will depend solely on an increase, if any, in the market value of the common stock.

 

The conversion of KAYS’ outstanding preferred stock by the CEO and convertible debt held by our principal stockholder would result in the issuance of 43,329,970 shares of KAYS’ common stock. Additionally, conversion of other convertible debt described in this Annual Report would result in further dilution to KAYS’ stockholders. Accordingly, such market overhang could adversely impact the market price of the common stock.

 

KAYS has 50,000 shares of Series C Convertible Preferred Stock outstanding, all of which are held by our CEO. Additionally, KAYS has $500K in principal amount of convertible promissory notes outstanding held by our principal stockholder, which are convertible into 50,000 shares of Series C Convertible Stock. These preferred shares and convertible promissory notes can be converted into a total of 43,329,970 shares of KAYS common stock. Additionally, the company has other convertible debt described in this Annual Report, which would result in further dilution if converted Such market overhang could adversely impact the market price of KAYS’s common stock as a result of the dilution which would result if such securities were converted into shares of KAYS common stock.

 

Future sales of shares of KAYS common stock pursuant to Rule 144 under the Securities Act could adversely affect the market price of KAYS’s common stock.

 

KAYS has a substantial number of shares of common stock which were issued in transactions exempt from the registration requirements of the Securities Act and are now available for public sale pursuant to the Rule 144 under the Securities Act. Such sales could adversely affect the market price of KAYS’s common stock.

 

Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested-director transactions, conflicts of interest and similar matters.

 

Sarbanes-Oxley as well as rule changes proposed and enacted by the SEC, the NYSE/AMEX and the NASDAQ Stock Market as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the NASDAQ Stock Market. Because we are not currently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with voluntary compliance, we have not yet adopted these measures.

 

We do not currently have independent audit or compensation committees. As a result, directors have the ability, among other things, to determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested- director transactions, conflicts of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations as a result thereof.

38

 

We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of Sarbanes-Oxley. The enactment of Sarbanes-Oxley has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.

 

Item 1B. Unresolved Staff Comments.

 

Not applicable.

 

Item 2. Properties.

 

The Company maintains office space at 888 S Andrews Ave, Suite 302, Fort Lauderdale, Florida 33316, pursuant to the terms of a commercial office lease providing for current rental payments of $4,457.18 per month. The lease was entered into on June 12, 2017, provides for an annual escalation of 3% effective January 1 of each year and extends for a period of five (5) years.

 

Our Kaya Shack™ retail outlet located at 1719 SE Hawthorne Boulevard, Portland, Oregon 97214, is occupied pursuant to a lease expiring in April 2019, at a current monthly rental of $ 2,632.18. The lease provides for an annual rental rate increase of 4% effective May of each year and two (2) five-year extension options at market rate.

 

Our Kaya Shack™ Marijuana Superstore located at 5757 Commercial Street SE, Salem, Oregon 97306 is occupied pursuant to a lease expiring in May 2020, at a current monthly rental of $ 4,698.00. The lease provides for an annual rental rate increase of 3% effective May of each year, and two (2) five-year extension options at market rate.

 

Our Kaya Shack™ Marijuana Superstore located at 2505 Liberty Road NE #120, Salem, Oregon 97301 is occupied pursuant to a lease expiring in August 2022, at a current monthly rental of $ 6,221.00. The lease provides for an annual rental rate increase of 3 % effective August of each year, and two (2) five-year extension options at market rate.

 

Our Kaya Shack™ Marijuana Superstore located at 1252 23rd Street SE #150, Salem, Oregon 97306, which opened April 12, 2018 is occupied pursuant to a lease expiring in August 2022 at a current monthly rental of $6,720.02. The lease provides for an annual rental rate increase of 3% effective May of each year, and two (2) five-year extension options at market rate.

 

As disclosed in “ Item 1. Business ,” in August 2017, KAYS we acquired a 26 acre parcel in Lebanon, Linn County, Oregon, which we intend to develop as a Kaya Farms™ legal cannabis cultivation and manufacturing facility. In addition, during 2018, we acquired the Eugene, Oregon based Sunstone Farms grow and manufacturing facility.

 

Item 3. Legal Proceedings.

 

From time to time KAYS be party to various legal proceedings in the ordinary course of business. Pleases see paragraphs below for results of legal proceedings during 2017 and 2018; there are no currently pending proceedings:

 

A. On June 22, 2016, Daniel A. Goldin and Wally Goldin commenced an action in Oregon Circuit Court, Multnomah County, against the Company, MJAI, its direct majority-owned subsidiary, Craig Frank, our Chairman, President and Chief Executive Officer, William David Jones, a consultant to our Company and BMN Capital Group, LLC (the “ Action ”). The plaintiffs alleged breach of contract, state securities fraud and state racketeering claims against the defendants arising from alleged misrepresentations made in subscription agreements with the Company entered into in October 2015 and January 2016 by Daniel A. Goldin and Wally Goldin, respectively, pursuant to which they each purchased 2,222,222 “ restricted ” shares of our common stock for $100,000 in a private transaction. In addition, Daniel A. Goldin alleged that the Company breached a purported employment agreement with him pursuant to which he was purportedly to be compensated for working in our Oregon operations through a combination of cash and stock. The plaintiffs are sought in excess of $1.7 million in damages.

The Company believed that not only was the Action without merit, but that it had various counterclaims against the plaintiffs, particularly Daniel L. Goldin. The Company defended against the Action and pursued its counterclaims both in the Action and in a separate lawsuit commenced against the plaintiffs in the U.S. District Court for the Southern District of Florida in which the Company alleged fraud by the plaintiffs and sought damages and the return of the common stock issued to the Company’s treasury

39

In September 2017, the parties entered in a settlement agreement, pursuant to which Mr. Goldin waived any rights to a total of 1.2 million shares of KAYS stock (200,000 shares of our common stock which were already issued in his name and an additional 1,000,000 shares which were to be issued) and $40,000 in cash compensation payable to him under the employment agreement. The Company paid the plaintiffs the sum of $247,500, in exchange for the return of the stock and the waiver of claims against any further stock or cash, all litigation was dismissed by the parties and the parties exchanged mutual releases.

In entering into the settlement agreement, the Company also took into consideration that legal fees and litigation costs incurred in proceeding further might very well exceed any judgment that would be awarded to the Company and the other defendants, and that even if a judgment were awarded, that there was significant doubt of the collectability of any such judgment from the Goldins.

B . On February 9, 2018 KAYS submitted a site plan review for the Company’s envisioned 101,000 square foot OLCC licensed Kaya Farms™ Marijuana Grow and Manufacturing Complex and an application for a conditional use permit for marijuana processing on the Company owned 26.50-acre property zoned Exclusive Farm Use (EFU) with the Linn County, Oregon Planning and Building Department.

On March 9, 2018 the Company was notified by the Linn County, Oregon Planning and Building Department (the “  Department  ”) that the application was deemed complete and received an official letter of completeness with respect to the application. The formal “   Letter of Completeness   ,” sent March 9, 2018 by a Linn County Senior Planner, confirmed the eligibility of the Company’s 26-acre plot for the purposes of growing legal cannabis, as well as the eligibility of the property for a special purpose exemption for the Company’s proposed manufacturing operations.

On April 20, 2018 the Company was notified by the Department that the site plan review for the indoor and outdoor marijuana operation on the 26.50-acre property (which encompasses approximately 86,000 square feet of the Company’s 101,000 square feet of the Company’s submitted buildings) had been approved. However, the conditional use permit for marijuana processing (which encompasses approximately 15,000 square feet of the Company’s 101,000 square feet of the Company’s submitted buildings) had been denied, largely due to the scale and coverage of the proposed processing operation. Additionally, local residents requested a hearing to appeal the approval of the site plan based on concerns that a portion of the approved site plan that supports the 36,000 square feet of green houses for outdoor growing is not eligible for the Irrigation rights that the Company possesses for the Property.

On June 12, 2018 the Linn County Planning Commission held a hearing and adopted a motion to Deny the previously approved site plan, citing that the proposed site plan does not comply with the odor and waste management standards set forth in Section 940.400 of the Linn County Development Code.

On August 7, 2018 KAYS filed a Notice of Appeal with the State of Oregon Land Use Board of Appeals (LUBA).

On October 9, 2018, Larkins Vacura Kayser LLP (“LVKLAW”), Oregon Counsel, received a letter from Linn County’s Attorney notifying them that Linn County did not intend to file a response brief or appear at the State of Oregon Land Use Board of Appeals (“LUBA”) hearing, and shortly thereafter LUBA cancelled the LUBA Hearing.

 

On November 13, 2018 LUBA issued its FINAL OPINION AND ORDER (the “Order”). The Order reversed the County’s decision and ordered the County to approve the Company’s Land Use Application for the to-be-built 85,000-square foot Kaya Farms & Greenhouse Facility in Lebanon, Oregon.

 

Item 4. Mine Safety Disclosures.  

 

Not applicable.

40

PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

 

Market for Common Stock

 

Our common stock is currently traded on the OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc. under the symbol “ KAYS .” Such market is extremely limited. We can provide no assurance that our shares will be continued to be traded on the OTCQB or another exchange, or if traded, that the current public market will be sustainable.

Holders of Our Common Stock

 

As of April 15, 2019 we had 618 holders of record of our common stock. One of these holders is CEDE and Company which is the mechanism used for brokerage firms to hold securities in book entry form on behalf of their clients and as of April 15, 2019, they held 74,601,385 shares of common stock for these shareholders. When the Company last received a report from CEDE it showed a log of 10,340 shareholders that consented to release their name to the Company for purposes of shareholder communications. Accordingly, we believe that KAYS has approximately 10-11,000 beneficial stockholders as of such date.

Securities Authorized for Issuance under Equity Compensation Plans 

 

 

 

    Number of securities to       Number of securities remaining available for
    be issued upon exercise of   Weighted-average exercise   future insurance under equity compensations
    outstanding options,   price of outstanding options,   plans (excluding securities reflected in column
Plan category warrants and rights warrants and rights  (a))
Equity compensation plans        
approved by   0 shares (1)       7,705,000 shares (1)

security

 holders

      n/a    
             
Equity compensation plans        
not approved by security        
holders   0 shares   n/a   0 shares
                   

 

  (1) Represents shares of common stock issued or reserved for issuance under our 2011 Incentive Stock Plan.

 

Recent Sales of Unregistered Securities

 

As detailed in the accompanying financial statements and footnotes, in 2018 KAYS issued a total of 3,419,041 shares of common stock to shareholders of the Company for conversion of principal and interest due from convertible promissory notes. 

 

In 2018 KAYS received a total of $1,030,000.00 from additional sales of Convertible Promissory Notes pursuant to the May 2017 Financing Agreement and $125,000.00 from sales of Convertible Promissory Notes pursuant to the January 2018 Financing Agreement (each as described below). Additionally, KAYS received $300,000.00 from stock subscriptions from accredited investors.

 

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May 2017 Financing

 

On May 11, 2017, we entered into a second financing agreement with the Institutional Investor to provide the Company with up to an additional $5.8 million in convertible note funding (the “ May 2017 Notes  ”) through July 31, 2018 (the “ May 2017 Financing Agreement ”). The May 2017 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding available to the Company thereunder to $6.3 million and to extend the time period for such funding to May 31, 2019 and was subsequently amended as of November 15, 2017 and as of March 31, 2018, to further increase the amount of funding available to the Company thereunder to $7.75 million and to provide for the remaining $5.8million in principal amount of May 2017 Notes to be (a) convertible into shares of the Company’s common stock at conversion prices ranging from $0.03 to $0.11 pursuant to the terms of each May 2017 Note as described below; and (b) to extend the time period for such funding to April 30, 2020.

 

Pursuant to an additional agreement reached as of March 31, 2018, KAYS and the Institutional Investor agreed that effective as of January 1, 2019, (a) the maturity date of all then outstanding Company promissory notes held by the Institutional Investor and its affiliate, NWP Finance LTD, will be extended from January 1, 2019 to January 1, 2020; (b) all of the $1.75 million in principal amount of May 2017 Notes currently outstanding and the remaining $5.8 million in principal amount of May 2017 Notes which may be issued under the Agreement, as amended, are to be secured by a mortgage lien on the Company’s 26-acre Lebanon, Oregon property, substantially similar in form and substance to the mortgage securing the $500,000 in principal amount of $0.03 Secured Notes purchased by the Institutional Investor, with the caveat that the property, improvements or rights to utilize them cannot be directly or indirectly leased, assigned or otherwise pledged to any entity without approval of the Institutional Investor, and in the event that there is a change in control of the Company or its subsidiaries the May 2017 Notes become immediately due and payable; and (c) the Institutional Investor was be granted piggy-back registration rights with respect to shares of the Company’s common stock it may hold or is issuable upon conversion of any Notes it or its Assigns may hold in the event the Company files a Registration Statement on Form S-1 with the Securities and Exchange Commission under the Securities Act of 1933, as amended to sell shares of its common stock or permit the resale by shareholders of previously issued shares of common stock, up to a maximum of 30% of the shares registered under such registration statement.

 

Moreover, effective as of January 20, 2019, the Agreement was further amended to: (a) extend the due dates for funding due under the Agreement for each of the remaining trenches (including the $420,000 remaining “$0.03” Notes that were due to expire December 31, 2018) by six (6) months; (b) agree to extend the maturity date all then outstanding Company promissory notes held by the Institutional Investor and its affiliate, NWP Finance LTD, from January 1, 2020 to January 1, 2021; and (c) pursuant to price adjustment features in the outstanding Notes held by the Institutional Investor, the Company confirmed that all outstanding Notes with a conversion price greater than $0.03 held by the Institutional Investor would be lowered to $0.03 per share at time of conversion.

 

As of the date of this Annual report, the Institutional Investor has purchased an aggregate of $2,625,000 in principal amount of May 2017 Notes from the Company under the May 2017 Financing Agreement, as amended to date, of which are (i) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (ii) secured by a mortgage lien on the Company’s 26 acre Lebanon, Oregon property (the “ $0.03 Secured Notes ”).

 

January 2018 Financing

 

Effective January 22, 2018, and amended as of July 31, 2018 we entered into a financing agreement with a high net worth investor (the “ HNW Investor ”) to provide the Company with up to $1.4 million in convertible note funding (the “ January 2018 Notes  ”) through July 31, 2018 (the “  January 2018 Financing Agreement  ”). Pursuant to the January 2018 Financing Agreement, upon execution of the January 2018 Financing Agreement, the HNW Investor purchased $100,000 in principal amount of January 2018 Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.10 per share (the “$0.10 Notes ”).

 

While the January 2018 Financing Agreement granted the HNW Investor the right to acquire additional January 2018 Notes by certain deadlines if additional funding was provided, no additional $0.10 Notes were purchased until the January 2018 Financing Agreement   was amended tin December, 2018 to allow the HNW investor the right to purchase an additional $25,000 of January 2018 Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.05 per share (the “$0.05 Notes ”).

 

Additionally, in January 2019 the Agreement was further amended to lower the conversion price of the previously purchased $0.10 Note to $0.05, and to modify terms of the $0.10 Note to make them consistent with the May 2017 Financing Agreement executed with the Institutional Investor, and to allow for the right of the HNW Investor to acquire an additional $200,000 of January 2018 Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.03 per share (the “$0.03 Notes ”).

 

As of the date of this Annual report, the HNW Investor has purchased an additional aggregate of $50,000 in principal amount of the $0.03 Notes and has indicated he will purchase the remaining $150,000 of the $0.03 Notes.

 

All the above securities were issued pursuant to the exemption from registration under the Securities Act afforded by Section 4(a)(2) thereof and Regulation D thereunder.

 

42

 

Item 6. Selected Financial Data.

 

Not applicable.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Results of Operations

 

Year ended December 31, 2018 compared to year ended December 31, 2017

 

Revenues

 

We had revenues of $1,136,599 for the year ended December 31, 2018, as compared to revenues of $966,382 for the year ended December 31, 2017. Our revenues during the first quarter and part of the second quarter of 2017 were adversely impacted as a result in the delay in receiving OLCC licensing for our Portland retail outlet until May 2, 2017, which rendered such location unable to process legal recreational sales for the first four calendar months of 2017, which was offset in part by sales from our third retail location (and second Kaya Shack™ Marijuana Superstore), which received its OLCC license and commenced recreational and medical marijuana sales in March 2017.

 

Cost of Sales

 

We had a cost of sales of $494,088 on revenues of $1,136,599 for the year ended December 31, 2018 versus a cost of sales of $394,424 on revenues of $966,382 for the year ended December 31, 2017.

 

Operating Expenses

 

General and administrative were $883,138 for the year ended December 31, 2018, as compared to $1,313,254 for the year ended December 31, 2017. Salaries and wages were $574,107 for the year ended December 31, 2018, as compared to $436,163 for the year ended December 31, 2017. The increases in these expense categories from 2017 to 2018, reflects our increased level of operations. Professional fees were $ 2,055,893 for the year ended December 31, 2018, as compared to $809,808 for the year ended December 31, 2017, reflecting the completion of licensing work with respect to the Company’s third and fourth retail outlets and the resolution of certain outstanding litigation involving zoning for the Kaya Farms grow facility in Eugene, Oregon. After giving effect to all of the foregoing, total operating expenses were $3,513,138 for the year ended December 31, 2018, as compared to $2,559,225 for the year ended December 31, 2017. Accordingly, our operating loss was $2,870,627 for the year ended December 31, 2018, as compared to $1,987,267 for the year ended December 31, 2017.

 

Interest expense

 

Interest expense was $541,038.00 for the year ended December 31, 2018, as compared to $354,374 for the year ended December 31, 2017, reflecting additional debt incurred in 2018 to fund expansion of our operations.

 

Net Income (Loss)

 

After giving effect to an operating loss of $2,870,627, interest expense of $541,038, amortization of debt discount of $2,583,712, derivative liabilities expense of $3,370,329 offset by other income from a change in derivative liabilities expense of $13,900,712 (arising from the stabilization of our stock prices which reduced the volatility factors used in the derivative calculations), we had net income from non-controlling interest of $209,807.00 for the year ended December 31, 2018. This compares to a net loss of $15,090,593 for the year ended December 31, 2017, after giving effect to an operating loss of $1,987,267, interest expense of $354,374, legal settlement costs of $247,500, amortization of debt discount of $2,267,026, derivative liabilities expense of $18,377,623 and loss on extinguishment of debt of $67,442 offset by other income from a change in derivative liabilities expense of $8,221,485 (arising from the stabilization of our stock prices which reduced the volatility factors used in the derivative calculations.)

 

43

 

Liquidity and Capital Resources

 

Overview

 

During 2018 our cash position decreased by $206,950 to $111,512 and our negative working capital decreased by $8,191,298 to $23,651,967, excluding derivative liabilities.

 

As of December 31, 2018, our working capital consisted of cash of $111,512, inventories of $131,542 and prepaid expenses of $20,541.

 

Our current liabilities include accounts payable and accrued expenses of $562,016, accounts payable and accrued expenses-related parties of $7,737, accrued interest of $659,169, convertible notes payable- net of discount of $2,894,294, notes payable of $9,312 and derivative liabilities of $19,783,034.

 

The following table sets forth the major sources and uses of cash for the years ended December 31, 2018 and 2017:

 

    2018     2017  
Net cash used in operating activities   $ 1,331,574     $ 2,214,244  
Net cash used in investing activities   $ 195,238       749,812  
Net cash provided by financing activities   $ 1,319,862       2,975,634  
Net (decrease) increase in cash     (206,950 )   $ 11,578

 

Cash Used in Operating Activities

 

During 2018, we used cash of $1,331,574 in operating activities, as compared to cash of $2,214,244 in 2017.

 

Cash Used in Investing Activities

 

During 2018, we used cash of $195,238 in investing activities, as compared to $749,812 in 2017. Expenditures in 2018 consisted of property and equipment. Expenditures in 2017 were related to the purchase of our 26-acre real property in Lebanon, Linn County, Oregon, the buildout of our third retail store, the buildout of our fourth retail outlet in Salem, Oregon, the purchase of delivery vehicles and the purchase of furniture and equipment.

 

Cash Provided by Financing Activities

 

During 2018, $1,075,333 of convertible debt was issued and $300,000.00 of restricted stock was issued pursuant to private placements that were sold to provide working capital, as compared to $3,150,000 of convertible debt in 2017. The Company used $55,471 and $254,366 to repay equipment debt and convertible debt in 2018 and 2017, respectively.

 

Additional Capital

 

As of December 31, 2018, we had cash of $111,512 and a working capital deficiency of $23,651,967.

 

Management believes that it will require additional capital, in addition to anticipated revenues from operations to fund expansion of the Company’s operations and ultimately achieve profitability. The Company intends to seek such additional capital from further private offerings of equity and/or debt securities. However, we may not be successful in raising additional capital on commercially reasonable terms, if and when needed, in which case our business, financial condition, cash flows and results of operations may be materially and adversely affected.

 

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Critical Accounting Estimates

 

The following are deemed to be the most significant accounting estimates affecting us and our results of operations:

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.

 

To confirm, all of our OLCC licensed cannabis retail sales operations are conducted and operated on a “cash and carry” basis- product(s) from our inventory accounts are sold to the customer(s) and the customer settles the account at time of receipt of product via cash payment at our retail store; the transaction is recorded at the time of sale in our point of sale software system. Revenue is only reported after product has been delivered to the customer and the customer has paid for the product with cash.

 

To date the only other revenue we have received is for ATM transactions and revenue from this activity is only reported after we receive payment via check from the ATM service provider company.

 

Fair value of financial instruments

 

The Company follows the provisions of ASC 820. This Topic defines fair value, establishes a measurement framework and expands disclosures about fair value measurements. We apply these provisions to estimate the fair value of our financial instruments including cash, accounts payable and accrued expenses, and notes payable.

 

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. Our 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.

 

45

Recently Issued Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.

 

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 . The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting , which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective date. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers . Since ASU 2014-09 was issued, several additional ASUs have been issued to clarify various elements of the guidance. These standards provide guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted the new standard to be effective with our first interim reporting period for the three months ended December 31, 2017. We use the modified retrospective method of adoption. We have completed an initial evaluation of the potential impact from adopting the new standard, including a detailed review of performance obligations for all material revenue streams. Based on this initial evaluation, adoption does not have a material impact on our financial position, results of operations, or cash flows. Related disclosures have been expanded in line with the requirements of the standard.

 

There are no other recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on its financial position, results of operations, or cash flows.

 

46

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data.

 

 See the Index of Consolidated Financial Statements on page F-1 below

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

Termination of L & L CPAS, P.A.

(i) Effective December 11, 2018, we terminated L & L CPAS, P.A. (“ L & L ”), as our independent registered public accounting firm. The decision to terminate L & L was unanimously approved by the board of directors of KAYS on December 11, 2018.

(ii) The report of L & L for the fiscal years ended December31, 2017 and January 31, 2016, did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that such reports on the Company’s financial statements contained an explanatory paragraph in respect to the substantial doubt about its ability to continue as a going concern.

(iii) During the fiscal years ended December 31, 2017 and January 31, 2016, and the subsequent period through the date of termination (A) there have been no disagreements with L & L, whether or not resolved, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of L & L, would have caused L & L, to make reference to the subject matter of the disagreement in connection with their respective reports; (B) no such disagreement was discussed with the Company’s board of directors or any committee of the board of directors of the Company; and (C) there have been no “ reportable events ” as described in Item 304(a)(1)(v) of Regulation S-K.

Engagement of M&K CPAS, PLLC

(i) Effective December 11, 2018, KAYS engaged M&K CPAS, PLLC (“ M&K ”) as our independent public registered accounting firm. The engagement of M&K was approved by the Company’s board of directors on December 11, 2018.

(ii) During the Company’s two most recent fiscal years and any subsequent interim period prior to M&K’s engagement as the Company’s new independent registered public accounting firm , the Company did not consult with M&K regarding either (A) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements; or (B) any matter that was either the subject of a disagreement as defined in Item 304 of Regulation S-K or a “ reportable event ” as such term is described in Item 304 

Disclosure controls and procedures

 

Under the direction of our Chairman and President, who is our principal, executive, financial and accounting officer, we evaluated our disclosure controls and procedures as of December 31, 2018. Our Chairman and President, who is our principal, executive, financial and accounting officer, concluded that our disclosure controls and procedures were not effective as of December 31, 2018.

 

We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chairman and President, who is our principal, executive, financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosures.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman and President, who is our principal, executive, financial and accounting officer, , of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of our fourth fiscal quarter covered by this report. Based on the foregoing, our Chairman and President concluded that our disclosure controls and procedures were not effective.  It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management of is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our Chairman and President, who is our principal, executive, financial and accounting officer and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

47

 

  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.

 

The Company’s Chairman and President, who is our principal, executive, financial and accounting officer, r assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018.  In making this assessment, the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“ COSO ”) in Internal Control-Integrated Framework (2013).  The COSO framework is based upon five integrated components of control: control environment, risk assessment, control activities, information and communications and ongoing monitoring.

 

Based on the assessment performed, the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, has concluded that the Company’s internal control over financial reporting, as of December 31, 2017, is not effective to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of its financial statements in accordance with generally accepted accounting principles.  Further, the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, has identified material weaknesses in internal control over financial reporting as of December 31, 2018.

 

Based on an evaluation, the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of December 31, 2018 (the “ Evaluation Date ”), to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms; and (ii) accumulated and communicated to the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure.  Each of the following is deemed a material weakness in our internal control over financial reporting:

 

  We do not have an audit committee.  While we are not currently obligated to have an audit committee, including a member who is an “ audit committee financial expert ,” as defined in Item 407 of Regulation S-K, under applicable regulations or listing standards; however, it is management’s view that such a committee is an important internal control over financial reporting, the lack of which may result in ineffective oversight in the establishment and monitoring of internal controls and procedures.

 

  We did not maintain proper segregation of duties for the preparation of our financial statements.  We currently have only one officer overseeing all transactions.  This has resulted in several deficiencies, including the lack of control over preparation of financial statements and proper application of accounting policies

   Lack of controls over related party transactions: As  of  December  31,  2018,  the  Company  did  not  establish  a  formal  written  policy  for  the  approval, identification and authorization of related party transactions.

The Company’s Chairman and President, who is our principal, executive, financial and accounting officer, believes that the material weaknesses set forth in the two items above did not have an effect on our financial results. However, the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, believes that the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and financial procedures, which could result in a material misstatement in our consolidated financial statements in future periods.

 

48

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal controls or in other factors that could affect these controls during the fourth quarter of the year ended December 31, 2018 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Item 9B. Other Information

 

None

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.  

 

Directors and Executive Officers

 

Our directors and executive officers and their respective ages and titles are as follows:

 

Name Age Position(s) and Office(s) Held
Craig Frank 59

Chairman of the Board, President, Chief Executive Officer, Acting Chief Financial Officer, Director

Carrie Schwarz 59 Director
Jordi Arimany 59 Director
Bruce Burwick 70 Director

 

Set forth below is a brief description of the background and business experience of our directors and executive officers.

 

Craig Frank became Chairman of the Board, President, Chief Executive Officer and a Director of the Company in January 2010. He assumed the appointed position of acting Chief Financial Officer in 2012. For the past 15 years, Mr. Frank has served as Chairman and CEO of Tudog International Consulting, a Florida-based company with business advisory, business development, market research, training, and merchant banking divisions. During his tenure at Tudog, Mr. Frank has worked with more than 200 companies from 19 countries. In addition, in such capacity, he developed the business plan for a biofuels company based in Central America, and is the co-founder of the Company’s predecessor, which we acquired in January 2010. He remains Tudog’s Chairman. Mr. Frank is a widely published author with articles on business matters featured in magazines and newsletters internationally, including publications of the Guatemala America Chamber of Commerce, the Israel Export Institute, the Romania Chamber of Commerce, and the World Association of Small and Medium Sized Enterprises. He is also an in-demand speaker at international conferences, including the Florida Sterling Council, the International Project Management Association, The Central American Center for Entrepreneurship, the Israel Center for Entrepreneurial Studies, and the Pino Center for Entrepreneurship at Florida International University. The Company believes that Mr. Frank’s consulting and entrepreneurial experience brings significant value to our management team.

 

Carrie Schwarz, who became a director in January 2010, has served as the Managing Partner of Athena Assets Management, a New York based hedge fund specializing in investments of special situation publicly traded securities since 2002. Ms. Schwarz has also been a Portfolio Manager at Metropolitan Capital, a New York based hedge fund. From 1999 to 2001 Ms. Schwarz was an executive at Bank of America Securities, where she built and managed a proprietary Risk Arbitrage Department. From 1991 to 1999 she founded and managed Athena Investment Partners, L.P., a hedge fund that focused on special situations. Prior thereto, she was with American Porters, L.P., a hedge fund that focused on risk arbitrage, which she joined as a junior analyst in 1995 and ultimately rose to become Head of Research and a partner. Ms. Schwarz serves on the board of directors of the American Friends of the Weizmann Institute of Science. We believe that her financial industry experience makes her a valuable member of the board of directors.

 

Jordi Arimany , who became a director in January 2010, has served as Vice President of Business Development of First Diversity Management Group, a Cleveland, Ohio-based human capital services company since 2008. From 2007 to 2008 he served as Associate to the Executive Vice President of Bunco Industrial, in Guatemala City, one of the largest private banks in Central America. From 2000 to 2007 he was National Business Development Manager to LAFISE (Latin American Financial Services), a Miami, Florida-based financial services firm operating throughout Latin America. Mr. Arimany has a Bachelor’s degree in Business Administration from John Brown University and a Master’s degree in Business Administration from Regent University. We believe that his Latin American financial and business experience makes him a valuable member of the board of directors.

 

Bruce R. Burwick , who became a director in January 2019, has been a serial entrepreneur for over 50 years. His business ventures have included both domestic and international start-ups including product concept, manufacturing, wholesale and retail distribution, marketing and e-commerce. This includes private label manufacturing for several NYSE listed companies. In Oct 2015 Mr. Burwick sold Dynamic Health Laboratories, Inc to a NYSE listed company. Since 2014, has invested in both Medical and Recreational cannabis businesses  

49

 

Terms of Office

 

Our directors are appointed for a one-year term to hold office until the next annual meeting of our stockholders and until a successor is appointed and qualified, or until their removal, resignation, or death. Executive officers serve at the pleasure of the board of directors.

 

Board Committees

 

Two of our three directors are “ independent ” within the scope of the rules adopted by the NASDAQ Stock Market and the SEC: Ms. Schwarz and Mr. Arimany. However, our board of directors does not currently have an audit committee, a compensation committee, or a corporate governance committee. We plan to establish such committees in the near future.

 

Board of Directors Role in Risk Oversight

 

Members of the board of directors have periodic meetings with management and the Company’s independent auditors to perform risk oversight with respect to the Company’s internal control processes. Our board is currently comprised of a majority of independent directors. The Company believes that the board’s role in risk oversight does not materially affect the leadership structure of the Company.

 

Code of Ethics

 

We adopted a Code of Business Conduct and Ethics (“ Ethics Code ”) on February 28, 2013 that includes provisions ranging from conflicts of interest to compliance with all applicable laws and regulations. All officers, directors and employees are bound by this Ethics Code, violations of which may be reported to any independent member of the board of directors.

 

Item 11.  Executive Compensation

 

Summary Compensation Table  

 

The table below summarizes all compensation awarded to, earned by, or paid to our Chief Executive Officer and acting Chief Financial Officer, who is our sole executive officer, for 2018 and 2017.

 

SUMMARY COMPENSATION TABLE

 

Name and principal position   Year     Salary ($)     Bonus ($)     Stock Awards (#)     Option Awards  (#)     Non-Equity Incentive Plan Compensation($)     Nonqualified Deferred Compensation Earnings ($)     All Other Compensation ($)     Total ($)  

Craig Frank 

CEO/Acting CFO

 

  2018     $300,000           3,000,000 (1)                             $300,000  
    2017     $300,000    50,000     2,000,000 (1)                              $350,000  

 

 

 (1)   Represents “ restricted ” shares of our common stock valued at $0.10 per share.

 

Mr. Frank's compensation was paid to Tudog International Consulting, Inc., of which Mr. Frank is the Chairman and a principal.

50

Employment and Consulting Agreements

 

The Company is currently not a party to any employment agreement with its executive officers. The Company has consulting agreements with Tudog International Consulting, of which firm Mr. Frank is Chairman and a Principal, for the services of Mr. Frank as CEO and acting CFO.

 

Outstanding Equity Awards at Fiscal Year-End

 

None.

 

Compensation of Directors Table

 

The table below summarizes all compensation paid to our nonemployee directors for 2018.

 

Name   Fees Earned or Paid in Cash   Stock Award   Option Awards   Nonequity Incentive Plan Compensation   Nonequity Deferred Compensation Earnings   All Other Compensations Total
 Carrie Schwarz     100,000 (1)           —  100,000 
 Jordi Arimany     100,000 (1)           —  100,000 

 

 

 (1) Represents restricted shares of common stock granted. 

 

Narrative Disclosure to the Director Compensation Table

 

Our non-employee directors are compensated with common stock. All such directors receive 100,000 “ restricted ” shares of common stock annually for their service.

 

2011 Incentive Stock Plan

 

Our 2011 Incentive Stock Plan, as amended (the “ Plan ”) provides for equity incentives to be granted to our employees, executive officers or directors or to key advisers or consultants. Equity incentives may be in the form of stock options with an exercise price not less than the fair market value of the underlying shares as determined pursuant to the Plan, restricted stock awards, other stock- based awards, or any combination of the foregoing. The Plan is administered by the board of directors.

 

A total of 30,000,000 shares of KAYS common stock has been reserved for issuance under the Plan. As of December 31, 2018. awards covering 22,295,000 shares have been issued under the Plan and 7,705,000 shares of common stock were available for issuance under the Plan.

 

51

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth the beneficial ownership of our common stock by each director and executive officer, by all directors and executivesofficers as a group and by each other person known by us to beneficially own 5% or more of our common stock as of the date of this Annual Report. The address of each such person is c/o the Company 305 S. Andrews Ave, Suite 209, Fort Lauderdale, FL, 33301.

 

Name and Address of   Number of Shares of   Percentage    
Beneficial Owner   Common Stock   of Shares    
Directors and                        
executive officers:                        
Craig Frank (1)(2)     26,965,129       12.40 %        
Carrie Schwarz     300,000       *       *  
Jordi Arimany     637,500       *       *  
Bruce Burwick     14,600,000       6.75 %        
All directors and                        
executive officers,                        
as a group (three                        
persons) (1)(2)     42,502,629       19.58 %        
Other 5% or greater                        
stockholders:                        
Ilan Sarid (3)     44,661,818       20.58 %%        

 

* Less than 1%

 

1. includes shares beneficially owned by Tudog International Consulting and Drora Frank.

 

2. Includes 21,664,985 shares of common stock issuable upon conversion of 50,000 shares of our Series C Convertible Preferred Stock held by Mr. Frank, which shares vote on an “as converted” basis.

 

3. Includes 21,664,985 shares of our common stock issuable upon conversion of 50,000 shares of our Series C Convertible Preferred Stock, which are issuable upon conversion of certain convertible promissory notes of the Company held by Mr. Sarid

 

52

 

The persons named above have full voting and investment power with respect to the shares indicated. Under the rules of the SEC, a person (or group of persons) is deemed to be a “beneficial owner” of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security, which that person has the right to acquire within 60 days, such as options or warrants to purchase our common stock.

 

  Securities Authorized for Issuance under Equity Compensation Plans 

 

Plan category   Number of securities to be issued upon exercise of outstanding options, warrants and rights   Weighted-average  exercise price of outstanding options, warrants and rights   Number of securities remaining available for future insurance under equity compensations plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders   shares (1)       shares (1)
             
Equity compensation plans not approved by security holders   0 shares   n/a   0 shares
             

 

(1) Represents shares of common stock issued or reserved for issuance under our 2011 Incentive Stock Plan.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

Related Party Transactions

 

At December 31, 2014, 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 no interest accrued until December 31, 2015. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares of KAYS. The remaining $250,000 is not convertible.

 

On December 31, 2015, the Company entered into an agreement to extend the debt until December 31, 2017 with no additional interest for the extension period. On January 1, 2018 the Company entered into an agreement to further extend the debt until December 31, 2021 with no additional interest for the extension period.

 

At December 2017, the company was indebted to Craig Frank, Chairman, CEO and Acting CFO for KAYS, in the amount of $7,737 for travel and miscellaneous expenses incurred by Mr. Frank from travel and related activities in Oregon.

 

In each of 2017 and 2018, the Company issued stock grants to Jordi Arimany and Carrie Schwarz for 100,000 shares of KAYS stock for their service as board members. The stock was issued from Treasury as restricted stock and carries a one-year restriction before it can be registered for resale pursuant to Rule 144.

 

In 2017 and 2018, the Company issued stock grants to Craig Frank for 2,000,000 and 3,000,00 shares of KAYS stock respectively, pursuant to his employment agreement via board resolution. Jordi Arimany and Carrie Schwarz for 100,000 shares of KAYS stock. The stock was issued from Treasury as restricted stock and carries a one year restriction before it can be registered for resale pursuant to Rule 144.

 

In August, 2018 KAYS entered into an agreement with Bruce Burwick, (who subsequently joined the Board of Directors and became an affiliate of the Company) to purchase the Eugene, Oregon based Sunstone Farms grow and manufacturing facility, which is licensed by the OLCC for both the production (growing) of medical and recreational marijuana flower and the processing of cannabis concentrates/extracts/edibles. The purchase includes a 12,000 square foot building housing an indoor grow facility, as well as equipment for growing and extraction activity. KAYS paid Bruce Burwick $1,300,000.00 for the real property and schedule of equipment that was and is used to operate the facility

 

Bruce Burwick acquired the property for satisfaction of a promissory note due him for $1,433,000.00. The purchase price of $1.3 million for the OLCC licensed marijuana production and processing facility, consisting of the building and equipment was paid for by the issuance of 12 million shares of KAYS restricted stock to the seller at closing. The Company valued the shares at $1,417,200. The shares carry a lock-up restriction that allows for their staged eligibility for resale over a 61-month period from the date of the purchase of the facility by KAYS.

 

Additionally, the seller purchased 2.5 million restricted shares for $250,000 in cash in a private transaction with the Company. The proceeds from the sale of those shares were and are being used for acquisition related expenses, transitional operating costs and facility capital improvements with respect to the production and processing facility we purchased

 

On August 24, 2018 the Company entered into a Consulting Agreement with Bruce Burwick and paid him 100,000 shares of KAYS stock via a stock grant from the 2011 Employee Stock Incentive Plan for services rendered to the Company through December 31. 2018. The stock was valued by the Company at $11,810. 

   

For more information please see Related Party Transactions, Note 11 in the Financials.

 

Review, Approval and Ratification of Related Party Transactions

 

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 shareholders. However, all matters relating to the compensation and stock awards for such persons were approved by the board of directors prior to implementation.

 

53

Item 14. Principal Accountant Fees and Services.

 

Audit Fees

 

The following is a summary of the fees billed to us for professional services (a) for the year ended December 31, 2018 by M&K CPAS, PLLC (our independent public registered accounting firm for 2018) and (b) for the year ended December 31, 2017 by L+L CPAS, P.A. our independent public registered accounting firm for 2017).

 

    2018   2017
Audit fees   $ 58,000     $ 52,500  
Audit-related fees     -0-       -0-  
Tax fees     -0-       -0-  
All other 
fees
    -0-       -0-  
      58,000     $ 52,500  

Audit fees consist of billings for the audit of the Company’s consolidated financial statements included in our Annual Reports on Form 10-K and reviews of the consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q.

 

The Company does not have an Audit Committee. It is the Company’s policy to have its Chief Executive Officer preapprove all audit and permissible non-audit services provided by the independent public accountants, subject to approval by the Board of Directors.

 

These services may include audit, audit-related, tax and other services. Pre-approval is generally for up to one year, is detailed as to the particular service or category of services and is generally subject to a specific budget. Unless there are significant variations from the pre-approved services and fees, the independent public accountants and management generally are not required to formally report to the Board of Directors regarding actual services and related fees.

 

54

PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

 

 

a)   The following documents are filed as part of this Annual Report:

 

(1)   Financial Statements – The following Consolidated Financial Statements of the Company are contained in Item 8 of this Annual Report:

 

  Reports of Independent Registered Public Accounting Firms

 

  Consolidated Balance Sheets at December 31, 2018 and 2017

 

  Consolidated Statements of Operations for the years ended December 31, 2018 and 2017

 

  Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2018 and 2017

 

  Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 20176

 

  Notes to the Consolidated Financial Statements.

 

(2)   Financial Statement Schedules were omitted, as they are not required or are not applicable, or the required information is included in the Consolidated Financial Statements.

 

(3)   Exhibits – The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Exchange Act:

 

55

 

Exhibit No.   Description of Exhibit  
3.1   Certificate of Incorporation, as amended (1)(2)

 

3.2   Bylaws, as amended (1)

 

10.1   Share Exchange Agreement dated February 3, 2010 by and among Netspace International, Inc. and the shareholders of Alternative Fuels Americas, Inc. (1)

 

10.2   2011 Incentive Stock Plan, as amended (1) +

 

10.6   Form of 8% Convertible Promissory Note (1)

 

10.5   Consulting Agreement between Registrant and Tudog International Consulting, Inc . (1) +

 

10.6   Office Lease for premises located at 305 South Andrews Avenue, Suite 209, Fort Lauderdale, FL 33301 (3)

 

10.9   Letter Agreement effective December 1, 2011 between Registrant and Ilan Sarid (1)

 

10.10   Amendment to Consulting Agreement between Registrant and Tudog International Consulting, Inc. (1) +

 

10.11   Amendment to Consulting Agreement between Registration and The Tudog Group (3) +

 

21.1   Subsidiaries of Registrant (4)

 

23.1   Consent of M&K CPAS LLC (5)

 

23.2   Consent of L&L CPAS, P.A. (5)

 

31.1   Section 302 Certification (5)  

 

32.1   Section 906 Certification (5)

 

 

(1)   Filed as an Exhibit to the Company’s Registration Statement on Form S-1, as amended (File No. 333-177532) and incorporated herein by reference.

(2)

 

 

 

Amendments to the Certificate of Incorporation are filed as Exhibits to the Company’s Current Reports on Form 8-K dated April 23, 2015 and March 22, 2017 and are incorporated herein by reference.

 

 

 

(3)   Filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by reference.

 

(4)  

Filed as an Exhibit to the Company’s annual Report on Form 10-K for the year ended December 31, 2017 and Incorporated herein by reference.

 

(5)   Filed herewith.

 

+ Management compensation arrangement.

56

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: April 19, 2019

 

  KAYA HOLDINGS, INC.
     
  By: /s/ Craig Frank
    Craig Frank
   

Chairman of the Board, President, Chief Executive Officer, Acting Chief Financial Officer

(Principal Executive, Financial and Accounting Officer

       

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, this Annual Report on Form 10K has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

 

 

Signature  Title Date
     
     
/ s/ Craig Frank Chairman of the Board, President, Chief Executive Officer,  
Craig Frank

Acting Chief Financial Officer and Director (Principal Executive,

Financial and Accounting Officer)

April 19  , 2019
     
     
     
/s/ Carrie Schwarz Director April 19, 2019
Carrie Schwarz    
     
     
/s/ Jordi Arimany Director April 19, 2019 
Jordi Arimany    

 

57

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Reports of Independent Registered Public Accounting Firms F-1
   
Consolidated Balance Sheets at December 31, 2018 and 2017  F-3
   
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017  F-4
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 F-5
   
Consolidated Statements of Changes in Net Capital Deficiency for the Years Ended December 31, 2018 and 2017 F-6
   
 
   
Notes to Consolidated Financial Statements  F-7

 

58

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Kaya Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Kaya Holdings, Inc. (the Company) as of December 31, 2018, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the period ended December 31, 2018, and the related notes and schedules (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. The financial statements of Kaya Holdings, Inc. as of December 31, 2017 were audited by other auditors, whose report dated April 17, 2018 expressed an unqualified opinion on those statements.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company suffered a net loss from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

We consent to the incorporation by reference of our report dated April 18, 2019 relating to our audit of the consolidated financial statements of Kaya Holdings, Inc. that appear in this Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

/s/ M&K CPAS, PLLC

www.mkacpas.com

Houston, Texas

April 19, 2019

 

We have served as the Company’s auditor since 2018.

 

  F- 1  

 

 

19720 Jetton Road,

3rd Floor Cornelius, NC 28031

Tel: 704-897-8336 Fax: 704-919-5089

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and

Kaya Holdings, Inc. and Subsidiaries

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Kaya Holdings, Inc. and Subsidiaries (“the Company”) as of December 31, 2017 the related statements of operations, stockholders’ deficit, cash flow and the related notes (collectively referred to as the “financial statements”) for the year ended December 31, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement based on our audit. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations, changes in stockholders’ deficit and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statement based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

The Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has an accumulated deficit, recurring losses, and expects continuing future losses, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ L&L CPAS, PA

L&L CPAS, PA

Certified Public Accountants

Cornelius, NC

The United States of America

April 17, 2018

 

The firm has served this client since November 2014.

 

  F- 2  

 

Kaya Holdings, Inc. and Subsidiaries

Consolidated Balance Sheet

December 31, 2018 and 2017           

 

ASSETS                
    (Audited)
December 31, 2018
    (Audited)
December 31, 2017
 
CURRENT ASSETS:                
Cash and equivalents   $ 111,512     $ 318,462  
Inventory-net of allowance     131,542       118,296  
Prepaid expenses     20,541       9,093  
Total current assets     263,595       445,851  
                 
L ong-term or Non-current ASSETS:                
Deposits     31,523       98,497  
Property and equipment, net     2,348,780       897,565  
Total other assets     2,380,303       996,062  
                 
Total assets   $ 2,643,898     $ 1,441,913  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)                
                 
CURRENT LIABILITIES:                
Accounts payable and accrued expense   $ 562,016     $ 464,461  
Accounts payable and accrued expense-related parties     7,737       8,923  
Accrued interest     659,169       302,341  
Convertible notes payable-related party-net of discount     —         500,000  
Net of discount                
Convertible notes payable-net of discount     2,894,294       355,000  
Notes payable     9,312       64,782  
Notes payable-related party     —         250,000  
Derivative liabilities     19,783,034       30,343,609  
Total current liabilities     23,915,562       32,289,116  
                 
LONG TERM LIABILITIES:                
Convertible notes payable-related party-net of discount     500,000       —    
Convertible notes payable-net of discount     1,283,557       1,555,206  
Notes payable-related party     250,000       —    
Total long term liabilities     2,033,557       1,555,206  
                 
Total liabilities     25,949,119       33,844,322  
                 
STOCKHOLDERS' EQUITY (DEFICIT):                
Convertible preferred stock, Series C, par value $.001; 10,000,000 shares authorized;                
49,900 and 49,900 issued and outstanding at December 31, 2018 and 2017     50       50  
, respectively                
Common stock , par value $.001;  500,000,000 shares authorized;                
165,812,128 shares issued as of December 31, 2018 and                
  138,993,087 shares issued as of December 31, 2017     165,812       138,993  
Subscriptions payable     397,209       152,796  
Additional paid in capital     17,100,137       12,811,671  
Accumulated deficit     (39,924,912 )     (44,672,209 )
Non-controlling interest     (1,043,517 )     (833,710 )
Net stockholders' equity/(deficit)     (23,305,221 )     (32,402,409 )
                 
Total liabilities and stockholders' equity/(deficit)   $ 2,643,898     $ 1,441,913  

 

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

  F- 3  

 

               

Kaya Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

(Audited)

 

    For the Year   For the Year
    Ended   Ended
    December 31, 2018   December 31, 2017
         
Net sales   $ 1,136,599     $ 966,382  
                 
Cost of sales     494,088       394,424  
                 
Gross profit     642,511       571,958  
                 
Operating expenses:                
Professional fees     2,055,893       809,808  
Salaries and wages     574,107       436,163  
General and administrative     883,138       1,313,254  
Total operating expenses     3,513,138       2,559,225  
                 
Operating loss     (2,870,627 )     (1,987,627 )
                 
Other income(expense):                
Interest expense     (541,038 )     (354,374 )
Legal settlement     —         (247,500 )
Amortization of debt discount     (2,583,712 )     (2,267,026 )
Derivative liabilities expense     (3,370,329 )     (18,377,623 )
Gain (loss) on extinguishment of debt     —         (67,442 )
Loss     —         (10,846 )
Change in derivative liabilities expense     13,900,712       8,221,485  
Other income (expense)     2,484       —    
Total other income (expense)     7,408,117       (13,103,326 )
                 
Net income (loss)     4,537,490       (15,090,593 )
                 
Net (loss) attributed to non-controlling interest   209,807     208,800
                 
Net income (loss) attributed to Kaya Holdings, Inc.     4,747,297       (14,881,793 )
                 
Net income (loss) per common share - Basic   $ 0.03     $ (0.12 )
                 
Net income (loss) per common share - Diluted   $ 0.01     $ (0.12
                 
Weighted average number of common shares outstanding - Basic   150,208,343     127,972,813  
                 
Weighted average number of common shares outstanding - Diluted   382,809,688     127,972,813  

 

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

  F- 4  

 

 

Kaya Holdings, Inc. and Subsidiaries

Consolidated Statement of Cashflows

(Audited)

 

    For the Year   For the Year
    Ended   Ended
    December 31, 2018   December 31, 2017
OPERATING ACTIVITIES:                
Net income/(loss)   $ 4,747,297     $ (15,090,593 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Net loss attributable to non-controlling interest     (209,807 )     (208,800 )
Depreciation     161,223       68,166  
Imputed interest     69,926       30,000  
Loss (gain) on extinguishment of debt     —         67,442  
Loss on disposal of fixed assets     —         10,846  
Derivative expense     3,370,329       18,377,623  
Change in derivative liabilities     (13,900,712 )     (8,221,485 )
Amortization of debt discount     2,583,712       2,267,026  
Stock to be issued for services - related parties     942,400       —    
Stock to be issued for services     301,510       127,010  
Stock issued for interest     —         52,536  
Changes in operating assets and liabilities:                
Prepaid expense     (11,447 )     (4,594 )
Inventory     (13,246 )     (34,299 )
Deposits     66,974       23,527  
Other assets     —         —    
Accrued interest     397,471       342,300  
Accounts payable and accrued expenses     162,796       (20,949 )
                 
        Net cash used in operating activities     (1,331,574 )     (2,214,244 )
                 
INVESTING ACTIVITIES:                
Purchase of property and equipment     (195,238 )     (749,812 )
Net cash used in investing activities     (195,238 )     (749,812 )
                 
FINANCING ACTIVITIES:                
Proceeds from common stock subscriptions     300,000       —    
Proceeds from convertible debt     1,075,333       3,150,000  
Payment on convertible debt     —         —    
Proceeds from Notes Payable     —         80,000  
Payments on notes payable     (55,471 )     (254,366 )
        Net cash provided by financing activities     1,319,862       2,975,634  
                 
NET INCREASE IN CASH     (206,950 )     11,578  
                 
CASH BEGINNING BALANCE     318,462       306,884  
                 
CASH ENDING BALANCE   $ 111,512     $ 318,462  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Taxes paid     —         —    
Interest paid     —         17,166  
                 
NON-CASH TRANSACTIONS AFFECTING OPERATING, INVESTING                
   AND FINANCING ACTIVITIES:                

Reclassification of derivative liability to additional paid in capital

   

1,184,821

         
Value of common shares issued for acquisition of fixed assets     1,417,200          
Value of common shares issued as payment of debt and interest     291,483       560,254  
Value of common shares issued as payment of interest         52,536  

Initial Derivative on Convertible notes payable

  $ 1,154,629     $  

 

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

  F- 5  

 

           

Kaya Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(Audited)

 

 

    Preferred Stock   Common Stock   Subscription
Payable
  Additional   Accumulated   Noncontrolling  

Total

Stockholders’

    Shares   Amount   Shares   Amount   Amount   Paid-In Capital   Deficit   Interest   Equity
Balance, December 31, 2016     49,900     $ 50       117,076,795     $ 117,076     $ 272,400     $ 9,035,740     $ (29,790,416 )   $ (624,910 )     (20,990,060 )
                                                                         
Reclassification of derivative liabilities to additional paid-in capital     —         —         —         —         —         2,960,979       —         —         2,960,979  
                                                                         
Imputed interest     —         —         —         —         —         30,000       —         —         30,000  
                                                                         
Common stock issued for debt conversion and interest     —         —         21,266,292       21,267       (77,234 )     616,222       —         —         560,255  
                                                                         
Common stock issued for services     —         —         650,000       650       (53,500 )     168,730       —         —         115,880  
                                                                         
Common stock to be issued for services     —         —         —         —         11,130       —                 —         11,130  
                                                                         
Net loss for the year ended December 31, 2017     —         —         —         —         —         —         (14,881,793 )     (208,800 )     (15,090,593 )
                                                                         
Balance, December 31, 2017     49,900     $ 50       138,993,087     $ 138,993     $ 152,796     $ 12,811,671     $ (44,672,209 )   $ (833,710 )   $ (32,402,409 )
                                                                         
Imputed interest     —         —         —         —         —         69,926       —         —         69,926  
                                                                         
Common stock issued for cash     —         —         3,000,000       3,000       —         297,000       —         —         300,000  
                                                                         
Common stock issued for services     —         —         2,200,000       2,200       65,000       234,310       —         —         301,510  
                                                                         
Common stock to be issued for acquisition of fixed assets     —         —         12,000,000       12,000       —         1,405,200       —         —         1,417,200  
                                                                         
Common stock issued for debt conversion and interest     —         —         3,419,041       3,419       179,413       161,009       —         —         343,841  
                                                                         
Pursuant director compensation policy     —         —         6,200,000       6,200       —         936,200       —         —         942,400  
                                                                         
Reclassification of derivative liability related to convertible notes     —         —         —         —         —         1,184,821       —         —         1,184,821  
                                                                         
Net loss     —         —         —         —         —         —         4,747,297       (209,807 )     4,537,490  
                                                                         
Balance, December 31, 2018     49,900     $ 50       165,812,128     $ 165,812     $ 397,209     $ 17,100,137     $ (39,924,912 )   $ (1,043,517 )   $ (23,305,221 )

 

 

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

  F- 6  

 

  

NOTE 1 – ORGANIZATION AND NATURE OF THE BUSINESS

 

Organization

 

Kaya Holdings, Inc. FKA (Alternative Fuels Americas, Inc.) is a holding company. The Company was incorporated in 1993 and has engaged in a number of businesses. Its name was changed on May 11, 2007 to NetSpace International Holdings, Inc. (a Delaware corporation) (“NetSpace”). NetSpace acquired 100% of Alternative Fuels Americas, Inc. (a Florida corporation) in January 2010 in a stock-for-member interest transaction and issued 6,567,247 shares of common stock and 100,000 shares of Series C convertible preferred stock to existing shareholders. Certificate of Amendment to the Certificate of Incorporation was filed in October 2010 changing the Company’s name from NetSpace International Holdings, Inc. to Alternative Fuels Americas, Inc. (a Delaware corporation). Certificate of Amendment to the Certificate of Incorporation was filed in March 2015 changing the Company’s name from Alternative Fuels Americas, Inc. (a Delaware corporation) to Kaya Holdings, Inc.

 

The Company has three subsidiaries, Alternative Fuels Americas, Inc, a Florida corporation, which is wholly-owned, Marijuana Holdings Americas, Inc., a Florida corporation (“MJAI”), which is majority-owned and 34225 Kowitz Road, LLC, a wholly-owned Oregon limited liability company which holds the Company’s recently acquired 26 acre property in Lebanon, Oregon on which it plans to develop a legal cannabis cultivation and manufacturing facility. MJAI develops and operates the Company’s legal cannabis retail operations in Oregon through controlling ownership interests in five Oregon limited liability companies: MJAI Oregon 1 LLC, MJAI Oregon 2 LLC, MJAI Oregon 3 LLC, MJAI Oregon 4 LLC and MJAI Oregon 5 LLC (Inactive).

 

Nature of the Business  

 

In January 2014, KAYS incorporated MJAI, a wholly-owned subsidiary, to focus on opportunities in the legal recreational and medical marijuana in the United States. MJAI has concentrated its efforts in Oregon, where through controlled Oregon limited liability companies, it initially secured licenses to operate a medical marijuana dispensary (an “MMD”) and following legalization of recreational cannabis use in Oregon, has secured licenses to operate four retail outlets and purchased 26 acres for development as a legal cannabis cultivation and manufacturing facility. The Company has developed the Kaya Shack™ brand for its retail operations.

 

On July 3, 2014 opened its first Kaya Shack™ MMD in Portland, Oregon.  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 outlet in Salem, Oregon, the Kaya Shack™ Marijuana Superstore. 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.

 

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) 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.

 

During August of 2017, we purchased 26 acres in Lebanon, Oregon, for development as a legal cannabis cultivation and manufacturing facility. The company is in the process of planning and permitting.

  F- 7  

 

 

On February 15, 2018, we received our OLCC recreational, medical and home delivery license for the Central Salem Kaya Shack TM outlet (Kaya Shack TM OLCC Marijuana Retailer License #4) a 3,100-square foot Kaya Shack TM Marijuana Superstore in Central Salem, Oregon. After various construction and permitting delays, On April 12, 2018, the location opened for business with both recreational and medical sales.

 

On August 18, 2018, the Company had concluded the purchase of the Eugene, Oregon based Sunstone Farms manufacturing facility, which is licensed by the OLCC for both the production of medical and recreational marijuana flower and the processing of cannabis concentrates/extracts/edibles. The purchase includes a 12,000 square foot building housing and indoor grow facility, as well as equipment for growing and extraction activity. The facility can produce in excess of 800 pounds cannabis flower annually as currently outfitted.

 

As part of planned expansion and renovations for the facility, the Company has begun the site improvements and is ramping up production to feed the existing four OLCC licensed cannabis retail stores in Oregon.

 

NOTE 2 – LIQUIDITY AND GOING CONCERN

 

The Company’s consolidated financial statements as of December 31, 2018 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 income of $4,747,297 for the year ended December 31, 2018 and a net loss of $14,881,793 for the year ended December 31, 2017. The increase in net income is due to the changes in derivative liabilities and the company continues to have operating losses. At December 31, 2018 the Company has a working capital deficiency of $23,651,967 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:

 

  the sale of additional equity and debt securities,  
  alliances and/or partnerships with entities interested in and having the resources to support the further development of the Company’s business plan,  
  business transactions to assure continuation of the Company’s development and operations,  
  development of a unified brand and the pursuit of licenses to operate recreational and medical marijuana facilities under the branded name.  
 

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.

 

  F- 8  

 

 

 

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 accompanying consolidated financial statements include the accounts of Kaya Holdings, Inc. and all wholly and majority-owned subsidiaries. All significant intercompany balances have been eliminated.

 

Wholly-owned subsidiaries:

· Alternative Fuels Americas, Inc. (a Florida corporation)
· 34225 Kowitz Road, LLC (an Oregon LLC)

 

Majority-owned subsidiaries:

· Marijuana Holdings Americas, Inc. (a Florida corporation)
o MJAI Oregon 1 LLC
o MJAI Oregon 2 LLC
o MJAI Oregon 3 LLC
o MJAI Oregon 4 LLC
o MJAI Oregon 5 LLC

 

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, 2018 is $131,542 and $118,296 as of December 31, 2017. No allowance as necessary as of December 31, 2018 and 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.

  

Real Property or Land is stated at cost and not depreciated. It is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount not be recoverable. 

 

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.

  F- 9  

 

 

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 anti-dilutive, 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:

 

 

Level 1 – Observable inputs that reflect quoted market prices in active markets

for identical assets or liabilities.

 

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.

 

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.

 

  Fair Value Measurements at December 31, 2018
    Level 1       Level 2       Level 3  
Assets                      
Cash $           111,512     $       $    
Total assets             111,512                          -                             -     
Liabilities                       
Convertible debentures, net of discounts of $1,191,264                      -                             -                 4,677,851  
Short term debt, net of discounts of $-0-                      -                    259,312                          -     
Derivative liability                      -                             -               19,783,034  
Total liabilities                      -                    259,312            19,783,034  
  $           111,512     $         (259,312)     $    24,460,885  
                       
                       
Fair Value Measurements at December 31, 2017
    Level 1       Level 2       Level 3  
Assets                      
Cash $           318,462     $       $    
Total assets             318,462                          -                             -     
Liabilities                       
Convertible debentures, net of discounts of $2,620,341                      -                             -                 2,410,206  
Short term debt, net of discounts of $-0-                      -                    314,782                          -     
Derivative liability                      -                             -               30,343,609  
Total liabilities                      -                    314,782            32,753,815  
  $           318,462     $         (314,782)     $    (32,753,815)  

 

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.

  F- 10  

 

 

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 Binomial 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 Binomial Option Model option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

 

  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.
  F- 11  

 

  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.
  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.
 

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.

 

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 Binomial option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

 

  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.
  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.
  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.
 

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.

 

  F- 12  

 

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

  

Effective January 1, 2018, the Company adopted ASC 606 – Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identifying the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 – Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. The Company believes that there are no material changes or financial impact to the 2017 Financials based on the adoption of ASC 606 – Revenues from Contracts with Customers.

 

To confirm, all of our OLCC licensed cannabis retail sales operations are conducted and operated on a “cash and carry” basis- product(s) from our inventory accounts are sold to the customer(s) and the customer settles the account at time of receipt of product via cash payment at our retail store; the transaction is recorded at the time of sale in our point of sale software system. Revenue is only reported after product has been delivered to the customer and the customer has paid for the product with cash.

 

To date the only other revenue we have received is for ATM transactions and revenue from this activity is only reported after we receive payment via check from the ATM service provider company.

 

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.

  F- 13  

 

 

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, 2018 and 2017.

 

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 January 2017, the FASB issued ASU No. 2017-01,  Business Combinations (Topic 805): Clarifying the Definition of a Business . The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, it (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace the missing elements. This ASU is the final version of proposed ASU 2015-330  Business Combinations (Topic 805) – Clarifying the Definition of a Business , which has been deleted. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. This ASU does not have a material impact on the Company’s financial statements.

 

In May 2017, the FASB issued ASU 2017-09,  Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting  to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718,  Compensation—Stock Compensation , to a change to the terms or conditions of a share-based payment award. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This ASU is the final version of proposed ASU 2016-360— Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting , which has been deleted. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. This ASU does not have a material impact on the Company’s financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

 

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 . The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.

 

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.

  F- 14  

 

 

 

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following at December 31, 2018 and December 31, 2017:  

    December 31, 2018   December 31, 2017
(Audited) (Audited)
ATM Machine   $ 11,000     $ 8,300  
Computer     22,736       15,833  
Furniture & Fixtures     49,408       39,655  
HVAC     25,000       -  
Land     697,420       516,076  
Leasehold Improvements     333,529       225,722  
Machinery and Equipment     405,233       143,661  
Sign     43,594       43,594  
Structural     1,017,359       -  
Vehicle     79,744       79,744  
Total     2,685,023       1,072,585  
Less: Accumulated Depreciation     (336,243 )     (175,020 )
Property, Plant and Equipment - net   $ 2,348,780     $ 897,565  

 

In August, 2018 KAYS entered into an agreement with Bruce Burwick, (who subsequently joined the Board of Directors and became an affiliate of the Company) to purchase the Eugene, Oregon based Sunstone Farms grow and manufacturing facility, which is licensed by the OLCC for both the production (growing) of medical and recreational marijuana flower and the processing of cannabis concentrates/extracts/edibles. The purchase includes a 12,000 square foot building housing an indoor grow facility, as well as equipment for growing and extraction activity. KAYS paid Bruce Burwick $1,300,000.00 for the real property and schedule of equipment that was and is used to operate the facility.

 

Bruce Burwick acquired the property for satisfaction of a promissory note due him for $1,433,000.00. The purchase price of $1.3 million for the OLCC licensed marijuana production and processing facility, consisting of the building and equipment was paid for by the issuance of 12 million shares of KAYS restricted stock to the seller at closing. The Company valued the shares at $1,417,200 based on the closing price of the stock the day the transaction closed. The shares carry a lock-up restriction that allows for their staged eligibility for resale over a 61-month period from the date of the purchase of the facility by KAYS.

 

Additionally, the seller purchased 2.5 million restricted shares for $250,000 in cash in a private transaction with the Company. The proceeds from the sale of those shares were and are being used for acquisition related expenses, transitional operating costs and facility capital improvements with respect to the production and processing facility we acquired

 

Depreciation and amortization expense totaled $161,223 and $68,166 for the years ended December 31, 2018 and 2017, respectively.

 

Depreciation and amortization expense total $161,223 and $68,166 for the years ended December 31, 2018 and 2017, respectively.

 

NOTE 5 – NON-CURRENT ASSETS

 

Other assets consisted of the following at December 31, 2018 and December 31, 2017:

 

   

December 31, 2018

(Audited)

 

December 31, 2017

(Audited)

Construction Deposits   $ -     $ 50,800  
Rent Deposits     22,032       38,206  
Security Deposits   $ 9,491     $ 9,491  
Non-Current Assets   $ 31,523     $ 98,497  

  F- 15  

 

NOTE 6 – 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 Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.05% to 2.63%, volatility ranging from 94.15% to 243.37%, trading prices ranging from $0.045 per share to $0.41 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 were $13,270,646 and $30,343,609 at December 31, 2018 and 2017, respectively.

 

See Below Summary Table

Convertible Debt Summary
  Debt Type Debt Classification Interest Rate Due Date  Ending
 CT  LT  12.31.18  12.31.17
               
A Convertible  X   10.0% 1-Jan-17           25,000  $       25,000
B Convertible  X   8.0% 1-Jan-19           65,700           65,700
C Convertible  X   8.0% 1-Jan-19           32,850           32,850
D Convertible  X   8.0% 1-Jan-19         209,047         209,047
O Convertible  X   8.0% 1-Jan-19         109,167         109,167
P Convertible  X   8.0% 1-Jan-19           52,767           52,767
Q Convertible  X   8.0% 1-Jan-19           52,050           52,050
R Convertible  X   8.0% Converted                  -            203,867
S Convertible  X   8.0% 1-Jan-19           50,400           50,400
T Convertible  X   8.0% 1-Jan-19         250,000         250,000
V Convertible  X   8.0% Converted                  -              25,000
W Convertible  X   8.0% Converted                  -              15,000
X Convertible  X     8.0% 1-Jan-19           66,800           60,000
BB Convertible  X   10.0% 1-Jan-19           50,000           50,000
CC Convertible  X   10.0% 1-Jan-19         100,000         100,000
EE Convertible      X 0.0% 31-Dec-21         500,000         500,000
KK Convertible  X   8.0% 1-Jan-19         150,000         150,000
LL Convertible  X   8.0% 1-Jan-19         600,000         600,000
MM Convertible  X   8.0% 1-Jan-19         100,000         100,000
NN Convertible  X   8.0% 1-Jan-19         500,000         500,000
OO Convertible  X   8.0% 1-Jan-19         500,000         500,000
PP Convertible    X 8.0% 1-Jan-20         500,000         500,000
QQ Convertible    X 8.0% 1-Jan-20         150,000         150,000
RR Convertible    X 8.0% 1-Jan-20         500,000         500,000
SS Convertible    X 8.0% 1-Jan-20         150,000         150,000
TT Convertible    X 8.0% 1-Jan-20         300,000                  -   
UU Convertible    X 8.0% 1-Jan-20         150,000                  -