Kaya Holdings, Inc. and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
Notes
to Consolidated Financial Statements
September
30, 2017 (unaudited)
NOTE
1 – ORGANIZATION AND NATURE OF THE BUSINESS
Organization
Kaya
Holdings, Inc., a Delaware corporation (the “Company” or “KAYS”), is a holding company. The Company was
incorporated in 1993 and has engaged in a number of businesses. Its name was changed on May 11, 2007 to NetSpace International
Holdings, Inc. (“NetSpace”). NetSpace acquired 100% of Alternative Fuels Americas, Inc, (a Florida corporation) in
January 2010 in a stock-for-member interest transaction and issued 6,567,247 shares of common stock and 100,000 shares of Series
C convertible preferred stock to existing shareholders. A Certificate of Amendment to the Certificate of Incorporation was filed
in October 2010 changing the Company’s name from NetSpace International Holdings, Inc. to Alternative Fuels Americas, Inc.
A Certificate of Amendment to the Certificate of Incorporation was filed in March 2015 changing the Company’s name from
Alternative Fuels Americas, Inc. to Kaya Holdings, Inc.
The
Company has 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, an 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 Kaya Shack™ legal
cannabis retail operations in Oregon through controlling ownership interests in four Oregon limited liabilities companies: MJAI
Oregon 1 LLC, MJAI Oregon 2 LLC, MJAI Oregon 3 LLC and MJAI Oregon 4 LLC.
Nature
of the Business
In
January 2014, KAYS incorporated 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 three retail outlets (with the license application for
a fourth outlet pending) 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, the Company 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.
Accordingly,
in 2016 the Company applied for OLLC licenses for its two initial Kaya Shack™ retail outlets (Portland, Oregon and South
Salem, Oregon), and also submitted license applications for its two new locations under construction and development at that time.
In
late December 2016, we received our OLCC recreational license for the South Salem Kaya Shack™ Marijuana Superstore (Kaya
Shack™ OLCC Marijuana Retailer License #1) and recreational and medical sales continued without interruption from 2016 through
the present at that location.
On
March 21, 2017, we received our North Salem Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #2) a
2,600-square foot Kaya Shack™ Marijuana Superstore in North Salem, Oregon, whereupon the location opened for business with
both recreational and medical sales.
On
May 2, 2017, we received our OLCC recreational license for our Portland Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana
Retailer License #3) 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
the third quarter of 2017, we purchased 26 acres in Lebanon, Oregon, for development as a legal cannabis cultivation and manufacturing
facility.
NOTE
2 - LIQUIDITY AND GOING CONCERN
The
Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2017 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 $2,436,271 for the nine months ended September 30, 2017 and a
net loss of $899,566 for the nine months ended September 30, 2016. At September 30, 2017, the Company has a working capital deficiency
of $5,147,348 and is totally dependent on its ability to raise capital. The Company has a plan of operations and acknowledges
that its plan of operations may not result in generating positive working capital in the near future. Even though management believes
that it will be able to successfully execute its business plan, which includes third-party financing and capital issuance, and
meet the Company’s future liquidity needs, there can be no assurances in that regard. These matters raise substantial doubt
about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this material uncertainty. Management recognizes that the Company must generate additional
funds to successfully develop its operations and activities. Management plans include:
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the
sale of additional equity and debt securities,
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alliances
and/or partnerships with entities interested in and having the resources to support the further development of the Company’s
business plan,
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business
transactions to assure continuation of the Company’s development and operations,
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development
of a unified brand and the pursuit of licenses to operate recreational and medical marijuana facilities under the branded
name.
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NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis
of Presentation
The
accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP) under the accrual basis of accounting.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Such
estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable
and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets,
estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded
as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.
Making
estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect
of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered
in formulating its estimate could change in the near term due to one or more future non-conforming events. Accordingly, actual
results could differ significantly from estimates.
Risks
and Uncertainties
The
Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks
including the potential risk of business failure.
The Company has experienced, and in the future expects to continue to experience, variability in its sales and earnings. The
factors expected to contribute to this variability include, among others, (i) the uncertainty associated with the commercialization
and ultimate success of the product, (ii) competition inherent at other locations where product is expected to be sold (iii) general
economic conditions and (iv) the related volatility of prices pertaining to the cost of sales.
Fiscal
Year
The
Company’s fiscal year-end is December 31.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Kaya Holdings, Inc. and its subsidiary, Alternative Fuels Americas,
Inc. (a Florida corporation) and Marijuana Holdings Americas, Inc. (a Florida corporation) which is a majority owned subsidiary
including all wholly owned LLC’s (MJAI Oregon 1 LLC, MJAI Oregon 2 LLC, MJAI Oregon 3 LLC, MJAI Oregon 4 LLC). All
inter-company accounts and transactions have been eliminated in consolidation.
Non-Controlling
Interest
The
company owns 55% of Marijuana Holdings Americas, Inc.
Cash
and Cash Equivalents
Cash
and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions
and all highly liquid investments with an original maturity of three months or less. The Company had no cash equivalents
Inventory
Inventory
consists of finished goods purchased, which are valued at the lower of cost or market value, with cost being determined on the
first-in, first-out method. The Company periodically reviews historical sales activity to determine potentially obsolete
items and also evaluates the impact of any anticipated changes in future demand. Total Value of Finished goods inventory
as of September 30, 2017 is $150,936 and $83,997 as of December 31, 2016. No allowance was necessary as of September 30, 2017
and December 31, 2016.
Property
and Equipment
Property
and equipment is stated at cost, less accumulated depreciation and is reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Depreciation
of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 5-7 years
of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred.
Upon
sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and
any gain or loss is reflected in the statements of operations.
Long-lived
assets
The
Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and
future benefits of its intangible assets, management performs an analysis of the anticipated undiscounted future net cash flow
of the individual assets over the remaining amortization period. The Company recognizes an impairment loss if the carrying value
of the asset exceeds the expected future cash flows.
Operating
Leases
We
lease our retail stores under non-cancellable operating leases. Most store leases include tenant allowances from landlords, rent
escalation clauses and/or contingent rent provisions. We recognize rent expense on a straight-line basis over the lease term,
excluding contingent rent, and record the difference between the amount charged to expense and the rent paid as a deferred rent
liability.
Deferred
Rent and Tenant Allowances
Deferred
rent is recognized when a lease contains fixed rent escalations. We recognize the related rent expense on a straight-line basis
starting from the date of possession and record the difference between the recognized rental expense and cash rent payable as
deferred rent. Deferred rent also includes tenant allowances received from landlords in accordance with negotiated lease
terms. The tenant allowances are amortized as a reduction to rent expense on a straight-line basis over the term of the lease
starting at the date of possession.
Earnings
Per Share
In
accordance with ASC 260, Earnings per Share, the Company calculates basic earnings per share by dividing net income (loss) by
the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed if the Company
has net income; otherwise it would be antidilutive, and would result from the conversion of a convertible note.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting
for Uncertainty in Income Taxes. Under this method, deferred income taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted
tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In
providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates
of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement
tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation
allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.
ASC
740-10 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant
tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not”
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority.
Fair
Value of Financial Instruments
The
Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance
on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability,
as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that
market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes
a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation
techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
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Level
1 – Observable inputs that reflect quoted market prices in active markets
for
identical assets or liabilities.
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Level
2 - Inputs reflect quoted prices for identical assets or liabilities in markets
that
are not active; quoted prices for similar assets or liabilities in active
markets;
inputs other than quoted prices that are observable for the assets
or
liabilities; or inputs that are derived principally from or corroborated by
observable
market data by correlation or other means.
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Level
3 – Unobservable inputs reflecting the Company’s assumptions
incorporated
in valuation techniques used to determine fair value.
These
assumptions are required to be consistent with market participant
assumptions
that are reasonably available.
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The
carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets,
accounts payable & accrued expenses, certain notes payable and notes payable – related party, approximate their fair
values because of the short maturity of these instruments.
The
Company accounts for its derivative liabilities, at fair value, on a recurring basis under level 3. See Note 7.
Embedded
Conversion Features
The
Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to
determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative
at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment
under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration
of any beneficial conversion feature.
Derivative
Financial Instruments
The
Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates
all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain
features that qualify as embedded derivatives.
For
derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its
fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income.
For option-based simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the
derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Beneficial
Conversion Feature
For
conventional convertible debt where the rate of conversion is below market value, the Company records a "beneficial conversion
feature" ("BCF") and related debt discount.
When
the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective
debt instrument (offset to additional paid in capital) and amortized to interest expense over the life of the debt.
Debt
Issue Costs and Debt Discount
The
Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These
costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life
of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original
Issue Discount
For
certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The original
issue discount would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over
the life of the debt.
Extinguishments
of Liabilities
The
Company accounts for extinguishments of liabilities in accordance with ASC 860-10 (formerly SFAS 140) “Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities”. When the conditions are met for extinguishment accounting,
the liabilities are derecognized and the gain or loss on the sale is recognized.
Stock-Based
Compensation - Employees
The
Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions
under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting
Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which
goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value
of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The
measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance
is complete or the date on which it is probable that performance will occur.
If
the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the
Company’s most recent private placement memorandum (based on sales to third parties) (“PPM”), or weekly or monthly
price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially
inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The
fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation
model. The ranges of assumptions for inputs are as follows:
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Expected
term of share options and similar instruments: The expected life of options and similar
instruments represents the period of time the option and/or warrant are expected to be
outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards
Codification the expected term of share options and similar instruments represents the
period of time the options and similar instruments are expected to be outstanding taking
into consideration of the contractual term of the instruments and employees’ expected
exercise and post-vesting employment termination behavior into the fair value (or calculated
value) of the instruments. Pursuant to paragraph 718-10-S99-1, it may be appropriate
to use the simplified method, i.e., expected term = ((vesting term + original
contractual term) / 2), if (i) A company does not have sufficient historical exercise
data to provide a reasonable basis upon which to estimate expected term due to the limited
period of time its equity shares have been publicly traded; (ii) A company significantly
changes the terms of its share option grants or the types of employees that receive share
option grants such that its historical exercise data may no longer provide a reasonable
basis upon which to estimate expected term; or (iii) A company has or expects to have
significant structural changes in its business such that its historical exercise data
may no longer provide a reasonable basis upon which to estimate expected term. The Company
uses the simplified method to calculate expected term of share options and similar instruments
as the company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term.
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Expected
volatility of the entity’s shares and the method used to estimate it. Pursuant
to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses
the calculated value method shall disclose the reasons why it is not practicable for
the Company to estimate the expected volatility of its share price, the appropriate industry
sector index that it has selected, the reasons for selecting that particular index, and
how it has calculated historical volatility using that index. The Company
uses the average historical volatility of the comparable companies over the expected
contractual life of the share options or similar instruments as its expected volatility. If
shares of a company are thinly traded the use of weekly or monthly price observations
would generally be more appropriate than the use of daily price observations as the volatility
calculation using daily observations for such shares could be artificially inflated due
to a larger spread between the bid and asked quotes and lack of consistent trading in
the market.
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Expected
annual rate of quarterly dividends. An entity that uses a method that employs
different dividend rates during the contractual term shall disclose the range of expected
dividends used and the weighted-average expected dividends. The expected dividend
yield is based on the Company’s current dividend yield as the best estimate of
projected dividend yield for periods within the expected term of the share options and
similar instruments.
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Risk-free
rate(s). An entity that uses a method that employs different risk-free rates shall disclose
the range of risk-free rates used. The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of grant for periods within the expected
term of the share options and similar instruments.
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Generally,
all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation
rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately
expected to vest.
The
expense resulting from share-based payments is recorded in general and administrative expense in the statements of operations.
Stock-Based
Compensation – Non Employees
Equity
Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The
Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance
of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant
to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity
instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance
will occur. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share
prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price
observations would generally be more appropriate than the use of daily price observations as such shares could be artificially
inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The
fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation
model. The ranges of assumptions for inputs are as follows:
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Expected
term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i)
of the FASB Accounting Standards Codification the expected term of share options and
similar instruments represents the period of time the options and similar instruments
are expected to be outstanding taking into consideration of the contractual term of the
instruments and holder’s expected exercise behavior into the fair value (or calculated
value) of the instruments. The Company uses historical data to estimate holder’s
expected exercise behavior. If the Company is a newly formed corporation or
shares of the Company are thinly traded the contractual term of the share options and
similar instruments is used as the expected term of share options and similar instruments
as the Company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term.
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Expected
volatility of the entity’s shares and the method used to estimate it. Pursuant
to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses
the calculated value method shall disclose the reasons why it is not practicable for
the Company to estimate the expected volatility of its share price, the appropriate industry
sector index that it has selected, the reasons for selecting that particular index, and
how it has calculated historical volatility using that index. The Company
uses the average historical volatility of the comparable companies over the expected
contractual life of the share options or similar instruments as its expected volatility. If
shares of a company are thinly traded the use of weekly or monthly price observations
would generally be more appropriate than the use of daily price observations as the volatility
calculation using daily observations for such shares could be artificially inflated due
to a larger spread between the bid and asked quotes and lack of consistent trading in
the market.
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Expected
annual rate of quarterly dividends. An entity that uses a method that employs
different dividend rates during the contractual term shall disclose the range of expected
dividends used and the weighted-average expected dividends. The expected dividend
yield is based on the Company’s current dividend yield as the best estimate of
projected dividend yield for periods within the expected term of the share options and
similar instruments.
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Risk-free
rate(s). An entity that uses a method that employs different risk-free rates shall disclose
the range of risk-free rates used. The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of grant for periods within the expected
term of the share options and similar instruments.
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Pursuant
to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee
enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments),
then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement
date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement
is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized
as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances.
Pursuant
to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return
for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement
for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such
an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof)
of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in
which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides
guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.
Pursuant
to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are
exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability
if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the
same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales
discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be
reversed if a share option and similar instrument that the counterparty has the right to exercise expires unexercised.
Pursuant
to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable
equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received
(that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement
date and no entry should be recorded.
Revenue
Recognition
Revenue
is recorded when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) asset is transferred
to the customer without further obligation, (3) the sales price to the customer is fixed or determinable, and (4) collectability
is reasonably assured.
Cost
of Sales
Cost
of sales represents costs directly related to the purchase of goods and third party testing of the Company’s products.
Related
Parties
The
Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions.
Pursuant
to Section 850-10-20 the related parties include a. affiliates of the Company; b. Entities for which investments in their equity
securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15,
to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and
profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management
of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the management
or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its
own separate interests; and g. Other parties that can significantly influence the management or operating policies of the transacting
parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The
consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements,
expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated or combined financial statements is not required in those statements.
The
disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions
to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such
other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the
dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change
in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties
as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Contingencies
The
Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain
conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment
indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material,
would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed. However, there is no assurance that such matters will not materially and adversely affect the Company’s business,
consolidated financial position, and consolidated results of operations or consolidated cash flows.
Uncertain
Tax Positions
The
Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to
the provisions of Section 740-10-25 for the reporting periods ended December 31, 2016, 2015 and 2014.
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
March 2016, the FASB issued ASU 2016-09, Stock Compensation, which is intended to simplify the accounting for share based payment
award transactions. The new standard will modify several aspects of the accounting and reporting for employee share based payments
and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits
or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The guidance
is effective for fiscal years beginning after December 15, 2016, including interim periods within that year, and will be adopted
by the Company in the first quarter of fiscal 2017. The Company anticipates the new standard will result in an increase in the
number of shares used in the calculation of diluted earnings per share and will add volatility to the Company’s effective
tax rate and income tax expense. The magnitude of such impacts will depend in part on whether significant employee stock option
exercises occur.
In
April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest—Imputation of Interest (Topic 83530): Simplifying
the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to
a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by ASU 2015-03.
ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods
within those fiscal years.
In
July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-11, Inventory
(Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”), which applies guidance on the subsequent measurement
of inventory. ASU 2015-11 states that an entity should measure inventory at the lower of cost and net realizable value. Net realizable
value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal
and transportation. The guidance excludes inventory measured using last in, first out or the retail inventory method. ASU 2015-11
is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company
is not planning to early adopt ASU 2015-11 and is currently evaluating ASU 2015-11 to determine the potential impact to its condensed
consolidated financial statements and related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The ASU will increase transparency
and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements. The ASU will require lessees to recognize in the balance sheet a liability to make lease payments
(the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.
The ASU is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those annual
periods. We do not believe the adoption of this update will have a material impact on our financial statements.
In
August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (”ASU”) No. 2016-15, “Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU includes specific guidance
to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.
The ASU is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual
periods. The Company does not expect the adoption of this ASU to have a significant impact on the consolidated financial statements.
Management
does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying financial statements.
Re-Classifications
Certain
amounts in 2016 were reclassified to conform to the 2017 presentation. These reclassifications had no effect on consolidated net
loss for the periods presented.
The
fair value of the warrants on the date of issuance and on each re-measurement date of those warrants classified as liabilities
is estimated using the Black-Scholes option pricing model using the following assumptions: contractual life according to the remaining
terms of the warrants, no dividend yield, weighted average risk-free interest rate of 1.09% at September 30, 2017 and weighted
average volatility of 130%. For this liability, the Company developed its own assumptions that do not have observable inputs or
available market data to support the fair value. This method of valuation involves using inputs such as the fair value of the
Company's various classes of preferred stock, stock price volatility, the contractual term of the warrants, risk free interest
rates and dividend yields.
NOTE
4 – CONVERTIBLE DEBT
These
debts have a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” The derivative component of the obligation are initially valued and classified as a derivative liability
with an offset to discounts on convertible debt. Discounts have been amortized to interest expense over the respective term of
the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option
Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging
from $.08 per share to $0.49 per share and a conversion price ranging from $0.03 per share to $0.12 per share. The total derivative
liabilities associated with these notes are $12,362,150 at September 30, 2017 and $19,346,348 as of December 31, 2016.
See
Summary Table – Page 17
Convertible
Debt Summary
|
Footnote
Number
|
Debt
Type
|
Debt
Classification
|
Interest
Rate
|
Due
Date
|
Ending
|
Current
|
LT
|
09.30.17
|
12.31.16
|
|
|
|
|
|
|
|
|
A
|
Convertible
|
X
|
|
10.0%
|
1-Jan-17
|
$25,000
|
$25,000
|
B
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
65,700
|
58,556
|
C
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
32,850
|
29,278
|
D
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
209,047
|
186,316
|
F
|
Convertible
|
X
|
|
8.0%
|
Converted
|
-
|
117,113
|
G
|
Convertible
|
X
|
|
8.0%
|
Converted
|
-
|
117,113
|
H
|
Convertible
|
|
X
|
8.0%
|
Converted
|
-
|
55,895
|
I
|
Convertible
|
|
X
|
8.0%
|
Converted
|
-
|
67,074
|
J
|
Convertible
|
|
X
|
8.0%
|
Converted
|
-
|
23,442
|
K
|
Convertible
|
|
X
|
8.0%
|
Converted
|
-
|
23,442
|
L
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
30,424
|
27,116
|
M
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
131,236
|
116,966
|
N
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
55,983
|
|
O
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
109,167
|
100,000
|
P
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
52,767
|
|
Q
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
52,050
|
|
R
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
203,867
|
|
S
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
50,400
|
|
T
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
250,000
|
|
V
|
Convertible
|
X
|
|
8.0%
|
1-Jan-18
|
25,000
|
|
W
|
Convertible
|
X
|
|
8.0%
|
1-Jan-18
|
15,000
|
|
X
|
Convertible
|
X
|
|
8.0%
|
1-Jan-18
|
60,000
|
|
Y
|
Convertible
|
X
|
|
8.0%
|
1-Jan-18
|
50,000
|
|
Z
|
Convertible
|
X
|
|
8.0%
|
Converted
|
-
|
25,000
|
AA
|
Convertible
|
X
|
|
6.0%
|
Converted
|
-
|
18,500
|
BB
|
Convertible
|
X
|
|
10.0%
|
1-Jan-19
|
50,000
|
50,000
|
CC
|
Convertible
|
X
|
|
10.0%
|
1-Jan-19
|
100,000
|
100,000
|
DD
|
Convertible
|
X
|
|
10.0%
|
30-Nov-19
|
50,000
|
50,000
|
EE
|
Convertible
|
X
|
|
0.0%
|
31-Dec-17
|
500,000
|
500,000
|
KK
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
150,000
|
-
|
LL
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
600,000
|
-
|
MM
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
100,000
|
-
|
NN
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
500,000
|
-
|
OO
|
Convertible
|
|
X
|
8.0%
|
1-Jan-19
|
500,000
|
-
|
PP
|
Convertible
|
|
X
|
8.0%
|
1-Jan-20
|
500,000
|
-
|
QQ
|
Convertible
|
|
X
|
8.0%
|
1-Jan-20
|
150,000
|
-
|
Current
Convertible Debt
|
|
|
|
875,000
|
1,690,811
|
Long-Term Convertible
Debt
|
|
|
|
3,743,490
|
-
|
Total
Convertible Debt
|
|
|
|
|
$4,618,490
|
$1,690,811
|
FOOTNOTES
FOR CONVERTIBLE DEBT SUMMARY TABLE
(1)
|
|
(A)
At
the option of the holder the convertible note may be converted into shares of the Company’s common stock at the
lesser of $0.40 or 20% discount to the market price, as defined, of the Company’s common stock. The Company is currently
in discussions with the lender on a payment schedule. The outstanding balance of this note is convertible into a variable
number of the Company’s common stock: therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” The derivative component of the obligation are initially valued and classified as a derivative
liability with an offset to discounts on convertible debt. Discounts have being amortized to interest expense over the
respective term of the related note. In determining the indicated value of the convertible note issued, the Company used
the Black Scholes Option Model with a risk-free interest rate of ranging from 0.08% to .87%, volatility ranging from 130%
of 157%, trading prices ranging from $.08 per share to $0.49 per share and a conversion price ranging from $0.05 per share
to $0.12 per share. The balance of the convertible note at September 30, 2017 including accrued interest and net of the
discount amounted to $43,075.
|
|
|
The Company
valued the derivative liabilities at September 30, 2017 at $23,610. The Company recognized a change in the fair value of derivative
liabilities for the three months ended September 30, 2017 of $(640), which were credited to operations. In determining the
indicated values at September 30, 2017, since the debt is in default the company used the maximum value these embedded options
represent, with a trading price of $.14, and conversion prices of $0.11 per share.
|
|
|
|
|
|
|
(B),
(C), (D), (H), (I), (J), (K), (L), (M)
On
December 31, 2015 the Company renegotiated twelve (12) convertible and non-convertible notes payable. The Total face value
of the notes issued was $888,500. The six-month notes were due on December 31, 2015. The new notes are convertible after
January 1, 2016 and are convertible into the Company’s common stock at a conversion rate of $0.03 per share. The
market value of the stock at the date when the debt becomes convertible was $0.087. All these amended debts have a price
adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”
The derivative component of the obligation are initially valued and classified as a derivative liability with an
offset to discounts on convertible debt. Discounts were amortized to interest expense over the respective term of the
related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option
Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 155% of 221%, trading prices
ranging from $.078 per share to $0.1 per share and a conversion price ranging from $0.03 per share to $0.04 per share.
The total derivative liabilities associated with these notes (one note was converted during the quarter ended March 31,
2016 and two notes were converted during the quarter ended December 31, 2016).was $2,640,030 at December 31, 2015 and
$4,718,754 at December 31, 2016, respectively.
On
January 1, 2017 the Company renegotiated the nine (9) remaining convertible notes payable The total face value of the
remaining notes issued was $588,085. The notes are due on January 1, 2019. The new notes were convertible after January
1, 2017 into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at
the date when the debt became convertible was $0.2675. As of September 30, 2017, the principal balance was $469,256. All
these amended debts have a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic
815-15 “Embedded Derivative.” The derivative component of the obligation are initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts are being amortized to interest expense
over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging
from 130% of 221%, trading prices ranging from $.14 per share to $0.22 per share and a conversion price ranging from $0.03
per share per share. The total derivative liabilities associated with these five remaining notes are $1,927,297
at September 30, 2017.
|
|
|
On January
8, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is
convertible into common shares at $0.03 per share. Note was Due in January of 2017 . On January 1, 2017, this note
was amended to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the
amount of $5,983 was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company
accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation
is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized
to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued,
the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging
from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September 30, 2017
is $55,983. The derivative liability associated with this note as of September 30, 2017 was $229,967.
|
|
|
On March
31, 2016, the Company received $100,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest
is convertible into common shares at $0.03 per share. Note was Due in January of 2017. On January 1, 2017, this note was amended
to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $9,167
was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these
Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially
valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest
expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130%
of 157%, trading prices ranging from $.05 per share to $0.49 per share.The principal balance as of September 30, 2017 is $109,167.
The derivative liability associated with this note as of September 30, 2017 was $448,334.
|
|
|
On July
13, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest
is convertible into common shares at $0.03 per share. Note was Due in January of 2017. On January 1, 2017, this note was amended
to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $2,767
was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these
Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially
valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest
expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130%
of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September 30, 2017 is $52,767.
The derivative liability associated with this note as of September 30, 2017 was $216,706.
|
|
|
On August
30, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest
is convertible into common shares at $0.03 per share. Note was Due in January of 2017. On January 1, 2017, this note was amended
to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $2,050
was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these
Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note
issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility
ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September
30, 2017 is $52,050. The derivative liability associated with this note as of September 30, 2017 was $213,763.
|
|
|
On November
3, 2016, the Company received $200,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest
is convertible into common shares at $0.03 per share. Note is Due in January of 2018. On January 1, 2017, this note was amended
to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $3,867
was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these
Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued,
the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging
from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September 30, 2017
is $203,867. The derivative liability associated with this note as of September 30, 2017 was $837,255.
|
|
|
On December
1, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 10% The Note and Interest is
convertible into common shares at $0.03 per share. Note is Due in January of 2018. On January 1, 2017, this note was amended to
extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $400
was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these
Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note
issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility
ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September
30, 2017 is $50,400. The derivative liability associated with this note as of September 30, 2017 was $206,986.
|
|
|
On December
30, 2016 the Company received $250,000 from the issuance of convertible debt. Interest is stated at 10% The Note and Interest
is convertible into common shares at $0.04 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining
the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest
rate of ranging from 0.05% to 1.08%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49
per share. The derivative liability associated with this note as of September 30, 2017 was $731,553.
|
|
|
On March
13, 2016, the Company received $25,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest
is convertible into common shares at $0.03 per share. Note was Due in January of 2017. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining
the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest
rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $.09.
The Note and Interest was converted to common shares on September 13, 2016
|
|
|
On September
13, 2016 the Company received $25,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is
convertible into common shares at $0.045 per share. Note is Due in January of 2018. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining
the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest
rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49.
The derivative liability associated with this note as of September 30, 2017 was $58,970.
|
|
|
On October
16, 2016 the Company received $15,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is
convertible into common shares at $0.03 per share. Note is Due in January of 2018. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the
indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate
of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per
share. The derivative liability associated with this note as of September 30, 2017 was $60,417.
|
|
|
On November
18, 2016 the Company received $60,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is
convertible into common shares at $0.03 per share. Note is Due in January of 2018. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the
indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate
of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per
share. The derivative liability associated with this note as of September 30, 2017 was $239,768.
|
|
|
On December
7, 2016 the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is
convertible into common shares at $0.03 per share. Note is Due in January of 2018. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the
indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate
of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per
share. The Note and Interest was converted to common shares in July of 2017
|
|
|
On October
1, 2015, the Company renegotiated a convertible notes payable. The original note was issued March 13, 2015 and due September 30,
2015, with conversion rate of $0.06 per share. The new note had an extended the due date to January 1, 2017 and convertible into
the Company’s common stock at a conversion rate of $0.045 per share. This note has a price adjustment provision. Therefore,
the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value
of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from
0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The Note
and Accrued interest was converted to common stock on September 23, 2016
|
|
|
On July
27, 2015, the Company issued a note payable for $28,500. The Company agrees to pay to the Holder $28,500 plus accrued interest
pursuant to the following schedule:
|
|
·
|
An
initial payment of $5,000 is due no later than December 1, 2015. This amount represents
the balance of the security deposit due for the lease of Commercial/Manufacturing Space
occupied by MJAI Oregon 1, LLC, an indirect controlled subsidiary of the Company.
|
|
·
|
A
final payment of $42,700 principal, plus any accrued Interest at 10% is due no later
than April 1, 2017. This amount represents the balance of accrued rent due for the initial
monthly lease payments from August 1, 2015 through December 31, 2016.
|
|
|
The note
was convertible after March 31, 2016 and is convertible into the Company’s common stock at a conversion rate of $0.10 per
share or 20% discount to the thirty day moving average stock price. This note has a price adjustment provision. Therefore, the
Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value
of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from
0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. This note
was paid in full as a result of a settlement agreement on March 31, 2017. The remaining balance is zero.
|
|
|
On September
23, 2015, the Company received a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $50,000 with interest accruing at 10%. The note and interest is convertible after September 23, 2015 into the Company’s
common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible
was $0.089. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15
“Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading
prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30,
2017 was $184,507. The note has been extended to January 1, 2019
|
|
|
On September
23, 2015, the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $100,000 with interest accruing at 10%. The note and interest is convertible after September 23, 2015 into the Company’s
common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible
was $0.078. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15
“Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading
prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30,
2017 was $368,997. The note has been extended to January 1, 2019
|
|
|
On September
23, 2015, the Company received a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $50,000 with interest accruing at 10%. The note and interest is convertible after September 23, 2015 into the Company’s
common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible
was $0.078. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15
“Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading
prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30,
2017 was $184,507. The note has been extended to November 30, 2017
|
|
|
At December
31, 2013, the Company was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100 principal
and $103,895 accrued interest, with interest accruing at 10%. On January 2, 2014, the Company entered into a Debt Modification
Agreement whereby the total amount of the debt was reduced to $750,000 and there is no accrued interest or principal due until
December 31, 2017. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares of AFAI, which if converted
are subject to resale restrictions through December 31, 2017. The two-year note in the aggregate amount of $500,000 is convertible
into the Company’s preferred stock at a conversion rate of $10.00 per share of preferred. At a conversion rate of 433.9297
common shares to 1 preferred share, this would result in a total of 21,696,485 common shares issued if all debt was converted.
The market value of the stock at the date of issuance of the debt was $0.04. The remaining $250,000 is not convertible. The company
has imputed interest on both the convertible debt and the non-convertible debt. The company used an interest rate of 4% for calculation
purposes. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet. This note was modified
and restated as of June 20, 2015, see Footnote 9. As of September 30, 2017, the balance of the convertible portion of the debt
was $500,000. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15
“Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black
Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading
prices ranging from $.05 per share to $0.49 per share.The derivative liability associated with this convertible portion of the
note as of September 30, 2017 was $2,539,521.
|
|
|
The net
balance reflected on the balance sheet is for the convertible portion net of remaing debt discount is $399,090. The remaining
$250,000 is not convertible. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet.
|
|
|
On January
4, 2017 the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.04 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion
price of $0.04 per share. The derivative liability associated with this note as of September 30, 2017 was $438,472.
|
|
|
On January
20, 2017 the Company received $600,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.07 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of September 30, 2017 was $872,083.
|
|
|
On January
31, 2017 the Company received $100,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.07 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.08%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of September 30, 2017 was $145,011.
|
|
|
On February
7, 2017 the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.10 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of September 30, 2017 was $451,464.
|
|
|
On February
21, 2017 the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.10 per share. Note is Due in January of 2019. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of September 30, 2017 was $450,129.
|
|
|
On May 11,
2017 the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible
into common shares at $0.05 per share. Note is Due in January of 2020. This note has a price adjustment provision. Therefore,
the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the
obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts
are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible
note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility
ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated
with this note as of September 30, 2017 was $1,183,165.
|
|
|
On July
17, 2017 the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is
convertible into common shares at $0.05 per share. Note is Due in January of 2020. This note has a price adjustment provision.
Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of September 30, 2017 was $349,668.
|
|
|
(GG),
(HH), (II), (JJ)(KK)
|
NOTE
5 - NON-CONVERTIBLE DEBT
A-Non-
Related Party
|
|
September 30, 2017
|
|
December 31, 2016
|
Note
GG
|
|
|
-0-
|
|
|
|
68,555
|
|
Note HH
|
|
|
-0-
|
|
|
|
68,555
|
|
Note II
|
|
|
37,780
|
|
|
|
65,262
|
|
Note JJ
|
|
|
37,780
|
|
|
|
65,262
|
|
Note
KK
|
|
|
13,571
|
|
|
|
31,661
|
|
Total
Non-Convertible Debt
|
|
|
89,131
|
|
|
|
299,295
|
|
|
|
(GG) On
September 8, 2015, the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the
aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the
company 3,161,583 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant
Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $100,000 10% promissory
note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note”
or September 9, 2017. The note and interest has been paid in full
|
|
|
(HH) On
September 9, 2015, the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the
aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the
company 3,161,583 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant
Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $100,000 10% promissory
note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note”
or September 9, 2017. The note and interest has been paid in full
|
|
|
(II) On
May 17, 2016, the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187
paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 17,
2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 17, 2018.
|
|
|
(JJ) On
May 9, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187
paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9,
2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 9, 2018
|
|
|
(KK) On
September 16, 2016 the Company received a total of $31,661 to be used for equipment in exchange for a two year note in the aggregate
amount of $31,661 with interest accruing at 18% per year and a 10% loan fee. The note is due September of 2018 with monthly payments
of principal and interest.
|
B-Related Party
|
|
|
|
|
Loan payable - Stockholder, 0%, Due December 31, 2017 (1)
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
(1)
|
|
At
December 31, 2013, the Company was indebted to an affiliated shareholder of the Company for $840,955, which consisted
of $737,100 principal and $103,895 accrued interest, with interest accruing at 10%. On January 2, 2014, the Company entered
into a Debt Modification Agreement whereby the total amount of the debt was reduced to $750,000 and there is no accrued
interest or principal due until December 31, 2017. $500,000 of the debt is convertible into 50,000 Series C Convertible
Preferred Shares of AFAI, which if converted are subject to resale restrictions through December 31, 2017. The two-year
note in the aggregate amount of $500,000 is convertible into the Company’s preferred stock at a conversion rate
of $10.00 per share of preferred. At a conversion rate of 433.9297 common shares to 1 preferred share, this would result
in a total of 21,696,485 common shares issued if all debt was converted. The market value of the stock at the date of
issuance of the debt was $0.04. The remaining $250,000 is not convertible. The company has imputed interest on both the
convertible debt and the non-convertible debt. The company used an interest rate of 4% for calculation purposes. The net
balance of $250,000 of the non-convertible portion is reflected on the balance sheet. This note was modified and restated
as of June 20, 2015, see Footnote 9. As of September 30, 2017, the balance of the convertible portion of the debt was
$500,000. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic
815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company
used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging
from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share.The derivative liability associated with
this convertible portion of the note as of September 30, 2017 was $2,539,521.
The
net balance reflected on the balance sheet is for the convertible portion net of remaing debt discount is $399,090. The
remaining $250,000 is not convertible. The net balance of $250,000 of the non-convertible portion is reflected on the
balance sheet.
|
NOTE
6 – STOCKHOLDERS’ EQUITY
The
Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001, of which 100,000 shares have been designated
as Series C convertible preferred stock (“Series C” or “Series C preferred stock”). The Board has the
authority to issue the shares in one or more series and to fix the designations, preferences, powers and other rights, as it deems
appropriate.
Each
share of Series C has 433.9297 votes on any matters submitted to a vote of the stockholders of the Company and is entitled to
dividends equal to the dividends of 433.9297 shares of common stock. Each share of Series C preferred stock is convertible at
any time at the option of the holder into 433.9297 shares of common stock.
The
Company has 500,000,000 shares of common stock authorized with a par value of $0.001. Each share of common stock has one vote
per share for the election of directors and all other items submitted to a vote of stockholders. The common stock does not have
cumulative voting rights, preemptive, redemption or conversion rights.
In
February of 2017, the Company issued 6,352,500 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor
that is a current shareholder of the company. This was a conversion of four (4) Notes Payable with a total value of $190,575 the
Notes Payable were due January 1, 2019.
In
June of 2017, the Company issued 987,632 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that
is a current shareholder of the company. The restricted common shares were issued as payment of interest of $29,638.
In
July of 2017, the Company issued 1,760,283 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that
is a current shareholder of the company. This was a conversion of a Notes Payable with a total value of $50,000 the Note Payable
was due January 1, 2019.
NOTE
7- DERIVATIVE LIABILITIES
The
Company identified conversion features embedded within convertible debt and issued in 2013 and subsequent periods. The Company
has determined that the features associated with the embedded conversion option, in the form a ratchet provision, should be accounted
for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available
to settle all potential future conversion transactions.
Additionally,
due to a recognition of tainting (due to shares not being held in reserve in 2014), all convertible notes are considered to have
a derivative liability. Therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”
The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to
discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining
the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest
rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49
per share and a conversion price ranging from $0.03 per share to $0.12 per share.
As
a result of the application of ASC No. 815, the fair value of the ratchet feature related to convertible debt and warrants is
summarized as follow:
Balance
as of December 31, 2016
|
|
$
|
19,346,348
|
|
Initial Derivative
Value
|
|
|
16,221,943
|
|
Change in
Derivative Values-reclassified to APIC
|
|
|
(22,114,526)
|
|
Conversion
or amendment
|
|
|
(1,091,615)
|
|
|
|
$
|
12,362,150
|
|
The
fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following
management assumptions as September 30, 2017:
The
Company recorded a derivative expense of $375,950 and $-0 - for the three months ended September 30, 2017 and 2016,
respectively and $16,221,943 and $129,340 for the nine months ended September 30, 2017 and 2016.
The
Company recorded a change in the value of embedded derivative liabilities income/(expense) of $ 1,260,200 and $181,986 for the
three months ended September 30, 2017 and 2016, respectively and $22,114,526 and $1,895,657 for the nine months ended September
30, 2017 and 2016
NOTE
8- DEBT DISCOUNT
The
Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining fair value
of the derivative liability, as it exceeded the gross proceeds of the note.
Debt
discount amounted to $2,217,596 as of September 30, 2017 and $863,860 as of December 31, 2016.
The
Company recorded $569,497 and $405,530 for the three months and $1,678,899 and $978,208 for the nine months ended September 30,
2017 and September 30, 2016, respectively for amortization of debt discount expense.
NOTE
9 – RELATED PARTY TRANSACTIONS
The
Company has agreements covering certain of its management personnel. Such agreements provide for minimum compensation levels and
are subject to annual adjustment.
The
Company’s Chief Executive Officer holds 50,000 shares of its Series C preferred stock. These shares can be converted into
21,696,485 shares of the Company’s common stock at his option.
The
Company’s largest stockholder has from time to time provided unsecured loans to the Company, See Note 4 for the detail of
the convertible and non-convertible debt with a face value of $750,000
NOTE
10– DEBT EXTINGUISHMENT
On
January 1, 2017, the Company renegotiated nine (9) convertible notes payable. The Total face value of the notes issued was
$876,468 the notes are due on January 1, 2019. The face value plus accrued interest due of $62,533 resulting in new face amount
due of $876,468. The new notes are convertible after January 1, 2017 and are convertible into the Company’s common stock
at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.225.
The Company recorded a loss from debt extinguishment of $67,442.
NOTE
11 – Warrants
On
September 8, 2015, the Company received a total of $100,000 from an accredited investor in exchange for a two year note in
the aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase
from the Company 3,161,583 paid and non-assessable shares of common stock at the price of $0.0316297 per share (the
“Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain
$100K, 10% promissory note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in
“The Note” or September 9, 2017. The Note and interest has been paid in full as of September 30, 2017.
On
September 9, 2015, the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the
aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the
Company 3,161,583 paid and non-assessable shares of common stock at the price of $0.0316297 per share (the “Warrant Exercise
Price”) for a period of five (5) years commencing from the earlier of such time as that certain $100K, 10% promissory note
due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or September
9, 2017. The Note and interest has been paid in full as of September 30, 2017.
On
May 9, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187
paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9,
2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 9, 2018.
On
May 17, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187
paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 17,
2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 17, 2018.
Warrants
issued to Non-Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
Weighted
|
|
|
|
|
Average
|
Average
|
|
|
|
Warrants
|
Exercise
|
Contract
|
|
|
|
Issued
|
Price
|
Terms
Years
|
Balance
as of December 31, 2016
|
11,065,540
|
0.0316297
|
1.79
|
Granted
|
|
|
-
|
-
|
-
|
Exercised
|
|
|
-
|
-
|
-
|
Expired
|
|
|
-
|
-
|
-
|
Balance
as of September 30, 2017
|
11,065,540
|
0.0316297
|
.66
|
NOTE
12 – COMMITMENTS AND CONTINGENCIES
The
Company is, from time to time involved in litigation in the normal course of business. While it is not possible at this time to
establish the ultimate amount of liability with respect to contingent liabilities, including those related to legal proceedings,
management is of the opinion that the aggregate amount of any such liabilities, for which provision has not been made, will not
have a material adverse effect on the Company’s financial position.
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 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 common 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.
NOTE
13– SUBSEQUENT EVENTS
On
November 13, 2017 we paid into escrow $247,500 to settle the commitment discussed in Note 12
On
November 3, 2017 three convertible notes with the face value of $217,643 were converted into 7,734,099 shares of common stock.
On
May 11, 2017, we entered into a financing agreement with an institutional investor (the “Investor”) to provide the
Company with up to $5.8 in convertible note funding through July 31, 2018 (the “May 2017 Financing Agreement”). The
May 2011 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 additionally amended as of November 15,
2017 to further increase the amount of funding available to the Company thereunder to $7.0 million and to extend the time period
for such funding to November 30, 2019.
Funding under the May 2017 Financing Agreement, as amended, takes the form of the offer
and sale of Convertible Notes (the “$7.0 Million Notes”). The $7.0 Million Notes are substantially similar in form
and substance to the $2.1 million Notes that were part of the $2.1 million Financing Agreement entered into between the Company
and the Investor in December 2016 and completed in March of 2017 (as well as the approximately $1.2 million in financing previously
received from the Investor in 2014 and 2015), except that the $7.0 million Notes are due and payable on January 1, 2020.
The
$7.0 million Notes are substantially similar in form and substance to the $2.1 million Notes that were part of the $2.1 million
Financing Agreement entered into between the Company and the Investor in December 2016 and completed in March of 2017 (as well
as the approximately $1.2 million in financing previously received from the Investor in 2014 and 2015), except that the $7.0 million
Notes are due and payable on January 1, 2020.
Pursuant
to the terms of the $7.0 million Financing Agreement, an additional $500,000 was delivered to the Company on November 3, 2017,
bringing the total amount received by the Company to $1,150,000 since its execution on May 11, 2017. The purpose for the increase
in the $7.0 million Financing Agreement was to allocate an additional $500,000 to be used for the targeted acquisition of property
in Oregon for the development of a Commercial and Medical Cannabis Grow Complex and related enterprises, and $500,000 has been
used against the purchase of an identified property which the Company closed on the property during the third Quarter of 2017.
For
more information on the $7.0 million Financing Agreement, please refer to the narrative in Item 2 (above), Management’s
Discussion and Analysis of Financial Condition and Results of Operations.