Notes
to Condensed Consolidated Financial Statements
September
30, 2017
(Unaudited)
Note 1 -
Organization
Business
Agritek
Holdings, Inc. (the “Company” or “Agritek”) and its wholly-owned subsidiaries, MediSwipe, Inc., Prohibition
Products Inc., and Agritek Venture Holdings, Inc. (“AVHI”) provide turnkey support solutions to the legal cannabis
industry. We provide key business services to the legal cannabis sector including:
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Funding
and Financing Solutions for Agricultural Land and Properties zoned for the regulated Cannabis Industry.
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Compliance
Consulting and Certification Solutions
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Dispensary
and Retail Solutions
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Commercial
Production and Equipment Build Out Solutions
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Multichannel
Supply Chain Solutions
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Branding,
Marketing and Sales Solutions of proprietary product lines
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Consum
er
Product Solutions
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The
Company is expanding throughout California, Colorado and Puerto Rico and presently intends to bring its’ array of services
to each new state that legalizes the use of cannabis according to appropriate state and federal laws. Our primary objective is
acquiring commercial properties to be utilized in the commercial marijuana industry as cultivation facilities in compliance with
Colorado and additional jurisdictions including California, Nevada and Puerto Rico in accordance with state law. This is an essential
aspect of our overall growth strategy because once acquired and re-zoned, the value of such real property is substantially higher
than under the previous zoning and use.
Once
properties are identified and acquired to be used for purposes related to the commercial marijuana industry as provided for by
state law, and we plan to create vertical channels within that legal jurisdiction including equipment financing, payment processing
and marketing of exclusive brands and services to retail dispensaries
Agritek’s
business focus is primarily to hold, develop and manage real property. The Company shall also provide oversight on every property
that is part of its portfolio. This can include complete architectural design and subsequent build-outs, general support, landscaping,
general up-keep, and state of the art security systems. At this time, Agritek does not grow, process, own, handle, transport,
or sell marijuana as the Company is organized and directed to operate strictly in accordance with all applicable state and federal
laws. As the legal environment changes in Colorado, California and other states, the Company’s management may explore business
opportunities that involve ownership interests in dispensaries and growing operations if and when such business opportunities
become legally permissible under applicable state and federal laws.
Recent
Events
On August
7, 2017, the Company signed a Letter of Intent (“LOI)” with Green Acres Pharms, LLC (“Green Acres”), whereby
in exchange for consulting fees, licensing fees and equipment financing fees, the Company will provide up to $250,000 of working
capital and potentially, up to $3,500,000 for the buyout of Green Acres existing mortgage on their 10,000- sq. ft. licensed cultivation
and manufacturing facility located in Washington State.
On August
22, 2017, the Company signed a LOI with Ponix Pods, LLC (“Ponix”), whereby, the Company has exclusive distribution
rights within the Cannabis industry, and the Company and Ponix will share revenues on all pods that are placed on the Company’s
property. Additionally, the Company plans to acquire 51% of Ponix.
Note 2 –
Summary of Significant Accounting Policies
Basis of
Presentation and Principles of Consolidation
The accompanying
condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all
adjustments necessary to present the financial position, results of operations and cash flows for the stated periods have been
made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain information and note
disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted. These condensed consolidated unaudited financial
statements should be read in conjunction with a reading of the Company’s consolidated financial statements and notes thereto.
Interim results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of future
results for the full year. Certain amounts from the 2015 period have been reclassified to conform to the presentation used in
the current period.
The condensed consolidated
unaudited financial statements of the Company
include the consolidated accounts of Agritek
and its wholly owned subsidiaries, AVHI and Prohibition Products, Inc. (“PPI”). PPI, a Florida corporation, was originally
formed on July 1, 2013 as The American Hemp Trading Company, Inc. (“AHTC”) and on August 27, 2014, AHTC changed its
name to PPI. All intercompany accounts and transactions have been eliminated in consolidation.
Cash and
Cash Equivalents
The Company considers
all highly liquid investments with an original term of three months or less to be cash equivalents.
Accounts
Receivable
The Company records
accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established
through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes
collectability is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on
existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. While management uses
the best information available to make its evaluations, this estimate is susceptible to significant change in the near term. As
of September 30, 2017, based on the above criteria, the Company has a full allowance for doubtful accounts of $43,408.
Inventory
Inventory is valued
at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially
obsolete or slow-moving inventory is made based on management analysis or inventory levels and future sales forecasts.
Deferred
Financing Costs
The costs related
to the issuance of debt are capitalized and amortized to interest expense using the straight-line method through the maturities
of the related debt.
Derivative
Financial Instruments
The Company does
not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of
it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value
reported as charges or credits to income.
For option-based
simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments
at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Debt Issue
Costs and Debt Discount
The Company may
record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These
costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life
of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original
Issue Discount
For certain convertible
debt issued, the Company may provide the debt holder with an original issue discount. The original issue discount would
be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
Marketable
Securities
The Company classifies
its marketable securities as available-for-sale securities, which are carried at their fair value based on the quoted market prices
of the securities with unrealized gains and losses, net of deferred income taxes, reported as accumulated other comprehensive
income (loss), a separate component of stockholders’ equity. Realized gains and losses on available-for-sale securities
are included in net earnings in the period earned or incurred.
Investment
of Non-Marketable Securities
The Company’s
investment in non-marketable securities consist of cash investments in a less than 10% interest in two privately held companies
of $25,000 each, that provide merchant processing services. During the nine months ended September 30, 2017, the Company has invested
in the following:
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$110,000
pursuant to a five (5) year operational and exclusive licensing agreement with a third
party who leases a 25,000-sq. ft. approved cultivation facility located in San Juan,
Puerto Rico (see Note 10).
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$100,000
pursuant to a five (5) year operational and exclusive licensing agreement with a third
party who leases a 10,000-sq. ft. approved cultivation facility located in Washington
State (see Note 10).
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$25,000
pursuant to LOI with a third party, whereby, the Company will have exclusive distribution
rights of pods in the cannabis industry, and will receive 50% of revenues from pod rentals
located on any of the Company’s properties.
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Property
and Equipment
Property and equipment
are stated at cost, and except for land, depreciation is provided by use of a straight-line method over the estimated useful lives
of the assets. The Company reviews property and equipment for potential impairment whenever events or changes in circumstances
indicate that the carrying amounts of assets may not be recoverable. In November 2015, the Company was made aware that the land
transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company
was a party to the land purchase, however, the second party to the land contract never filed the original quit claim deed on behalf
of the Company, even though a copy of the notarized quit claim deed was sent to the Company. In February, 2017, the original owner
of the 80 acres foreclosed on the property from the second pa
rty
and the Company entered into a new land purchase contract directly with the landowner on February 7, 2017.To date, the Company
has paid a total of $106,557 and is on the deed of trust of the property with a remaining note balance of approximately $17,500
held by the original owner. The estimated useful lives of property and equipment are as follows:
Furniture and
equipment
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5
years
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Manufacturing equipment
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7
years
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The
Company's property and equipment c
onsisted of the following at September 30, 2017 and December
31, 2016:
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September
30,
2017
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December
31,
2016
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Furniture and equipment
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$
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61,821
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$
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34,587
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Land
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124,057
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Accumulated
depreciation
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(14,572
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(8,307
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Balance
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$
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171,306
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$
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26,280
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Depreciation expense
of $2,310 and $6,265 was recorded for the three and nine months ended September 30, 2017, respectively, and $1,173 and $2,625
for the three and nine months ended September 30, 2016, respectively.
Long-Lived
Assets
Long-lived assets
are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Revenue Recognition
The Company recognizes
revenue in accordance with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are met: (1) persuasive
evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and
(4) collectability is reasonably assured. The Company recognizes revenue during the month in which products are shipped or fees
are earned. Consulting revenue of $24,000 and $48,000 has been recognized for the three and nine months ended September 30, 2017.
Fair Value
of Financial Instruments
Fair value measurements
are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used
to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources
independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market
participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the
price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in
an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses
prices and other relevant information generated by market transactions involving identical or comparable assets (“market
approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset
or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority
is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that
is significant to the fair value measurement.
The three
hierarchy levels are defined as follows:
Level 1 – Quoted
prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted
prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in
active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices
or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments
are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology
is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit
risk as observed in the credit default swap market.
The Company's financial
instruments consist primarily of cash, accounts receivable, notes receivable, accounts payable and accrued expenses, note payable
and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value
due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value
is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or
cash flows.
Income Taxes
The Company accounts
for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the
estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance
related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not
be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date
of enactment.
ASC 740-10 prescribes
a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides
guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition
issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been
assessed, nor paid, any interest or penalties.
Uncertain tax positions
are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized. The Company’s tax years subsequent to 2005 remain subject
to examination by federal and state tax jurisdictions.
Earnings
(Loss) Per Share
Earnings (loss)
per share are computed in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed
by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average
number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income
by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities,
if any, outstanding during the period. As of September 30, 2017, there were warrants and options to purchase 53,324,086 shares
of common stock and the Company’s outstanding convertible debt is convertible into approximately 141,132,791 shares of common
stock. These amounts are not included in the computation of dilutive loss per share because their impact is antidilutive.
Accounting
for Stock-Based Compensation
The Company accounts
for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement
date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is
reached, or (2) the date at which the counterparty's performance is complete. Stock awards granted to non-employees are valued
at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense
during the period in which services are provided. For the nine months ended September 30, 2017, the Company recorded stock based
compensation of $491,431 (See Note 7).
Use of Estimates
The preparation
of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues
and expenses during the reported period. Actual results could differ from those estimates.
Advertising
The Company records
advertising costs as incurred. For the three and nine months ending September 30, 2017 advertising expenses was $6,179 and $8,179,
respectively and for the three and nine months ended September 30, 2016, advertising expense was $321 and $6,321, respectively.
Note 3 –
Recent Accounting Pronouncements
Accounting standards
that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial statements upon adoption.
Note 4 –
Concentration of Credit Risk
Cash
Financial instruments that poten
tially subject the Company to concentrations
of credit risk consist principally of cash. The Company maintains cash balances at one financial institution,
which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insured institution insures
up to $250,000 on account balances.
Note
5 –
Note Payable
Note
Payable Land
On
March 18, 2014, in conjunction with the land purchase of 80 acres in Pueblo County, Colorado, the Company paid $36,000 cash and
entered into a promissory note in the amount of $85,750. On March 4, 2015, and May 4, 2015, the Company paid $9,000 and $2,437,
respectively, of the December 1, 2014 amount. In November 2015, the Company was made aware that the land transaction regarding
80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company was a party to the
land purchase, however, the second party to the land contract never filed the original quit claim deed on behalf of the Company,
even though a copy of the notarized quit claim deed was sent to the Company. In February, 2017, the original owner of the 80 acres
foreclosed on the property from the second party and the Company entered into a new land purchase contract directly with the landowner
on February 7, 2017.To date, the Company has paid a total of $106,557 and is on the deed of trust of the property with a remaining
note balance of approximately $17,500 held by the original owner.
Note
6 –
Convertible Debt
2014
Convertible Note
In
January 2014, the Company entered into a Secured Promissory Note for $1,660,000 (the “2014 Company Note”) to Tonaquint,
Inc. (“Tonaquint”) which includes a purchase price of $1
,500,000
and transaction costs of $160,000. On January 31, 2014, the Company received $300,000 of the purchase price. Tonaquint also issued
to the Company 6 secured promissory notes, each in the amount of $200,000 (the 2014 “Inv
estor
Notes”). All or any portion of the outstanding balance of the 2014 Investor Notes may be prepaid, without penalty, along
with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay Tonaquint any amounts on
the unfunded portion of the 2014 Company Note. The 2014 Company Note bears interest at 8% per annum (increases to 22% per annum
upon an event of default) and is convertible into shares of the Company’s common stock at Tonaquint’s option at a
price of $0.55 per share, exercisable in seven tranches, consisting of a first tranche of $340,000 of principal and any interest,
fees costs or charges, and six additional tranches of $220,000 each, plus any interest, costs, fees or charges.
Beginning on the
date that is six (6) months after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid
to the Company (the “Initial Installment Date”), and on each applicable Installment Date thereafter, the Company is
to pay the Holder, the applicable Installment Amount due on such date. Ten Installment Amounts of $166,000 plus the sum of any
accrued and unpaid interest, fees, costs or charges may be made (a) in cash (a “Company Redemption”), (b) by converting
such Installment Amount into shares of Common Stock (a “Company Conversion”), or (c) by any combination of a Company
Conversion and a Company Redemption so long as the entire amount of such Installment Amount due shall be converted and/or redeemed
by the Company on the applicable Installment Date. The 2014 Company Note matured fifteen months after the Issuance Date.
During the year
ended December 31, 2014, the Company received an additional $800,000 of the purchase price and an additional $200,000 (including
$21,188 of interest) during the year ended December 31, 2015. On December 16, 2015, the Company and AVHI, the Company’s
wholly owned subsidiary entered into a Deed in Lieu of Foreclosure Agreement (the “DLF Agreement”) with Tonaquint,
pursuant to which in exchange for the Company conveying its’ interest in the Company’s Nevada owned real estate (the
“Property”), Tonaquint agreed to refrain and forbear from exercising and enforcing its remedies under their 2014 Convertible
Note. Additionally, the Company received $25,000 and a reduction of the Note balance of $500,000. AVHI had a cost of approximately
$224,466 for the Property.
As of the date
of the DLF Agreement, the Company and Tonaquint agreed to offset the remaining unpaid principal balance of the Investor Notes
of $176,642 to the Note. The parties further agreed that accrued and unpaid interest of $316,723 would be added to the Note and
each party confirmed that the Note balance as of the DLF Agreement was $311,815. As of December 31, 2015, $311,815 of principal
and accrued interest of $1,041 is outstanding on the 2014 Company Note.
On January 19,
2016, the Company accepted and agreed to a Debt Purchase Agreement (the “DPA”), whereby LG Capital Funding, LLC (“LG”)
acquired $157,500 of the Tonaquint 2014 Convertible Note in exchange for $75,000. The Company issued an 8% Replacement Note to
LG for $157,500 (the “Second Replacement Note”). The Second Replacement Note is due January 19, 2017 and is convertible
into shares of the Company’s common stock at any time at the discretion of LG at a variable conversion price (“VCP”).
The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date
multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. For the nine months ended September
30, 2017, the Company issued 12,268,244 shares of common stock upon the conversion of $157,500 of principal and $13,242 accrued
and unpaid interest on the note. The shares were issued at approximately $0.014 per share. The principal balance of the note as
of September 30, 2017 and December 31, 2016 was $-0- and $157,500, respectively.
On January 19,
2016, the Company accepted and agreed to a DPA, whereby Cerberus Finance Group, LTD (“Cerberus”) acquired $154,315
of principal and $2,434 of accrued and unpaid interest of the Tonaquint 2014 Convertible Note in exchange for $75,000. The Company
issued an 8% Replacement Note to Cerberus for $156,749 (the “Third Replacement Note”). The Third Replacement Note
is due January 19, 2017 and is convertible into shares of the Company’s common stock at any time at the discretion of LG
at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion
date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. For the nine months ended September
30, 2017, the Company issued 11,059,977 shares of common stock upon the conversion of $147,249 of principal and $11,749 accrued
and unpaid interest on the note. The shares were issued at approximately $0.0144 per share. The principal balance of the note
as of September 30, 2017 and December 31, 2016 was $-0- and $147,249, respectively.
2016 Convertible
Notes
On January 19,
2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase
Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture
(the “LG Debenture”) in the aggregate principal amount of $76,080, and delivered on January 31, 2016, gross proceeds
of $62,500 excluding transaction costs, fees, and expenses. For the nine months ended September 30, 2017, the Company issued 28,295,680
shares of common stock upon the conversion of $76,080 of principal and $4,752 accrued and unpaid interest on the note. The shares
were issued at approximately $0.0097 per share. The principal balance of the note as of September 30, 2017 and December 31, 2016
was $-0- and $76,080, respectively.
On January 19,
2016, the Company also issued a back end note to LG, under the same terms and conditions, in the amount of $65,625. The back-end
note was funded July 14, 2016, upon the receipt of $ 62,500, excluding transaction costs, fees and expenses. For the nine months
ended September 30, 2017, the Company issued 5,432,726 shares of common stock upon the conversion of $65,625 of principal and
$3,698 accrued and unpaid interest on the note. The shares were issued at approximately $0.01276 per share. The principal balance
of the back end-note as of September 30, 2017 and December 31, 2016 was $-0- and $65,625, respectively.
On January 19,
2016, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase
Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an
8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $34,775, and delivered on
January 25, 2016, gross proceeds of $25,000 excluding transaction costs, fees, and expenses. For the nine months ended September
30, 2017, the Company issued 2,953,523 shares of common stock upon the conversion of $34,775 of principal and $3,255 accrued and
unpaid interest on the note. The shares were issued at approximately $0.01287 per share. The principal balance of the note as
of September 30, 2017 and December 31, 2016 was $-0- and $34,775, respectively.
On January 19,
2016, the Company also issued a back-end note to Cerberus, under the same terms and conditions, in the amount of $22,000. The
back-end note was funded August 1 upon receipt of $20,000, excluding transaction costs, fees and expenses. For the nine months
ended September 30, 2017, the Company issued 4,264,903 shares of common stock upon the conversion of $22,000 of principal and
$1,500 accrued and unpaid interest on the note. The shares were issued at approximately $0.00551 per share. The principal balance
of the back-end note as of September 30, 2017 and December 31, 2016 was $-0- and $22,000, respectively.
On March 23, 2016,
the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase
Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an
8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $22,000, and delivered on
March 31, 2016, gross proceeds of $20,000 excluding transaction costs, fees, and expenses. For the nine months ended September
30, 2017, the Company issued 3,023,338 shares of common stock upon the conversion of $22,000 of principal and $2,199 accrued and
unpaid interest on the note. The shares were issued at approximately $0.008 per share. The principal balance of the note as of
September 30, 2017 and December 31, 2016 was $-0- and $22,000, respectively.
On April 15, 2016,
the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase Agreement
(the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture (the
“LG Debenture”) in the aggregate principal amount of $65,625, and delivered on April 15, 2016, gross proceeds of $62,500
excluding transaction costs, fees, and expenses. For the nine months ended September 30, 2017, the Company issued 12,718,484 shares
of common stock upon the conversion of $65,625 of principal and $6,535 accrued and unpaid interest on the note. The shares were
issued at approximately $0.0057 per share. The principal balance of the note as of September 30, 2017 and December 31, 2016 was
$-0- and $65,625, respectively.
On October 14,
2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase
Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture
(the “LG Debenture”) in the aggregate principal amount of $32,813, and delivered on October 14, 2016, gross proceeds
of $30,813 excluding transaction costs, fees, and expenses. For the nine months ended September 30, 2017, the Company issued 6,499,359
shares of common stock upon the conversion of $32,813 of principal and $2,999 accrued and unpaid interest on the note. The shares
were issued at approximately $0.00551 per share. The principal balance of the note as of September 30, 2017 and December 31, 2016
was $-0- and $32,813, respectively.
On October 31,
2016, the Company entered into a Convertible Promissory Note ("St. George 2016 Notes") for $555,000 to St. George Investments,
LLC. (“St. George”) which includes a purchase price of $500,000 and transaction costs of $5,000 and OID interest of
$50,000. On October 31, 2016, the Company received $100,000 and recorded $115,000 as convertible note payable, including $5,000
of transaction costs and $10,000 OID interest. St. George also issued to the Company eight secured promissory notes, each in the
amount of $50,000. All or any portion of the outstanding balance of the St. George 2016 Notes may be prepaid, without penalty,
along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay St. George any amounts
on the unfunded portion of the St. George 2016 Notes. The St. George 2016 Note bears interest at 10% per annum (increases to 22%
per annum upon an event of default) and is convertible into shares of the Company’s common stock at St. George’s option
at a price of $0.05 per share. On December 14, 2016, March 1, 2017, May 19, 2017, and July 28, 2017 respectively, St. George funded
five of the secured promissory notes issued to the Company. During the nine months ended September 30, 2017, the Company issued
31,143,888 shares of common stock upon the conversion of $170,000 of principal and $14,900 accrued and unpaid interest on the
note. The shares were issued at approximately $0.0059 per share. The principal balance of the note as of September 30, 2017 and
December 31, 2016 was $220,000 and $170,000, respectively.
Beginning on the
date that is six (6) months after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid
to the Company (the “Initial Installment Date”), and on each applicable Installment Date thereafter, the Company is
to pay the Holder, the applicable Installment Amount due on such date. Five Installment Amounts of $111,000 plus the sum of any
accrued and unpaid interest, fees, costs or charges may be made (a) in cash (a “Company Redemption”), (b) by converting
such Installment Amount into shares of Common Stock (a “Company Conversion”), or (c) by any combination of a Company
Conversion and a Company Redemption so long as the entire amount of such Installment Amount due shall be converted and/or redeemed
by the Company on the applicable Installment Date. The St. George 2016 Note matures fifteen months after the Issuance Date.
On December 15,
2016, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase
Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture
(the “LG Debenture”) in the aggregate principal amount of $32,813, and delivered on December 15, 2016, gross proceeds
of $30,813 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017 and December
31, 2016 was $32,813, respectively. Also on December 15, 2016, the Company issued to LG, a back-end note under the same terms
and conditions, in the amount of $32,813. On September 28, 2017, the back-end note was funded upon receipt of $30,813, excluding
transaction costs, fees, and expenses.
Principal and interest
on the above LG and Cerberus convertible debentures is due and payable one year from their respective funding date, and the LG
and Cerberus Debentures are convertible into shares of the Company’s common stock at any time at the discretion of LG and
Cerberus, respectively, at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately
prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.
The Company may
prepay the LG and/or the Cerberus Debentures, subject to prior notice to the holder within an initial 30-day period after issuance,
by paying an amount equal to 118% multiplied by the amount that the Company is prepaying. For each additional 30-day period the
amount being prepaid is multiplied by an additional 6%, up to a maximum of 148% on the 180
th
day from issuance.
Beginning on the 180
th
day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture,
so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing.
The Company determined
that the conversion feature of the 2016 Convertible Notes represent an embedded derivative since the Notes are convertible into
a variable number of shares upon conversion. Accordingly, the 2016 Convertible Notes were not considered to be conventional debt
under ASC 815-40 (formerly EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Company’s Own Stock) and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative
liability. Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance
sheet with the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance
to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other
income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative
liability on the balance sheet. The embedded feature included in the 2016 Convertible Notes resulted in an initial debt discount
of $865,593, an initial derivative liability expense of $2,317,830 and an initial derivative liability of $3,183,423.
2017 Convertible
Notes
On January 24,
2017, the Company completed the closing of a private placement financing transaction with LG, pursuant to a Securities Purchase
Agreement (the “LG Purchase Agreement”). Pursuant to the LG Purchase Agreement, LG purchased an 8% Convertible Debenture
(the “LG Debenture”) in the aggregate principal amount of $94,500, and delivered on January 25, 2017, gross proceeds
of $90,000 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017 was $94,500.
Also on January 24, 2017, the Company issued to LG, a back-end note under the same terms and conditions, in the amount of $94,500.
On June 26, 2017, the back-end note was funded upon receipt of $90,000, excluding transaction costs, fees, and expenses. For the
nine months ended September 30, 2017, the Company issued 4,300,002 shares of common stock upon the conversion of $34,500 of principal
and $665 accrued and unpaid interest on the back-end note. The shares were issued at approximately $0.00818 per share. The principal
balance of the back-end note as of September 30, 2017 was $60,000.
On January 24,
2017, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase
Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an
8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $63,000, and delivered on
January 25, 2017, gross proceeds of $60,000 excluding transaction costs, fees, and expenses. For the nine months ended September
30, 2017, the Company issued 5,229,334 shares of common stock upon the conversion of $28,000 of principal and $1,117 accrued and
unpaid interest on the note. The shares were issued at approximately $0.00557 per share. The principal balance of the note as
of September 30, 2017 was $35,000. Also on January 24, 2017, the Company issued to Cerberus, a back-end note under the same terms
and conditions, in the amount of $63,000. On June 30, 2017, the back-end note was funded upon receipt of $60,000, excluding transaction
costs, fees, and expenses. The principal balance of the back-end note as of September 30, 2017 was $63,000.
On February 1,
2017, the Company completed the closing of a private placement financing transaction with Power Up Lending Group, LTD (“Power
Up”), pursuant to a Securities Purchase Agreement (the “Power Up Purchase Agreement”). Pursuant to the Power
Up Purchase Agreement, Power Up purchased an 12% Convertible Debenture (the “Power Up Debenture”) in the aggregate
principal amount of $140,000, and delivered on February 3, 2017 (the “Funding Date”), gross proceeds of $136,500 excluding
transaction costs, fees, and expenses. Principal and interest on the Power Up Debentures is due and payable on November 5, 2017,
and the Power Up Debenture is convertible into shares of the Company’s common stock beginning six months from the Funding
Date, at a VCP. The VCP is calculated as the average of the three (3) lowest closing bid price during the ten (10) trading days
immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.
The Company may prepay the Power Up Debenture, subject to prior notice to the holder within an initial 30-day period after issuance,
by paying an amount equal to 120% multiplied by the amount that the Company is prepaying. For each additional 30-day period the
amount being prepaid is multiplied by an additional 5%, up to a maximum of 140% on the 180
th
day from issuance. Beginning
on the 180
th
day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so
long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing. On June 23, 2017, the
Company accepted and agreed to Assignment Agreements (‘AA”), whereby, Power Up assigned $70,000 of their note to LG,
and $70,000 of their note to Cerberus. As part of the AA, the Company agreed to pay Power Up $65,000. The Company issued an 8%
Replacement Note to LG for $73,198 (the “First Power Up Replacement Note”), and an 8% Replacement Note to Cerberus
for $73,198 (the “Second Power Up Replacement Note”) The First and Second Power Up Replacement Notes are due June
23, 2018 and are convertible into shares of the Company’s common stock at any time at the discretion of LG and Cerberus,
respectively, at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior
to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.
On February 24,
2017, the Company completed the closing of a private placement financing transaction with LG. Pursuant to the LG Purchase Agreement,
LG purchased an 8% Convertible Debenture in the aggregate principal amount of $26,000, and delivered on February 24, 2017, gross
proceeds of $24,000 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017
was $26,000. Also on February 24, 2017, the Company issued to LG, a back-end note under the same terms and conditions, in the
amount of $26,000 (not funded as of the date of this report).
On February 24,
2017, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase
Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an
8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $17,500, and delivered on
February 27, 2017, gross proceeds of $16,000 excluding transaction costs, fees, and expenses. The principal balance of the note
as of September 30, 2017 was $17,500. Also on February 24, 2017, the Company issued to Cerberus, a back-end note under the same
terms and conditions, in the amount of $17,500 (not funded as of the date of this report).
On March 24, 2017,
the Company completed the closing of a private placement financing transaction with LG. Pursuant to the LG Purchase Agreement,
LG purchased an 8% Convertible Debenture in the aggregate principal amount of $52,000, and delivered on March 28, 2017, gross
proceeds of $49,600 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017
was $52,000. Also on March 24, 2017, the Company issued to LG, a back-end note under the same terms and conditions, in the amount
of $52,000 On September 28, 2017, the back-end note was funded upon receipt of $49,600, excluding transaction costs, fees, and
expenses. The principal balance of the back-end note as of September 30, 2017 was $52,000.
On April 24, 2017,
the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase
Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an
8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $42,000, and delivered on
May 3, 2017, gross proceeds of $40,000 excluding transaction costs, fees, and expenses. The principal balance of the note as of
September 30, 2017 was $42,000. Also on April 24, 2017, the Company issued to Cerberus, a back-end note under the same terms and
conditions, in the amount of $42,000 (not funded as of the date of this report).
On May 24, 2017,
the Company completed the closing of a private placement financing transaction with LG. Pursuant to the LG Purchase Agreement,
LG purchased an 8% Convertible Debenture in the aggregate principal amount of $52,000, and delivered on May 24, 2017, gross proceeds
of $49,600 excluding transaction costs, fees, and expenses. The principal balance of the note as of September 30, 2017 was $52,000.
Also on May 24, 2017, the Company issued to LG, a back-end note under the same terms and conditions, in the amount of $52,000
(not funded as of the date of this report).
On August 8, 2017,
the Company completed the closing of a private placement financing transaction with Power Up, pursuant to a Securities Purchase
Agreement (the “Power Up Purchase Agreement”). Pursuant to the Power Up Purchase Agreement, Power Up purchased an
12% Convertible Debenture (the “Power Up Debenture”) in the aggregate principal amount of $128,000, and delivered
on August 9, 2017 (the “Funding Date”), gross proceeds of $125,000 excluding transaction costs, fees, and expenses.
Principal and interest on the Power Up Debentures is due and payable on May 15, 2018, and the Power Up Debenture is convertible
into shares of the Company’s common stock beginning six months from the Funding Date, at a VCP. The VCP is calculated as
the average of the three (3) lowest closing bid price during the ten (10) trading days immediately prior to the conversion date
multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. The Company may prepay the Power Up
Debenture, subject to prior notice to the holder within an initial 30-day period after issuance, by paying an amount equal to
120% multiplied by the amount that the Company is prepaying. For each additional 30-day period the amount being prepaid is multiplied
by an additional 5%, up to a maximum of 140% on the 180
th
day from issuance. Beginning on the 180
th
day
after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still
outstanding, unless the Company and the holder agree otherwise in writing. The principal balance of the note as of September 30,
2017 was $128,000.
Principal and interest
on the 2017 LG and Cerberus Debentures above is due and payable one year from their respective funding date, and the LG and Cerberus
Debentures are convertible into shares of the Company’s common stock at any time at the discretion of LG and Cerberus, respectively,
at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion
date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount.
The Company may
prepay the 2017 LG and/or the Cerberus Debentures, subject to prior notice to the holder within an initial 30-day period after
issuance, by paying an amount equal to 118% multiplied by the amount that the Company is prepaying. For each additional 30-day
period the amount being prepaid is multiplied by an additional 6%, up to a maximum of 148% on the 180
th
day from issuance.
Beginning on the 180
th
day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture,
so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing.
The Company determined
that the conversion feature of the 2017 Convertible Notes represent an embedded derivative since the Notes are convertible into
a variable number of shares upon conversion. Accordingly, the 2017 Convertible Notes were not considered to be conventional debt
under ASC 815-40 (formerly EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Company’s Own Stock) and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative
liability. Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance
sheet with the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance
to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other
income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative
liability on the balance sheet. The embedded feature included in the 2017 Convertible Notes resulted in an initial debt discount
of $1,159,590, an initial derivative liability expense of $776,112 and an initial derivative liability of $1,935,702.
Convertible
Note Conversions
During the nine
months ended September 30, 2017, the Company issued the following shares of common stock upon the conversions of portions of the
Convertible Notes:
Date
|
|
Principal
Conversion
|
|
Interest
Conversion
|
|
Total
Conversion
|
|
Conversion
Price
|
|
Shares
Issued
|
|
Issued to
|
|
1/10/17
|
|
|
$
|
73,000
|
|
|
$
|
5,664
|
|
|
$
|
78,664
|
|
|
$
|
0.01595
|
|
|
|
4,931,912
|
|
|
Cerberus
|
|
1/17/17
|
|
|
$
|
57,500
|
|
|
$
|
4,562
|
|
|
$
|
62,062
|
|
|
$
|
0.01537
|
|
|
|
4,037,878
|
|
|
LG
|
|
1/27/17
|
|
|
$
|
48,129
|
|
|
$
|
3,914
|
|
|
$
|
52,043
|
|
|
$
|
0.01276
|
|
|
|
4,078,598
|
|
|
Cerberus
|
|
2/8/17
|
|
|
$
|
60,000
|
|
|
$
|
5,050
|
|
|
$
|
65,050
|
|
|
$
|
0.012934
|
|
|
|
5,029,369
|
|
|
LG
|
|
2/27/17
|
|
|
$
|
26,120
|
|
|
$
|
2,171
|
|
|
$
|
28,291
|
|
|
$
|
0.013804
|
|
|
|
2,049,467
|
|
|
Cerberus
|
|
3/10/17
|
|
|
$
|
40,000
|
|
|
$
|
3,630
|
|
|
$
|
43,630
|
|
|
$
|
0.01363
|
|
|
|
3,200,997
|
|
|
LG
|
|
3/27/17
|
|
|
$
|
34,775
|
|
|
$
|
3,255
|
|
|
$
|
38,030
|
|
|
$
|
0.012876
|
|
|
|
2,953,523
|
|
|
Cerberus
|
|
3/28/17
|
|
|
$
|
65,625
|
|
|
$
|
3,697
|
|
|
$
|
69,322
|
|
|
$
|
0.01276
|
|
|
|
5,432,725
|
|
|
LG
|
|
4/25/17
|
|
|
$
|
76,081
|
|
|
$
|
4,752
|
|
|
$
|
80,833
|
|
|
$
|
0.009744
|
|
|
|
8,295,680
|
|
|
LG
|
|
5/10/17
|
|
|
$
|
22,000
|
|
|
$
|
2,199
|
|
|
$
|
24,199
|
|
|
$
|
0.008
|
|
|
|
3,023,338
|
|
|
Cerberus
|
|
5/10/17
|
|
|
$
|
20,640
|
|
|
$
|
9,360
|
|
|
$
|
30,000
|
|
|
$
|
0.0075
|
|
|
|
4,000,000
|
|
|
St Georges
|
|
5/25/17
|
|
|
$
|
29,052
|
|
|
$
|
947
|
|
|
$
|
30,000
|
|
|
$
|
0.00564
|
|
|
|
5,319,149
|
|
|
St Georges
|
|
6/6/17
|
|
|
$
|
32,813
|
|
|
$
|
2,999
|
|
|
$
|
35,811
|
|
|
$
|
.00551
|
|
|
|
6,499,359
|
|
|
LG
|
|
6/8/17
|
|
|
$
|
34,100
|
|
|
$
|
900
|
|
|
$
|
35,000
|
|
|
$
|
0.00564
|
|
|
|
6,205,674
|
|
|
St Georges
|
|
6/9/17
|
|
|
$
|
22,000
|
|
|
$
|
1,500
|
|
|
$
|
23,500
|
|
|
$
|
0.00551
|
|
|
|
4,264,903
|
|
|
Cerberus
|
|
6/29/17
|
|
|
$
|
48,849
|
|
|
$
|
1,151
|
|
|
$
|
50,000
|
|
|
$
|
.00564
|
|
|
|
8,865,248
|
|
|
St Georges
|
|
6/30/17
|
|
|
$
|
30,625
|
|
|
$
|
2,960
|
|
|
$
|
33,585
|
|
|
$
|
0.0058
|
|
|
|
5,790,541
|
|
|
LG
|
|
7/17/17
|
|
|
$
|
37,358
|
|
|
$
|
733
|
|
|
$
|
38,091
|
|
|
$
|
0.00564
|
|
|
|
6,753,817
|
|
|
St Georges
|
|
7/25/17
|
|
|
$
|
35,000
|
|
|
$
|
3,575
|
|
|
$
|
38,575
|
|
|
$
|
0.005568
|
|
|
|
6,927,943
|
|
|
LG
|
|
7/26/17
|
|
|
$
|
28,000
|
|
|
$
|
1,117
|
|
|
$
|
29,117
|
|
|
$
|
0.005568
|
|
|
|
5,229,334
|
|
|
Cerberus
|
|
8/15/17
|
|
|
$
|
35,199
|
|
|
$
|
409
|
|
|
$
|
35,608
|
|
|
$
|
0.0058
|
|
|
|
6,139,276
|
|
|
LG
|
|
8/29/17
|
|
|
$
|
38,000
|
|
|
$
|
558
|
|
|
$
|
38,558
|
|
|
$
|
0.005858
|
|
|
|
6,582,115
|
|
|
LG
|
|
9/19/17
|
|
|
$
|
34,500
|
|
|
$
|
665
|
|
|
$
|
35,165
|
|
|
$
|
0.008178
|
|
|
|
4,300,002
|
|
|
LG
|
|
|
|
|
$
|
929,366
|
|
|
$
|
65,767
|
|
|
$
|
995,133
|
|
|
|
|
|
|
|
119,910,850
|
|
|
|
A summary of the
convertible notes payable balance as of September 30, 2017 is as follows:
|
|
2017
|
Beginning Principal Balance
|
|
$
|
826,480
|
|
Convertible notes-newly issued
|
|
|
1,083,710
|
|
Conversion of convertible notes (principal)
|
|
|
(929,366
|
)
|
Unamortized discount
|
|
|
(511,985
|
)
|
Ending Principal Balance
|
|
$
|
468,839
|
|
Note 7 -
Derivative
liabilities
As of September
30, 2017, the Company revalued the embedded conversion feature of the 2016 and 2017 Convertible Notes, and warrants (see note
9). The fair value of the 2016 and 2017 Convertible Notes and warrants was calculated at September 30, 2017 based on the Black
Scholes method consistent with the terms of the related debt.
A summary of the
derivative liability balance as of September 30, 2017 is as follows:
|
|
|
Notes
|
|
|
|
Warrants
|
|
|
|
Total
|
|
Beginning Balance
|
|
$
|
1,410,747
|
|
|
$
|
203,023
|
|
|
$
|
1,613,770
|
|
Initial Derivative Liability
|
|
|
1,935,702
|
|
|
|
186,206
|
|
|
|
2,121,908
|
|
Fair Value Change
|
|
|
238,522
|
|
|
|
490,166
|
|
|
|
728,688
|
|
Reclassified to Additional paid- in capital
|
|
|
(1,332,421
|
)
|
|
|
—
|
|
|
|
(1,332,421
|
)
|
Reduction for debt assignment
|
|
|
(206,709
|
)
|
|
|
—
|
|
|
|
(206,709
|
)
|
Ending Balance
|
|
$
|
2,045,841
|
|
|
$
|
879,395
|
|
|
$
|
2,925,236
|
|
The embedded derivative
within Warrant #’s 2 thru 5 (see Note 10) resulted in an initial derivative liability expense and an initial derivative
liability of $186,205. The valuation of the embedded derivative within the effective warrants was recorded with an offsetting
gain on derivative liability
The fair value
at the commitment date for the 2017 Convertible Notes and the re-measurement dates for the Company’s derivative liabilities
were based upon the following management assumptions as of September 30, 2017:
|
|
Commitment
date
|
|
Remeasurement
date
|
Expected
dividends
|
|
|
-0-
|
|
|
|
-0-
|
|
Expected
volatility
|
|
|
199%-361
|
%
|
|
|
357
|
%
|
Expected
term
|
|
|
12 months
|
|
|
|
3-12
months
|
|
Risk
free interest
|
|
|
.65%-1.23
|
%
|
|
|
1.06%-1.26
|
%
|
The Company evaluated
all outstanding warrants to determine whether these instruments may be tainted. All warrants outstanding were considered tainted.
The Company valued the embedded derivatives within the warrants using the Black-Scholes valuation model. The fair
value at the funding date for Warrant #’s 2-5 and the re-measurement dates for Warrant #’s 1-5 were based upon the
following management assumptions:
|
|
Commitment
date
|
|
Remeasurement
date
|
Expected
dividends
|
|
|
-0-
|
|
|
|
-0-
|
|
Expected
volatility
|
|
|
203%
- 384
|
%
|
|
|
357
|
%
|
Expected
term
|
|
|
4.26
- 4.64 years
|
|
|
|
4.09
years
|
|
Risk
free interest
|
|
|
1.72%
- 1.82
|
%
|
|
|
1.81
|
%
|
Note 8 –
Related Party Transactions
Effective January
1, 2013, the Company agreed to an annual compensation of $150,000 for its CEO, Mr. Michael Friedman (resigned March 20, 2015,
re-appointed November 4, 2015). Effective March 20, 2015, Mr. Justin Braune was named CEO and President. Mr. Braune also was appointed
to the Board of Directors. The Company agreed to an annual compensation of $100,000 for Mr. Braune in his role of CEO and Director
of the Company and to issue Mr. Braune 15,000,000 shares of restricted common stock. Mr. Braune resigned from the board of directors and
as CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation. The Company also initially
issued Mr. Braune 12,500,000 shares of common stock on October 13, 2015. On October 16, 2015, Mr. Braune advised the Company’s
transfer agent at the time to cancel the shares.
For the three and
nine months ended September 30, 2017 and 2016, the Company recorded expenses of $37,500 and $112,500, respectively, to the CEO,
included in Administrative and Management Fees in the consolidated statements of operations, included herein. As of September
30, 2017, and December 31, 2016, the Company owed the CEO $35,479 and $54,246, respectively, and is included in due to related
party on the Company’s consolidated balance sheet. On January 30, 2017, the Company issued 10,000,000 shares of common stock
to the Company’s CEO. The shares were issued for services performed as the sole Officer and director of the Company since
November 2014.
On April 14, 2015,
the Company appointed Dr. Stephen Holt to the Advisory Board of the Board of Directors of the Company. The Company issued 5,000,000
shares of restricted common stock to Dr. Holt for his appointment. The Company valued the 5,000,000 shares of common stock at
$100,000 ($0.02 per share, the market price of the common stock on the grant date) as stock compensation expense for the year
ended December 31, 2015. Additionally, the Company agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000
shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share. 400,000
Option Shares vested immediately and the remaining 600,000 Option Shares vested over 12 months. Accordingly, the Company has recorded
$2,371 for the nine months ended September 30, 2016 in stock compensation expense and all of the options have vested.
On October 5, 2017,
the Company agreed to lease from the Company’s CEO, a "420 Style" resort and estate property approximately one
hour outside of Quebec City, Canada. The fifteen-acre estate consists of nine (9) unique guest suites, horse stables, and is within
walking distance to a public golf course. A separate structure will serve as a small grow facility run by patient employees and
caretakers on the property which may be toured by guests of the facility. Pursuant to the agreement, the Company will pay $8,000
per month in exchange for the Company being entitled to all rents and income generated from the property. The Company will be responsible
for all costs of the property, including, but not limited to, renovations, repairs and maintenance, insurance and utilities. Prior
to the agreement, the Company issued 5,000,000 shares of common stock as a prepayment of future rents.
A
mounts
Due from 800 Commerce, Inc.
800 Commerce, Inc.,
a commonly controlled entity until February 29, 2016, owed Agritek $282,947 as of February 29, 2016, as a result of advances received
from or payments made by Agritek on behalf of 800 Commerce. These advances were non-interest bearing and were due on demand. Effective
February 29, 2016, the Company received 1,102,462 shares of common stock of Petrogress, Inc. (formerly known as 800 Commerce,
Inc.) as settlement of the $282,947 owed to the Company.
Note 9 –
Common and Preferred Stock
C
ommon
Stock
During the nine
months ended September 30, 2017, the Company issued the following shares of common stock upon the conversions of portions of the
convertible notes:
Date
|
|
Principal
Conversion
|
|
Interest
Conversion
|
|
Total
Conversion
|
|
Conversion
Price
|
|
Shares
Issued
|
|
Issued to
|
|
1/10/17
|
|
|
$
|
73,000
|
|
|
$
|
5,664
|
|
|
$
|
78,664
|
|
|
$
|
0.01595
|
|
|
|
4,931,912
|
|
|
Cerberus
|
|
1/17/17
|
|
|
$
|
57,500
|
|
|
$
|
4,562
|
|
|
$
|
62,062
|
|
|
$
|
0.01537
|
|
|
|
4,037,878
|
|
|
LG
|
|
1/27/17
|
|
|
$
|
48,129
|
|
|
$
|
3,914
|
|
|
$
|
52,043
|
|
|
$
|
0.01276
|
|
|
|
4,078,598
|
|
|
Cerberus
|
|
2/8/17
|
|
|
$
|
60,000
|
|
|
$
|
5,050
|
|
|
$
|
65,050
|
|
|
$
|
0.012934
|
|
|
|
5,029,369
|
|
|
LG
|
|
2/27/17
|
|
|
$
|
26,120
|
|
|
$
|
2,171
|
|
|
$
|
28,291
|
|
|
$
|
0.013804
|
|
|
|
2,049,467
|
|
|
Cerberus
|
|
3/10/17
|
|
|
$
|
40,000
|
|
|
$
|
3,630
|
|
|
$
|
43,630
|
|
|
$
|
0.01363
|
|
|
|
3,200,997
|
|
|
LG
|
|
3/27/17
|
|
|
$
|
34,775
|
|
|
$
|
3,255
|
|
|
$
|
38,030
|
|
|
$
|
0.012876
|
|
|
|
2,953,523
|
|
|
Cerberus
|
|
3/28/17
|
|
|
$
|
65,625
|
|
|
$
|
3,697
|
|
|
$
|
69,322
|
|
|
$
|
0.01276
|
|
|
|
5,432,725
|
|
|
LG
|
|
4/25/17
|
|
|
$
|
76,081
|
|
|
$
|
4,752
|
|
|
$
|
80,833
|
|
|
$
|
0.009744
|
|
|
|
8,295,680
|
|
|
LG
|
|
5/10/17
|
|
|
$
|
22,000
|
|
|
$
|
2,199
|
|
|
$
|
24,199
|
|
|
$
|
0.008
|
|
|
|
3,023,338
|
|
|
Cerberus
|
|
5/10/17
|
|
|
$
|
20,640
|
|
|
$
|
9,360
|
|
|
$
|
30,000
|
|
|
$
|
0.0075
|
|
|
|
4,000,000
|
|
|
St Georges
|
|
5/25/17
|
|
|
$
|
29,052
|
|
|
$
|
947
|
|
|
$
|
30,000
|
|
|
$
|
0.00564
|
|
|
|
5,319,149
|
|
|
St Georges
|
|
6/6/17
|
|
|
$
|
32,813
|
|
|
$
|
2,999
|
|
|
$
|
35,811
|
|
|
$
|
.00551
|
|
|
|
6,499,359
|
|
|
LG
|
|
6/8/17
|
|
|
$
|
34,100
|
|
|
$
|
900
|
|
|
$
|
35,000
|
|
|
$
|
0.00564
|
|
|
|
6,205,674
|
|
|
St Georges
|
|
6/9/17
|
|
|
$
|
22,000
|
|
|
$
|
1,500
|
|
|
$
|
23,500
|
|
|
$
|
0.00551
|
|
|
|
4,264,903
|
|
|
Cerberus
|
|
6/29/17
|
|
|
$
|
48,849
|
|
|
$
|
1,151
|
|
|
$
|
50,000
|
|
|
$
|
.00564
|
|
|
|
8,865,248
|
|
|
St Georges
|
|
6/30/17
|
|
|
$
|
30,625
|
|
|
$
|
2,960
|
|
|
$
|
33,585
|
|
|
$
|
0.0058
|
|
|
|
5,790,541
|
|
|
LG
|
|
7/17/17
|
|
|
$
|
37,358
|
|
|
$
|
733
|
|
|
$
|
38,091
|
|
|
$
|
0.00564
|
|
|
|
6,753,817
|
|
|
St Georges
|
|
7/25/17
|
|
|
$
|
35,000
|
|
|
$
|
3,575
|
|
|
$
|
38,575
|
|
|
$
|
0.005568
|
|
|
|
6,927,943
|
|
|
LG
|
|
7/26/17
|
|
|
$
|
28,000
|
|
|
$
|
1,117
|
|
|
$
|
29,117
|
|
|
$
|
0.005568
|
|
|
|
5,229,334
|
|
|
Cerberus
|
|
8/15/17
|
|
|
$
|
35,199
|
|
|
$
|
409
|
|
|
$
|
35,608
|
|
|
$
|
0.0058
|
|
|
|
6,139,276
|
|
|
LG
|
|
8/29/17
|
|
|
$
|
38,000
|
|
|
$
|
558
|
|
|
$
|
38,558
|
|
|
$
|
0.005858
|
|
|
|
6,582,115
|
|
|
LG
|
|
9/19/17
|
|
|
$
|
34,500
|
|
|
$
|
665
|
|
|
$
|
35,165
|
|
|
$
|
0.008178
|
|
|
|
4,300,002
|
|
|
LG
|
|
|
|
|
$
|
929,366
|
|
|
$
|
65,767
|
|
|
$
|
995,133
|
|
|
|
|
|
|
|
119,910,850
|
|
|
|
In addition to
the above, during the nine months ended September 30, 2017, the Company:
On January 16,
2017, the Company entered into a Business Consultant Agreement (the “BCA”). Pursuant to the BCA, the Company issued
5,000,000 shares of common stock for services to be provided to the Company related to business development, product marketing,
helping identify mergers and acquisition candidates, and will consult with and advise the Company on matters pertaining to business
modeling and strategic alliances. The Company valued the shares at $0.03 per share (the market price of the common stock) and
recorded stock compensation expense for the nine months ended September 30, 2017, of $150,000.
On
January 27, 2017, the Company issued 1,000,000 shares of restricted common stock to Kopelowitz Ostrow P.A
.
(“
KO
”)
pursuant to a Debt Settlement and Release Agreement
(the “Debt Settlement”) by and between the Company and KO. Among the terms of the Debt Settlement was the forgiveness
of $24,614 of debt the Company owed KO for legal services provided.
On January 30,
2017, the Company issued 1,000,000 shares of common stock to Venture Equity. The Company valued the shares at $0.03 per share
(the market price of the common stock) and cancelled of $13,169 of accrued and unpaid fees owed Venture Equity and recorded stock
based compensation expense for the nine months ended September 30, 2017, of $16,831.
Also on January
30, 2017, the Company issued 10,000,000 shares of common stock to the Company’s CEO. The shares were issued for services
performed as the sole Officer and director of the Company since November 2014. The Company valued the shares at $0.03 per share
(the market price of the common stock) and for the nine months ended September 30, 2017, recorded stock compensation expense,
management, of $300,000.
On June 19, 2017,
the Company issued 1,319,149 shares of common stock to St. George pursuant to the “true-up” terms and conditions of
the St. George note.
On August 8, 2017,
the Company issued 2,000,000 shares of common stock for compensation for services of the Company’s chief operating officer.
The Company valued the shares at $0.0123 per share (the market price of the common stock) and for the nine months ended September
30, 2017, recorded stock compensation expense, management, of $24,600.
On August 8, 2017,
the Company issued 5,000,000 shares of common stock as a prepayment of rent for the property known as the "420 Style"
resort and estate, located in Canada (see note 11). The Company valued the shares at $0.0123 per share (the market price of the
common stock) and has included $61,500 deferred expenses in the equity section of the balance sheet presented herein.
During the nine
months ended September 30, 2017, the company issued 48,602,064 shares of common stock to St. George pursuant to Notices of Exercise
of Warrant received. The shares were issued based upon the cashless exercise provision of the warrant.
Preferred
Stock
On June 26, 2015,
the Company filed with the Delaware Secretary of State the Amended and Restated Designation Preferences and Rights (the “Certificate
of Designation”) of Class B Preferred Stock (the “Series B Preferred Stock”). Pursuant to the Certificate of
Designation, 1,000 shares constitute the Series B Preferred Stock. The Series B Preferred Stock and any accrued and unpaid dividends
thereon shall, with respect to rights on liquidation, winding up and dissolution, rank senior to the Company’s issued and
outstanding common stock and Series A preferred stock.
The Series
B
P
ref
e
r
red
S
tock
has the
right to vote in aggregate, on all shareholder matters equal to 51% of the total vote, no matter how many shares of common stock
or other voting stock of the Company are issued or outstanding in the future. The Series B Preferred Stock has a right to
vote on all matters presented or submitted to the Company’s stockholders for approval in pari passu with the common stockholders,
and not as a separate class. The holders of Series B Preferred Stock have the right to cast votes for each share of Series B Preferred
Stock held of record on all matters submitted to a vote of common stockholders, including the election of directors. There is
no right to cumulative voting in the election of directors. The holders of Series B Preferred Stock vote together with all other
classes and series of common stock of the Company as a single class on all actions to be taken by the common stockholders except
to the extent that voting as a separate class or series is required by law. As of September 30, 2017, and December 31, 2016, there
were 1,000 shares of Class B Preferred Stock outstanding.
Warrants
and Options
On April 14,
2015, in connection with the appointment of Dr. Stephen Holt to the advisory board, the Company agreed the advisor shall receive
a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at
an exercise price equal to $0.05 per share and expiring April 14, 2018. Option Shares of 400,000 vested immediately and 50,000
Option Shares vested each month from April 2015 through March 2016. Accordingly, as of March 31, 2016, 1,000,000 Option Shares
have vested and the Company recorded $2,317 as stock compensation expense for the nine months ended September 30, 2016, based
on Black-Scholes.
On April 26, 2013
and in connection with the appointment of Mr. James Canton to the Company’s advisory board, the Company issued a warrant
to Mr. Canton to purchase 300,000 shares of common stock. The warrant expired April 26, 2016.
On October 31,
2016, the Company granted (Warrant #1) to St. George the right to purchase at any time on or after November 10, 2016 (the “Issue
Date”) until the date which is the last calendar day of the month in which the fifth anniversary of the Issue Date occurs
(the “Expiration Date”), a number of fully paid and non-assessable shares (the “Warrant Shares”) of Company’s
common stock, equal to $57,500 divided by the Market Price (defined below) as of the Issue Date, as such number may be adjusted
from time to time pursuant to the terms and conditions of Warrant #1 to Purchase Shares of Common Stock. The Market Price is equal
to the lowest intra-day trade price in the twenty (20) Trading Days immediately preceding the applicable date of exercise, multiplied
by sixty percent (60%). The exercise price is the lower of $0.05 and is subject to price adjustments pursuant to the agreement
and includes a cashless exercise provision. The Company also issued Warrant #’s 2-9, with each warrant only effective upon
St. George funding of the secured notes they issued to the Company. Warrant #’s 2-9 give St. George the right to purchase
Warrant Shares equal to $27,500 divided by the Market Price on the funded date. On December 14, 2016, the Company received a payment
of $50,000, and accordingly, Warrant #2 became effective. On March 12, 2017, the Company received a payment of $50,000, and accordingly,
Warrant #3 became effective. On May 19, 2017, the Company received a payment of $50,000, and accordingly, Warrant #4 became effective.
On July 28, 2017, the Company received a payment of $100,000, and accordingly, Warrant #’s 5 and 6 became effective.
Note 10 –
Commitments and Contingencies
Office
Space
In April 2014,
the Company entered into a two-year sublease agreement for the use of up to 7,500 square feet with a
Colorado
based oncology clinical trial and drug testing company and facility presently doing cancer research and testing for established
pharmaceutical companies seeking FDA approval for new drugs
. Pursuant to the lease, as amended, the Company agreed to pay
$3,500 per month for the space. The lease expired in April 2016, and the Company owes the landlord $48,750.
In
December 2016, the Company signed a one-year lease for office space in San Juan, Puerto Rico. The lease requires monthly base
rent of $800 for the months of December 2016 through February 2017, and $900 per month for the months of March 2017 through November
2017.
In
January 2017, the Company signed a five (5) year lease, beginning February 1, 2107, for approximately 6,000 square feet of office
space, comprised of two floors, in San Juan, Puerto Rico. Pursuant to the lease, the Company will pay $3,000 per month for the
third floor of the building for the first year of the lease. The rent will increase 3% per year on February beginning in 2018
and an additional 3% per year on each successive February 1, during the term of the lease. The landlord has agreed that for the
month of February 2017, the rent will be $1,500. The rent for second floor of the building will be $2,000 per month during the
term of the lease and the Company does not have any rent payments for the first three months of the lease (February 2017 through
April 2017).
On December 1,
2016, the Company signed a one (1) year lease for a corporate apartment in Puerto Rico for $5,500 per month.
For the three and
nine months ended September 30, 2017 the Company recorded rent expense of $35,038 and $93,105, respectively, and for the three
and nine months ended September 30 2016, the Company recorded rent expense of $24,400 and $49,109, respectively.
Leased
Properties
On
April 28, 2014, the Company executed and closed a ten-year lease agreement for 20 acres of an agricultural farming facility located
in South Florida following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing
low grade marijuana specifically for the use of treating epilepsy and cancer patients. Pursuant to the lease agreement,
the Company maintains a first right of refusal to purchase the property for three years. The Company has recorded $9,561 and $28,683
of expense (included in leased property expenses) for the three and nine months ended September 30, 2017, respectively, and $19,122
and $57,366 for the three and nine months ended September 30, 2016, respectively.
The
Company is currently in default of the lease agreement, as rents have not been for the second year of the lease beginning May
2015.
On
July 11, 2014, the Company signed a ten-year
lease agreement for an additional 40 acres
in Pueblo, Colorado. The lease requires monthly rent payments of $10,000 during the first year and is subject to a 2% annual increase
over the life of the lease. The lease also provides rights to 50 acres of certain tenant water rights for $50,000 annually plus
cost of approximately $2,400 annually. The Company paid the $50,000 in July 2014, and has not used the property and any water
and has not paid for any water rights after September 30, 2015. The Company has recorded $-0- of expense for the three and nine
months ended September 30, 2017, and $32,850 and $98,550 for the three and nine months ended September 30, 2016, respectively,
(included in leased property expenses). The Company is currently in default of the lease agreement, as rents have not been paid
since February 2015.
Agreements
On April
5, 2017, the Company executed a five (5) year operational and exclusive licensing agreement with a third party who leases a 25,000-sq.
ft. approved cultivation facility located in San Juan, Puerto Rico. The Company will be the exclusive funding source, and supervise
all infrastructure buildout, equipment lease/finance, security systems and personnel and provide access of seasoned Colorado and
California cultivation crews to ensure the facility meets all standard operating procedures as set forth by the Department Of
Health of Puerto Rico. Under the agreement, the Company receives $12,000 a month in consulting fees, licensing fees on all vaporizer
and edible sales, equipment and lighting rental and financing fees along with equity interest in the property.
On
August 7, 2017, the Company signed a LOI with Green Acres, whereby in consideration of consulting fees, licensing fees on all
vaporizer and edible brands, equipment and lighting rental and financing fees, the Company will provide up to $250,000 of working
capital and potentially, up to $3,500,000 for the buyout of Green Acres existing mortgage on their Washington State facility.
On August
22, 2017, the Company signed a LOI with Ponix, whereby, the Company has exclusive distribution rights within the Cannabis industry,
and the Company and Ponix will share revenues on all pods that are placed on the Company’s property. Additionally, the Company
plans to acquire 51% of Ponix (the “Acquisition”). As consideration for the Acquisition, the Company will issue 5,000,000
shares of common stock of the Company, and upon completion of the Acquisition, the Company will provide $100,000 within thirty
(30) days and no less than $250,000 within six months of the Acquisition.
Legal &
Other
On March 2, 2015,
the Company, the Company’s CEO and the Company’s CFO at the time were named in a civil complaint filed by Erick Rodriguez
in the District Court in Clark County, Nevada (the “DCCC”). The complaint alleges that Mr. Rodriguez never received
250,000 shares of Series B preferred stock that were initially approved by the Board of Directors in 2012, subject to the completion
of a merger of a company controlled by Mr. Rodriguez. Since the merger was never completed, the shares were never certificated
to Mr. Rodriguez. On March 21, 2017, the DCC agreed to Set Aside the Entry of Default against the Defendants. Mr. Rodriguez resigned
in June 2013.
On May 6, 2016,
the Company, B. Michael Freidman and Barry Hollander (former CFO) were named as defendants in a Summons/Complaint filed by Justin
Braune (the “Plaintiff”) in Palm Beach County Civil Court, Florida (the “PBCCC”). The complaint alleges
that Mr. Braune was entitled to shares of common stock of the Company. On December 5, 2016, the PBCCC set aside a court default
that had been previously issued. The defendants have answered the complaint, including the defenses that Mr. Braune advised the
Company’s transfer agent and the Company in his letter of resignation dated November 4, 2015, clearly stating that he has
relinquished all shares of common stock. The Company has filed a counterclaim suit against the Plaintiff, as well as sanctions
against the Plaintiff and their counsel.
Note 11 –
Going Concern
The accompanying
condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of September
30, 2017, the Company had an accumulated deficit of $20,464,359 and working capital deficit of $3,686,261, inclusive of a derivative
liability of $2,925,236. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 12 –
Segment Reporting
During
the three and nine months ended September 30, 2017 and 2016, the Company operated in one reportable segment, wholesale sales.
Note 13 –
Subsequent Events
On October 5, 2017,
the Company agreed to lease from the Company’s CEO, a "420 Style" resort and estate property approximately one
hour outside of Quebec City, Canada. The fifteen-acre estate consists of nine (9) unique guest suites, horse stables, and is within
walking distance to a public golf course. A separate structure will serve as a small grow facility run by patient employees and
caretakers on the property which may be toured by guests of the facility. Pursuant to the agreement, the Company will pay $8,000
per month in exchange for the Company being entitled to al rents and income generated from the property. The Company will be responsible
for all costs of the property, including, but not limited to, renovations, repairs and maintenance, insurance and utilities. Prior
to the agreement, the Company issued 5,000,000 shares of common stock as a prepayment of future rents.
On October 9, 2017,
the Company issued 4,340,042 shares of common stock upon the conversion of $30,710 of principal and interest. The shares were
issued at $0.007076 per share.
On October 11,
2017, the Company signed a LOI with MediK8 Mobile, Inc. (“MediK8”) and Anton Ansalmar, the sole officer of MediK8,
whereby the Company and MediK8 will form a Joint Venture (the “JV”) and share revenue on a 50/50 basis on all clients
paying a monthly hosting or transaction fee to the JV. The JV will develop a web based and mobile platform and social marketplace,
consisting of a HIPPA compliant database of registered patients, consumers and licensed vendors
On October 12,
2017, the Company issued 7,512,057 shares of common stock upon the exercise of warrant #1 (see note 9).
On October 16,
2017, the company received $75,000 pursuant to a Stock Purchase Agreement by and between the Company and St George.
On October 23,
2017, the Company issued 5,057,830 shares of common stock upon the conversion of $30,802 of principal and interest. The shares
were issued at $0.00609 per share.
On October 27,
2017, the Company entered into a LOI with Corix Bioscience, Inc (“Corix”), whereby Corix would acquire certain assets
of the Company in exchange for 5,000,000 shares of Corix common stock.
On November 6,
2017, the Company issued 3,536,715 shares of common stock upon the conversion of $20,718 of principal and interest. The shares
were issued at $0.005858 per share.
On November 6,
2017, the Company issued 6,205,674 shares of common stock upon the conversion of $35,000 of principal and interest. The shares
were issued at $0.00564 per share.
On November 13,
2017, the company received $35,000 pursuant to a Stock Purchase Agreement by and between the Company and St George.
On November 13,
2017, the Company issued 7,121,885 shares of common stock upon the conversion of $41,720 of principal and interest. The shares
were issued at $0.005858 per share.