Quarterly Report (10-q)

Date : 12/17/2018 @ 8:32PM
Source : Edgar (US Regulatory)
Stock : Agritek Holdings, Inc. (AGTK)
Quote : 0.19  -0.01 (-5.00%) @ 7:55PM

Quarterly Report (10-q)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: September 30, 2018

 

OR

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from ________________ to __________________

 

Commission File Number 000-1321002

 

AGRITEK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

 

Delaware   20-8484256
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

 

777 Brickell Avenue, Suite 500, Miami, FL 33131

(Address of principal executive offices)

 

(305) 721-2727

(Registrant's telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

 

Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer  Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

 

Smaller reporting company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Sectionn13(a) of the Exchange Act.   

 

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

 

The number of shares outstanding of the Registrant's $0.0001 par value Common Stock as of December 13, 2018, was 1,064,368,366 shares.

 
 

 

AGRITEK HOLDINGS, INC.

FORM 10-Q

Quarterly Period Ended September 30, 2018

 

INDEX

 

FORWARD-LOOKING STATEMENTS Page
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets at September 30, 2018, and December 31, 2017 (Unaudited) 2
  Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (Unaudited) 3
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (Unaudited)   4
  Notes to Condensed Financial Statements (Unaudited) 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                                                     25
Item 3. Quantitative and Qualitative Disclosures about Market Risks 33
Item 4. Controls and Procedures 33
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 33
Item 1A. Risk Factors 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Mine Safety Disclosures 34
Item 5. Other Information 34
Item 6. Exhibits 35
     
SIGNATURES  
 
 

 

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this quarterly report on Form 10-Q. Additionally, statements concerning future matters are forward-looking statements.

 

Although forward-looking statements in this quarterly report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the fiscal year ended December 31, 2017, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this quarterly report on Form 10-Q and in other reports that we file with the Securities and Exchange Commission (the “SEC”). You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report on Form 10-Q.

 

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with, or furnish to, the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this quarterly report on Form 10-Q, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

 
 

 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
     
      September 30,       December 31,  
      2018       2017  
                 
ASSETS                
Current Assets:                
Cash and cash equivalents   $ 35,321     $ 304,889  
Marketble Securities     9,211       41,861  
Inventory, net     31,048       10,000  
Prepaid assets and other     45,000       48,500  
Total current assets     120,580       405,251  
                 
Notes receivable     285,000       210,000  
Property and equipment, net of accumulated depreciation of $52,192 (2018) and $23,824 (2017)     315,223       286,415  
Security deposit and other     13,825       13,825  
Total assets   $ 734,628     $ 915,491  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT                
                 
Current Liabilities:                
Accounts payable and accrued expenses   $ 1,371,012     $ 1,089,334  
Due to related party     4,493       7,715  
Customer deposits     2,400       2,400  
Deferred rent     24,916       24,916  
Convertible notes payable, net of discount of $780,122 (2018) and $494,193 (2017)     561,434       485,250  
Derivative liabilities     1,911,033       5,416,830  
Note payable, current portion     21,500       51,500  
Total current liabilities     3,896,788       7,077,945  
                 
Commitments and Contingencies                
                 
Stockholders' Deficit:                
Series B convertible preferred stock, $0.01 par value; 1,000,000 shares authorized, and 1,000 shares issued and outstanding     10       10  
Common stock, $.0001 par value; 1,000,000,000 shares authorized; 830,376,608 (2018) and 723,680,348 (2017) shares issued and outstanding     83,038       72,369  
Common stock to be issued     5,754       5,257  
Additional paid-in capital     22,624,771       19,312,650  
Accumulated comprehensive gain (loss)     (7,314 )     25,337  
Accumulated deficit     (25,868,419 )     (25,578,077 )
Total stockholders' deficit     (3,162,160 )     (6,162,454 )
                 
Total liabilities and stockholders' deficit   $ 734,628     $ 915,491  
                 
                 
See notes to condensed consolidated financial statements.

  2  

 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 
   

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

    2018   2017   2018   2017
                 
Consulting and other income   $ —       $ 24,000     $ —       $ 48,000  
Product revenue     1,027       —         1,255       —    
Total revenue     1,027       24,000       1,255       48,000  
Cost of revenue, includes $7,500 and $22,500 related party for 2018     7,508       —         22,620       —    
Gross profit  (loss)     (6,481 )     24,000       (21,365 )     48,000  
                                 
Operating Expenses:                                
Management fees, includes $22,950 related party stock compensation, for the nine months ended September 30, 2018, and $300,000 related party stock compensation for the nine months ended September 30, 2017     25,108       37,500       112,950       412,500  
Administrative fees, includes related party expenses of $16,000 and $52,000 for the three and nine months ended September 30, 2018, respectively, and $12,000 and $36,000 for the three and nine months ended September 30, 2017, respectively     16,000       18,400       60,415       50,400  
Professional and consulting fees, includes stock-based compensation of $97,500 for the nine months ended September 30, 2018, and $24,600 and $191,431 for the three and nine months ended September 30, 2017, respectively     25,932       172,640       345,557       530,175  
Gain on recapture of reserve for land     —         —         —         (47,502 )
Rent and other occupancy costs     22,906       34,874       36,016       92,940  
Leased property expense, includes related party expense of $24,000 and $72,000 for the three and nine months ended September 30, 2018, respectively     59,057       9,561       257,123       28,683  
Advertising and promotion, includes related party expenses of $25,000 for the nine months ended September 30, 2018     637       7,179       60,376       12,627  
Travel and entertainment     41,167       52,412       124,610       93,215  
Other general and administrative expenses     44,467       62,412       102,692       112,992  
                                 
Total operating expenses     235,274       394,978       1,099,739       1,286,030  
                                 
Operating loss     (241,755 )     (370,978 )     (1,121,104 )     (1,238,030 )
                                 
Other Income (Expense):                                
Loss on debt settlement     —         —         (58,759 )     —    
Loss on legal matter     —         —         (232,246 )     —    
Interest expense     (1,337,367 )     (438,553 )     (1,854,530 )     (1,110,560 )
Derivative liability income (expense)     85,909       (1,187,676 )     2,976,297       (1,691,003 )
              —                    
Total other income (expense), net     (1,251,458 )     (1,626,229 )     830,762       (2,801,563 )
                                 
Net loss   $ (1,493,213 )   $ (1,997,207 )   $ (290,342 )   $ (4,039,592 )
                                 
Unrealized gain (loss) on marketable securities     (2,356 )     (2,093 )     (32,651 )     5,508  
Net comprehensive (loss)   $ (1,495,569 )   $ (1,999,300 )   $ (322,993 )   $ (4,034,084 )
                                 
Basic and diluted loss per share   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.01 )
                                 
Weighted average number of common shares outstanding Basic     810,165,619       543,605,667       780,208,585       479,525,626  
                                 
                                 
See notes to condensed consolidated financial statements.

  3  

 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
         
     

Nine Months Ended Ended

September 30,

 
      2018       2017  
                 
Cash flow from operating activities:                
Net loss   $ (290,342 )   $ (4,039,592 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Stock based compensation     120,450       491,431  
Common stock issued for additional interest to convertible noteholder     —         16,094  
Amortization of deferred financing costs     87,466       64,120  
Loss on legal settlement     232,246       —    
Loss on debt settlement     58,759       —    
Depreciation     28,368       6,265  
Initial expense for fair value of derivative liabilities     437,368       962,317  
Amortization of discounts on convertible notes     1,622,702       904,638  
Change in fair values of derivative liabilities     (3,413,562 )     728,687  
Recapture of reserve for land     —         (47,502 )
Changes in operating assets and liabilities:                
Increase in :                
Inventory     (21,048 )     (40,000 )
Prepaid assets and other     3,500       (1,000 )
Security deposit     —         (13,000 )
Increase (decrease) in:                
Accounts payable and accrued expenses     88,481       178,403  
Due to related party     (3,222 )     (18,767 )
Deferred rent     —         24,916  
Net cash used in operating activities     (1,048,834 )     (782,991 )
                 
Cash flows from investing activities:                
Purchase of property, equipment and furniture     (57,176 )     (68,788 )
Purchase of notes receivable     (75,000 )     (235,000 )
Net cash used in investing activities     (132,176 )     (303,788 )
                 
Cash flows from financing activities:                
Proceeds from issuance of convertible debt     729,500       1,013,193  
Payments made of principal and interest on convertible notes     (178,058 )     —    
Payments made on note payable     (30,000 )     (17,500 )
Proceeds from sale of common stock to be issued     390,000       335,000  
Net cash provided by financing activities     911,442       1,330,693  
                 
Net increase (decrease) in cash and cash equivalents     (269,568 )     243,913  
                 
Cash and cash equivalents, Beginning     304,889       67,260  
                 
Cash and cash equivalents, Ending   $ 35,321     $ 311,173  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 6,816     $ 1,275  
Cash paid for income taxes   $ —       $ —    
                 
Schedule of non-cash financing activities:                
Discount from derivatives   $ 1,908,631     $ —    
Conversion of notes payable and interest into common stock   $ 374,608     $ 995,133  
Fair value of marketable securities issued in exchange for debt   $ —       $ 16,525  
Change in fair value for available for sale marketable securities   $ (32,651 )   $ 5,508  
Issuance of note payable as part of land acquisition   $ —       $ 35,000  
Settlement of derivatives   $ 2,438,234     $ —    
Cashless warrant exercise   $ 3,925     $ 4,860  
 
 
See notes to condensed consolidated financial statements.

  4  

 

AGRITEK HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2018 and 2017

 

 

Note 1 - Organization

 

Business

 

Agritek Holdings Inc. (“the Company” or “Agritek Holdings”) and its wholly-owned subsidiaries, MediSwipe, Inc. (“MediSwipe”), Prohibition Products Inc. (“PPI”), and Agritek Venture Holdings, Inc. (“AVHI”) is a fully integrated, active investor and operator in the legal cannabis sector. Specifically, Agritek Holdings provides strategic capital and functional expertise to accelerate the commercialization of its diversified portfolio of holdings. Currently, the Company is focused on three high-value segments of the cannabis market, including real estate investment, intellectual property brands; and infrastructure, with operations in three U.S. States, Colorado, Washington State, California as well as Canada and Puerto Rico. Agritek Holdings invests its capital via real estate holdings, licensing agreements, royalties and equity in acquisition operations.

We provide key business services to the legal cannabis sector including:

 

  •  Funding and Financing Solutions for Agricultural Land and Properties zoned for the regulated Cannabis Industry.
  •  Dispensary and Retail Solutions
  •  Commercial Production and Equipment Build Out Solutions
  •  Multichannel Supply Chain Solutions
  •  Branding, Marketing and Sales Solutions of proprietary product lines
  •  Consumer Product Solutions 

 

The Company intends to bring its’ array of services to each new state that legalizes the use of cannabis according to appropriate state and federal laws. Our primary objective is acquiring commercial properties to be utilized in the commercial marijuana industry as cultivation facilities in compliance with state laws. This is an essential aspect of our overall growth strategy because once acquired and re-zoned, the value of such real property is substantially higher than under the previous zoning and use.

Once properties are identified and acquired to be used for purposes related to the commercial marijuana industry as provided for by state law, and we plan to create vertical channels within that legal jurisdiction including equipment financing, payment processing and marketing of exclusive brands and services to retail dispensaries

Agritek’s business focus is primarily to hold, develop and manage real property. The Company shall also provide oversight on every property that is part of its portfolio. This can include complete architectural design and subsequent build-outs, general support, landscaping, general up-keep, and state of the art security systems. At this time, Agritek does not grow, process, own, handle, transport, or sell marijuana as the Company is organized and directed to operate strictly in accordance with all applicable state and federal laws. As the legal environment changes in Colorado, California and other states, the Company’s management may explore business opportunities that involve ownership interests in dispensaries and growing operations if and when such business opportunities become legally permissible under applicable state and federal laws.

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America ("US GAAP"). The consolidated financial statements of the Company include the consolidated accounts of Agritek and its’ wholly owned subsidiaries MediSwipe, AVHI, The American Hemp Trading Company, Inc., a Colorado Corporation (dba 77Acres, Inc.) and PPI. PPI, a Florida corporation, was originally formed on July 1, 2013 as The American Hemp Trading Company, Inc. (“HempFL”) and on August 27, 2014, HempFL changed its’ name to PPI. All intercompany accounts and transactions have been eliminated in consolidation. 

 

  5  

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.

 

Accounts Receivable

 

The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectability is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term. As of September 30, 2018, and December 31, 2017, based on the above criteria, the Company has a full allowance for doubtful accounts of $43,408.

 

Inventory

 

Inventory is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow-moving inventory is made based on management analysis or inventory levels and future sales forecasts.

 

Notes receivable

 

    September 30,
2018
  December 31,
2017
  Client 1     $ 170,000     $ 110,000  
  Client 2       115,000       100,000  
  Total     $ 285,000     $ 210,000  

 

Note receivable from Client 1 is pursuant to a five (5) year operational and exclusive licensing agreement with a third party who leases a 15,000-sq. ft. approved cultivation facility located in San Juan, Puerto Rico (see Note 10).
Note receivable from Client 2 is pursuant to a five (5) year operational and exclusive licensing agreement with a third party who leases a 10,000-sq. ft. approved cultivation facility located in Washington State (see Note 10).

 

Deferred Financing Costs

 

The costs related to the issuance of debt are capitalized and amortized to interest expense using the straight-line method through the maturities of the related debt.

 

Derivative Financial Instruments

 

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. 

 

For option-based simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. 

 

  6  

 

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 prior to maturity 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 initial carrying value of the note and is amortized to interest expense through the maturity of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized amounts is immediately expensed. 

 

Marketable Securities and Other Comprehensive Income

 

The Company classifies its marketable securities as available-for-sale securities, which are carried at their fair value based on the quoted market prices of the securities with unrealized gains and losses, net of deferred income taxes, reported as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Realized gains and losses on available-for-sale securities are included in net earnings in the period earned or incurred.

 

Property and Equipment

 

Property and equipment are stated at cost, and except for land, depreciation is provided by use of a straight-line method over the estimated useful lives of the assets. The Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable. In February, 2017, the Company entered into a land purchase contract to acquire approximately 80 acres including water and mineral rights. The total cost of the land was $129,555. The Company paid $41,554 at closing and issued a note payable for $88,000. The Company is on the deed of trust of the property with a remaining note balance of $21,500 and $51,500 due the seller as of September 30, 2018 and December 31, 2017, respectively. The estimated useful lives of property and equipment are as follows:

 

Furniture and equipment 5 years
Manufacturing equipment 7 years

 

The Company's property and equipment consisted of the following at September 30, 2018, and December 31, 2017:

 

    September 30,
2018
  December 31,
2017
Furniture and equipment   $ 237,860     $ 180,684  
Land     129,555       129.555  
Accumulated depreciation     (52,192 )     (23,824 )
Balance   $ 315,223     $ 286,415  

 

Depreciation expense of $10,250 and $28,368 was recorded for the three and nine months ended September 30, 2018, respectively, and $2,310 and $6,265 for the three and nine months ended September 30, 2017, respectively.

 

Long-Lived Assets

 

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

  7  

 

Deferred rent

 

The Company calculates the total cost of the lease for the entire lease period and divides that amount by the number of months of the lease. The result is the average monthly expense and is charged to rent expense with the offset to deferred rent, irrespective of the actual amount paid. The amounts paid are charged to the deferred rent account. As of September 30, 2018, the Company has a balance of $24,916 in deferred rent which is included in the consolidated balance sheet.

 

Revenue Recognition

 

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

 

There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three and nine months ended September 30, 2018 and 2017, or the twelve months ended December 31, 2017.

 

Fair Value of Financial Instruments

 

The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. 

 

The following are the hierarchical levels of inputs to measure fair value: 

 

  Level 1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
  Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
  Level 3 - Unobservable inputs reflecting the Company's assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

 

The carrying amounts of the Company's financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of the short maturity of these instruments. 

 

  8  

 

The following table represents the Company’s financial instruments that are measured at fair value on a recurring basis as of September 30, 2018, and December 31, 2017, for each fair value hierarchy level:

 

September 30, 2018     Derivative Liabilities       Total  
Level I   $ —       $ —    
Level II   $ —       $ —    
Level III   $ 1,911,033     $ 1,911,033  
December 31, 2017                
Level I   $ —       $ —    
Level II   $ —       $ —    
Level III   $ 5,416,830     $ 5,416,830  

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

 

ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid, any interest or penalties.

 

Uncertain tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized. The Company’s tax years subsequent to 2005 remain subject to examination by federal and state tax jurisdictions.

 

Earnings (Loss) Per Share

 

Earnings (loss) per share are computed in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. As of September 30, 2018, there were warrants and options to purchase 50,937,528 shares of common stock and the Company’s outstanding convertible debt is convertible into approximately 245,073,504 shares of common stock. These amounts are included in the computation of dilutive net income per share.

 

Accounting for Stock-Based Compensation 

 

The Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. Stock awards granted to non-employees are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in which services are provided. For the nine months ended September 30, 2018, the Company recorded stock- based compensation of $120,450, and $24,600 and $491,431 for the three and nine months ended September 30, 2017, respectively. (See Note 9).

 

  9  

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.

 

Advertising

 

The Company records advertising costs as incurred. For the three and nine months ended September 30, 2018, advertising expense was $637 and $60,376, respectively, and $7,179 and $12,627 for the three and nine months ended September 30, 2017, respectively.

 

Note 3 – Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”. Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard will have on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company elected to early adopt the new guidance in the second quarter of fiscal year 2016 which requires us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption was the recognition of additional stock compensation expense and paid-in capital for all periods in fiscal year 2016. Additional amendments to the recognition of excess tax benefits, accounting for income taxes and minimum statutory withholding tax requirements had no impact to retained earnings as of January 1, 2016, where the cumulative effect of these changes is required to be recorded. We have elected to account for forfeitures as they occur to determine the amount of compensation cost to be recognized in each period.

 

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230).” ASU No. 2016-18 requires that restricted cash be included with cash and cash equivalents when reconciling the change in cash flow. This guidance is reflected in these financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes the second step of the two-step goodwill impairment test. Under ASU 2017-04, an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019; early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not elected early adoption of this standard and is currently in the process of evaluating the impact of adopting ASU 2017-04 and cannot currently estimate the financial statement impact of adoption.

 

  10  

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this update provide guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in Topic 718. The guidance will be effective for the Company for its fiscal year 2018, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.  

 

Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. 

 

Note 4 – Marketable Securities

 

The Company owns marketable securities (common stock) as of September 30, 2018, and December 31, 2017 is outlined below:

 

   

September 30,

2018

 

December 31,

2017

Beginning balance   $ 41,862     $ 39,769  
Unrealized gain (loss) marked to fair value     (32,651 )     2,093  
Ending balance   $ 9,211     $ 41,862  

 

800 Commerce, Inc. (now known as Petrogress, Inc), was a commonly controlled entity until February 29, 2016, owed Agritek $282,947 as of February 29, 2016, as a result of advances received from or payments made by Agritek on behalf of 800 Commerce. These advances were non-interest bearing and were due on demand. Effective February 29, 2016, the Company received 11,025 shares of common stock of Petrogress, Inc. as settlement of the $282,947 owed to the Company. The market value on the date the Company received the shares of common stock was $16,525.

 

Note 5 - Prepaid Expenses

 

Prepaid expenses consisted of the following at September 30, 2018 and December 31, 2017:

 

   

September 30,

2018

 

December 31,

2017

Vendor deposits   $ 31,000     $ 46,000  
Investor relations     6,000       2,500  
Rent, related party     8,000       —    
Total prepaid expenses   $ 45,000     $ 48,500  

 

Note 6– Concentration of Credit Risk

 

Cash

 

Financial   instruments   that   potentially   subject   the   Company to concentrations of credit risk consist principally of cash. The Company maintains cash balances at one financial institution, which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insured institution insures up to $250,000 on account balances.

 

  11  

 

Note 7 – Note Payable  

 

Note Payable Land

 

On March 18, 2014, in conjunction with the land purchase of 80 acres in Pueblo County, Colorado, the Company paid $36,000 cash and entered into a promissory note in the amount of $85,750. In November 2015, the Company was made aware that the land transaction regarding 80 acres in Pueblo County, Colorado, may not have been properly deeded to the Company. The company was a party to the land purchase, however, the second party to the land contract never filed the original quit claim deed on behalf of the Company, even though a copy of the notarized quit claim deed was sent to the Company. In February, 2017, the original owner of the 80 acres foreclosed on the property from the second party and the Company entered into a new land purchase contract (including water and mineral rights) directly with the landowner on February 7, 2017. The Company is on the deed of trust of the property and as of September 30, 2018, and December 31, 2017, the note balance is $21,500 and $51,500, respectively.

 

Note 8 – Convertible Debt

 

2016 Convertible Notes

 

On October 31, 2016, the Company entered into a Convertible Promissory Note ("St. George 2016 Notes") for $555,000 to St. George Investments, LLC. (“St. George”) which included a purchase price of $500,000 and transaction costs of $5,000 and OID interest of $50,000. On October 31, 2016, the Company received $100,000 and recorded $115,000 as convertible note payable, including $5,000 of transaction costs and $10,000 OID interest. St. George also issued to the Company eight secured promissory notes, each in the amount of $50,000. All or any portion of the outstanding balance of the St. George 2016 Notes may be prepaid, without penalty, along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay St. George any amounts on the unfunded portion of the St. George 2016 Notes. The St. George 2016 Note bears interest at 10% per annum (increases to 22% per annum upon an event of default) and is convertible into shares of the Company’s common stock at St. George’s option at a price of $0.05 per share. On December 14, 2016, St. George funded one of the secured promissory notes issued to the Company. During the year ended December 31, 2017, St. George funded the remaining secured promissory notes issued to the Company, of which $177,684 was used as part of the Company’s debt consolidation plan. During the nine months ended September 30, 2018, the Company issued 33,244,681 shares of common stock upon the conversion of $175,120 of principal and $12,380 accrued and unpaid interest on the note. The shares were issued at approximately $0.00564 per share. On July 5, 2018, St. George sold the remaining balance of the 2016 Note of $138,124 to L2 Capital, LLC (“L2”, see below). The principal and interest balance of the note as of September 30, 2018, and December 31, 2017, was $-0- and $313,244, respectively.

 

Beginning on the date that is six (6) months after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid to the Company (the “Initial Installment Date”), and on each applicable Installment Date thereafter, the Company is to pay the Holder, the applicable Installment Amount due on such date. Five Installment Amounts of $111,000 plus the sum of any accrued and unpaid interest, fees, costs or charges may be made (a) in cash (a “Company Redemption”), (b) by converting such Installment Amount into shares of Common Stock (a “Company Conversion”), or (c) by any combination of a Company Conversion and a Company Redemption so long as the entire amount of such Installment Amount due shall be converted and/or redeemed by the Company on the applicable Installment Date. The St. George 2016 Note matured fifteen months after the Issuance Date.

 

  12  

 

2017 Convertible Notes

 

On January 24, 2017, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $63,000, and delivered on January 25, 2017, gross proceeds of $60,000 excluding transaction costs, fees, and expenses. During the three months ended March 31, 2017, the Company recorded a debt discount of $60,000 and recorded amortization expense of $10,833. As of September 30, 2018, the note was paid in full. Also, on January 24, 2017, the Company issued to Cerberus, a back-end note under the same terms and conditions, in the amount of $63,000. On June 30, 2017, the back-end note was funded upon receipt of $60,000, excluding transaction costs, fees, and expenses. During the nine months ended September 30, 2018, the Company redeemed the back- end note. The principal balance of the back-end- note as of September 30, 2018, and December 31, 2017 was $-0- and $63,000, respectively. The Company recorded a repayment loss of $20,790 and is included in Loss on debt settlement for the nine months ended September 30, 2018.

 

On February 1, 2017, the Company completed the closing of a private placement financing transaction with Power Up Lending Group, LTD (“Power Up”), pursuant to a Securities Purchase Agreement (the “Power Up Purchase Agreement”). Pursuant to the Power Up Purchase Agreement, Power Up purchased an 12% Convertible Debenture (the “Power Up Debenture”) in the aggregate principal amount of $140,000, and delivered on February 3, 2017 (the “Funding Date”), gross proceeds of $136,500 excluding transaction costs, fees, and expenses. Principal and interest on the Power Up Debentures is due and payable on November 5, 2017, and the Power Up Debenture is convertible into shares of the Company’s common stock beginning six months from the Funding Date, at a VCP. The VCP is calculated as the average of the three (3) lowest closing bid price during the ten (10) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. During the year ended December 31, 2017, the Company recorded a debt discount of $136,500 and during the year ended December 31, 2017, recorded amortization expense of $136,500. The Company may prepay the Power Up Debenture, subject to prior notice to the holder within an initial 30-day period after issuance, by paying an amount equal to 120% multiplied by the amount that the Company is prepaying. For each additional 30-day period the amount being prepaid is multiplied by an additional 5%, up to a maximum of 140% on the 180 th day from issuance. Beginning on the 180 th  day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing. On June 23, 2017, the Company accepted and agreed to Assignment Agreements (‘AA”), whereby, Power Up assigned $70,000 of their note to LG, and $70,000 of their note to Cerberus. As part of the AA, the Company agreed to pay Power Up $65,000. The Company issued an 8% Replacement Note to LG for $73,198 (the “First Power Up Replacement Note”), and an 8% Replacement Note to Cerberus for $73,198 (the “Second Power Up Replacement Note”) The First and Second Power Up Replacement Notes were due June 23, 2018 and were convertible into shares of the Company’s common stock at any time at the discretion of LG and Cerberus, respectively, at a VCP. The VCP is calculated as the lowest trading price during the eighteen (18) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. During the year ended December 31, 2017, the Company issued 12,721,391 shares of common stock upon the conversion of $73,198 of principal and $967 accrued and unpaid interest on the First Power Up Replacement Note. The shares were issued at approximately $0.00583 per share. The principal balance of the First Power Up Replacement Note as of December 31, 2017 was $-0-. During the nine months ended September 30, 2018, the Company redeemed the back- end note, and recorded a loss of $24,155 and is included in Loss on debt settlement for the nine months ended September 30, 2018. The principal balance of the Second Power Up Replacement Note as of September 30, 2018 and December 31, 2017 was $-0- and $73,199 respectively.

 

On February 24, 2017, the Company completed the closing of a private placement financing transaction with Cerberus, pursuant to a Securities Purchase Agreement (the “Cerberus Purchase Agreement”). Pursuant to the Cerberus Purchase Agreement, Cerberus purchased an 8% Convertible Debenture (the “Cerberus Debenture”) in the aggregate principal amount of $17,500, and delivered on February 27, 2017, gross proceeds of $16,000 excluding transaction costs, fees, and expenses. During the nine months ended September 30, 2018, the Company redeemed the note. The principal and interest balance of the note as of September 30, 2018, and December 31, 2017 was $-0- and $17,500, respectively. Also, on February 24, 2017, the Company issued to Cerberus, a back-end note under the same terms and conditions, in the amount of $17,500. On December 7, 2017, the back-end note was funded upon receipt of $16,000, excluding transaction costs, fees, and expenses. During the nine months ended September 30, 2018, the Company redeemed the back- end note. The principal balance of the back-end- note as of September 30, 2018 and December 31, 2017 was $-0- and $17,500, respectively. The Company recorded a repayment loss of $11,550 on the redemption of the debenture and back-end note and is included in Loss on debt settlement for the nine months ended September 30, 2018.

 

  13  

 

On December 20, 2017, the Company entered into a Convertible Promissory Note ("St. George 2017 Notes") for $1,105,000 to St. George which includes a purchase price of $1,000,000 and transaction costs of $5,000 and OID interest of $100,000. On December 21, 2017, the Company received $200,000 and recorded $225,000 as convertible note payable, including $5,000 of transaction costs and $20,000 OID interest. St. George also issued to the Company four secured promissory notes, each in the amount of $200,000. All or any portion of the outstanding balance of the St. George 2017 Notes may be prepaid, without penalty, along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay St. George any amounts on the unfunded portion of the St. George 2017 Notes. The St. George 2017 Note bears interest at 10% per annum (increases to 22% per annum upon an event of default) and is convertible into shares of the Company’s common stock at St. George’s option at a price of $0.05 per share. On December 27, 2017, St. George funded $250,000 of the secured promissory notes issued to the Company, and the Company recorded $270,000 as convertible note payable, including $20,000 OID interest, $242,060 of the funding was used as part of the Company’s debt consolidation plan. During the year ended December 31, 2017, the Company recorded debt discounts of $450,000. During the nine months ended September 30, 2018, St. George funded $350,000 of the secured promissory notes issued to the Company, of which $236,817 was used as part of the Company’s debt consolidation plan, and the Company recorded $390,000 as convertible note payable, including $40,000 OID interest. On July 5, 2018, St. George sold the remaining principal balance of the 2017 Note of $885,000 to L2 (see below). During the nine months ended September 30, 2018, the Company amortized $833,363 of debt discount to amortization expense. As of September 30, 2018, and December 31, 2017, the unamortized note discounts were $-0- and $529,068, respectively. The principal and interest balance of the St George 2017 Note as of September 30, 2018 and December 31, 2017, was $-0- and $495,926 respectively.

 

2018 Convertible Notes

 

On May 4, 2018, the Company completed the closing of a private placement financing transaction with Power Up Lending Group, LTD (“Power Up”), pursuant to a Securities Purchase Agreement (the “Power Up Purchase Agreement”). Pursuant to the Power Up Purchase Agreement, Power Up purchased an 12% Convertible Debenture (the “Power Up Debenture”) in the aggregate principal amount of $78,000, and delivered on May 11, 2018 (the “Funding Date”), gross proceeds of $75,000 excluding transaction costs, fees, and expenses. Principal and interest on the Power Up Debentures is due and payable on February 28, 2019, and the Power Up Debenture is convertible into shares of the Company’s common stock beginning six months from the Funding Date, at a VCP. The VCP is calculated as the average of the three (3) lowest closing bid price during the ten (10) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. The Company recorded a debt discount of $74,759 and during the nine months ended September 30, 2018, recorded amortization expense of $35,747. As of September 30, 2018, the unamortized note discount was $39,012. The Company may prepay the Power Up Debenture, subject to prior notice to the holder within an initial 30-day period after issuance, by paying an amount equal to 120% multiplied by the amount that the Company is prepaying. For each additional 30-day period the amount being prepaid is multiplied by an additional 5%, up to a maximum of 140% on the 180 th day from issuance. Beginning on the 180 th  day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing. The principal and interest balance of the Power Up Note as of September 30, 2018, was $81,692.

 

  14  

 

On May 8, 2018, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with L2 Capital, LLC (“L2”) pursuant to which the Company issued and sold a promissory note to the Investor in the aggregate principal amount of up to $565,555 (the “Note”), which is convertible into shares of common stock of the Company, subject to the terms, conditions and limitations set forth in the Note. The Note accrues interest at a rate of 9% per annum. The aggregate principal amount of up to $565,555 consists of a prorated original issuance discount of up to $55,555 and a $10,000 credit to L2 for transactional expenses with net consideration to the Company of up to $500,000 which will be funded in tranches. The maturity date of each tranche funded shall be six (6) months from the effective date of each payment and is the date upon which the principal sum, as well as any accrued and unpaid interest and other fees for each tranche, shall be due and payable. L2 has the right at any time to convert all or any part of the funded portion of the Note into fully paid and non-assessable shares of common stock of the Company at the Conversion Price, which is equal to 58% multiplied by the lowest VWAP during the twenty-five (25) Trading Day period ending, in Holder’s sole discretion on each conversion, on either (i) the last complete Trading Day prior to the Conversion Date or (ii) the Conversion Date (subject to adjustment as provided in the Note), subject to the occurrence of any Event of Default (as defined therein) under the Note. In connection with the funding of the initial tranche $100,000 on May 23, 2018, the Company recorded $121,111 of the Note and also issued a common stock purchase warrant to L2 to purchase up to 6,968,411 shares of the Company’s common stock pursuant to the terms therein (the “L2 Warrant”) as a commitment fee. The Company recorded an initial derivative liability and derivative expense of $108,569 for the issuance of the warrant. The Company recorded a debt discount of $121,111 and during the nine months ended September 30, 2018, recorded amortization expense of $87,402. As of September 30, 2018, the unamortized note discount is $33,709. At the time that each subsequent tranche under the Note is funded by L2 in cash, then on such funding date, the warrant shares shall immediately and automatically be increased by the quotient of 100% of the face value of the respective tranche and 110% of the VWAP of the common stock on the Trading Day immediately prior to the funding date of the respective tranche. The L2 Warrant is exercisable for a period of five (5) years from date of issuance. The L2 Warrant includes a cashless net exercise provision whereby L2 can elect to receive shares equal to the value of the L2 Warrant minus the fair market value of shares being surrendered to pay for the exercise. Since the date of the initial funding L2 has funded $154,500 of additional tranches and the Company increased the Note by $171,665. The Company recorded an initial derivative liability on the additional tranches funded of $191,322, a debt discount of $171,665 and an initial derivative expense of $19,657. During the nine months ended September 30, 2018, the Company recorded amortization expense of $77,206 and the unamortized debt discount s of September 30, 2018, on the additional tranches funded is $94,459. The principal and interest balance of the Note as of September 30, 2018, was $298,803.

 

On June 22, 2018, the Company completed the closing of a private placement financing transaction with Power Up, pursuant to a Securities Purchase Agreement (the “Power Up Purchase Agreement”). Pursuant to the Power Up Purchase Agreement, Power Up purchased an 12% Convertible Debenture (the “Power Up Debenture”) in the aggregate principal amount of $53,000, and delivered on June 27, 2018 (the “Funding Date”), gross proceeds of $50,000 excluding transaction costs, fees, and expenses. Principal and interest on the Power Up Debentures is due and payable on February 28, 2019, and the Power Up Debenture is convertible into shares of the Company’s common stock beginning six months from the Funding Date, at a VCP. The VCP is calculated as the average of the three (3) lowest closing bid price during the ten (10) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. The Company recorded a debt discount of $49,398 and during the nine months ended September 30, 2018, and has recorded amortization expense of $15,733. As of September 30, 2018, the unamortized note discount was $33,665. The Company may prepay the Power Up Debenture, subject to prior notice to the holder within an initial 30-day period after issuance, by paying an amount equal to 120% multiplied by the amount that the Company is prepaying. For each additional 30-day period the amount being prepaid is multiplied by an additional 5%, up to a maximum of 140% on the 180 th day from issuance. Beginning on the 180 th  day after the issuance of the Debentures, the Company is not permitted to prepay the Debenture, so long as the Debenture is still outstanding, unless the Company and the holder agree otherwise in writing. The principal and interest balance of the Power Up Note as of September 30, 2018, was $54,678.

 

On July 5, 2018, as part of the Company’s debt consolidation plan, the Company accepted and agreed to a Note Purchase Agreement (the “NPA”), whereby, St George assigned $174,374.72 of principal and interest of their St George 2016 Note (See above) and $927,323.67 of principal and interest on their St George 2017 Note (see above) to L2. The Company issued a 10% Replacement Promissory Note (the “RPN”) to L2 for $1,101,698. The RPN is due January 5, 2019, and is convertible into shares of the Company’s common stock at any time at the discretion of L2 at a conversion price equal to the lowest trading price during the twenty-five (25) trading days immediately prior to the conversion date multiplied by fifty eight percent (58%), representing a forty two percent (42%) discount. During the nine months ended September 30, 2018, the Company recorded amortization expense of $522,420 and as of September 30, 2018 the unamortized note discount was $579,278. During the nine months ended September 30, 2018, L2 converted $187,308 of the RPN into 34,500,000 shares of common stock at n average conversion price of $0.0054 per share. As of September 30, 2018, the remining principal and interest balance of the RPN is $961,875.

 

  15  

 

The Company determined that the conversion feature of the 2017 and 2018 Convertible Notes represent an embedded derivative since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the 2017 Convertible Notes were not considered to be conventional debt under ASC 815-40 (formerly EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock) and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The embedded feature included in the 2017 Convertible Notes that were funded in 2018, and the 2018 Convertible Notes resulted in an initial debt discount of $1,908,631, an initial derivative liability expense of $328,799 and an initial derivative liability of $2,237,430. During the nine months ended September 30, 2018, the Company recorded amortization expense on the debt discounts of $1,622,702, and there remains $780,122 of unamortized debt discount as of September 30, 2018.

 

Convertible Note Conversions   

 

During the nine months ended September 30, 2018, the Company issued the following shares of common stock upon the conversions of portions of the Convertible Notes:

 

Date   Principal Conversion   Interest Conversion   Total Conversion   Conversion Price   Shares Issued   Issued to
  2/12/18     $ 69,221     $ 5,779     $ 75,000     $ 0.00564       13,297,872     St Georges
  3/27/18     $ 47,061     $ 2,939     $ 50,000     $ 0.00564       8,865,248     St Georges
  4/23/18     $ 26,234     $ 1,266     $ 27,500     $ 0.00564       4,875,887     St Georges
  6/11/18     $ 32,604     $ 2,396     $ 35,000     $ 0.00564       6,205,674     St Georges
  7/9/18     $ 17,690     $ —       $ 17,690     $ 0.00707       2,500,000     L2
  7/31/18     $ 27,550     $ —       $ 27,550     $ 0.00550       5,000,000     L2
  8/6/18     $ 44,080     $ —       $ 44,080     $ 0.00551       8,000,000     L2
  9/18/18     $ 29,928     $ —       $ 29,928     $ 0.00498       6,000,000     L2
  9/24/18     $ 31,320     $ —       $ 31,320     $ 0.00520       6,000,000     L2
  9/28/18     $ 36,540     $ —       $ 36,540     $ 0.00522       7,000,000     L2
        $ 362,228     $ 12,380     $ 374,608               67,744,681      

 

A summary of the convertible notes payable balance as of September 30, 2018, and December 31, 2017, is as follows:

 

    2018   2017
Beginning Principal Balance   $ 979,443       826,480  
Convertible notes-newly issued     816,966       1,813,210  
Conversion of convertible notes (principal)     (362,228 )     (1,350,247 )
Accrued interest added to convertible notes     78,574       —    
Principal payments     (171,199 )     (310,000 )
Unamortized discount     (780,122 )     (494,193 )
Ending Principal Balance, net   $ 561,434       485,260  

 

The Company recorded a loss on debt settlement of $58,759 on the redemption of convertible notes for the nine months ended September 30, 2018.

 

  16  

 

Note 9 - Derivative liabilities

 

As of September 30, 2018, the Company revalued the embedded conversion feature of the Convertible Notes, and warrants (see note 11). The fair values were calculated based on the Monte Carlo simulation method consistent with the terms of the related debt.

 

A summary of the derivative liability balance as of September 30, 2018, is as follows:

 

      Notes       Warrants       Total  
Beginning Balance   $ 3,608,345     $ 1,808,485     $ 5,416,830  
Initial Derivative Liability     2,237,430       108,569       2,345,999  
Fair Value Change     (2,093,754 )     (1,319,808 )     (3,413,562 )
Derivative Settlement     (2,332,708 )     (105,526 )     (2,438,234 )
Ending Balance   $ 1,419,313     $ 491,720     $ 1,911,033  

 

The credit to derivative expense for the nine months ended September 30, 2018, of $2,976,297 is comprised of the initial derivative expense of $437,368 resulting from the issuances of new convertible notes and warrants in the period and the fair value change decreasing the liability and expense by $3,413,562. For the nine months ended September 30, 2017, there was derivative expense of $1,691,003, comprised of $962,317 of initial derivative expense resulting form new convertible notes issued during the nine months ended September 30, 2017, and the change, increasing the liability and expense by $728,686.

 

The fair value at the commitment date for the 2018 Convertible Notes and the re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of September 30, 2018:

 

    Commitment date   Remeasurement date
Expected dividends     -0-       -0-  
Expected volatility     88%-178%       100%-102%
Expected term     6-12 months       6-6.5 months  
Risk free interest     1.83%-2.36%       2.36%-2.37%  

 

On May 23, 2018, the Company issued a warrant to purchase 6,968,411 shares of common stock (see Norte 8) and valued the warrant at $108,569. As of September 30, 2018, the Company evaluated all outstanding warrants to determine whether these instruments may be tainted. All warrants outstanding were considered tainted. The Company valued the embedded derivatives within the warrants using the Black-Scholes valuation model.   The fair value for Warrants as of the issue date and measurement date were based upon the following management assumptions:

 

    Commitment date   Remeasurement date
Expected dividends     -0-       -0-  
Expected volatility     198%       189%-194%
Expected term     5 years       3.03-4.8 years  
Risk free interest     2.78%       2.78%-3.0%  

 

Note 10 – Related Party Transactions

 

Effective January 1, 2013, the Company agreed to an annual compensation of $150,000 for its CEO, Mr. Michael Friedman (resigned March 20, 2015, re-appointed November 4, 2015). Effective March 20, 2015, Mr. Justin Braune was named CEO and President. Mr. Braune also was appointed to the Board of Directors. The Company agreed to an annual compensation of $100,000 for Mr. Braune in his role of CEO and Director of the Company and to issue Mr. Braune 15,000,000 shares of restricted common stock. Mr. Braune resigned from the board of directors and as CEO on November 4, 2015, and agreed to cancel the 15,000,000 shares in his letter of resignation. The Company also initially issued Mr. Braune 12,500,000 shares of common stock on October 13, 2015. On October 16, 2015, Mr. Braune advised the Company’s transfer agent at the time to cancel the shares. 

 

  17  

 

For the three and nine months ended September 30, 2018 and 2017, the Company recorded expenses to the CEO of $32,608 and $112,500, respectively, and $37,500 and $112,500 for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2018, $7,500 and $22,500, respectively, is included in cost of sales and $25,108 and $90,000, respectively, is included in Management Fees in the condensed consolidated statements of operations, included herein. As of September 30, 2018, and December 31, 2017, the Company owed the CEO $4,493 and $7,715, respectively, and is included in due to related party on the Company’s consolidated balance sheet. On June 25, 2018, the Company issued 1,700,000 shares to the CEO. The Company recorded an expense of $22,950 (based on the market price of the Company’s common stock of $0.0135 per share) for 1,700,000 shares and is included in management fees in the condensed consolidated statements of operations for the three and nine months ended September 30, 2018. On January 30, 2017, the Company issued 10,000,000 shares of common stock to the Company’s CEO. The shares were issued for services performed as the sole Officer and director of the Company since November 2014. The shares were valued at $301,000 ($0.0301 per share, the market price of the common stock on the grant date) and are included in Management Fees for the nine months ended September 30, 2017, in the consolidated statements of operations, included herein.

 

On October 5, 2017, the Company agreed to lease from the Company’s CEO, a "420 Style" resort and estate property approximately one hour outside of Quebec City, Canada. The fifteen-acre estate consists of nine (9) unique guest suites, horse stables, and is within walking distance to a public golf course. A separate structure will serve as a small grow facility run by patient employees and caretakers on the property which may be toured by guests of the facility. Pursuant to the agreement, the Company will pay $8,000 per month in exchange for the Company being entitled to all rents and income generated from the property. For the three and nine months ended September 30, 2018, the Company paid and recorded $24,000 and $72,000, respectively, of expense, included in leased property expense, related party in the condensed consolidated statements of operations, included herein. The Company will be responsible for all costs of the property, including, but not limited to, renovations, repairs and maintenance, insurance and utilities. For the three and nine months ended September 30, 2018, the Company has incurred $33,500 and $133,000, respectively, of renovation expense. On August 8, 2017, the Company issued 5,000,000 shares of common stock to the seller. The Company valued the shares at $0.0123 per share (the market price of the common stock) and has included $61,500 in stock- based compensation expense for the year ended December 31, 2017. The Company has since paid in excess of $50,000 towards renovations. Mr. Johnston will now retain the shares under an amended agreement in exchange for legal fees, tax and license applications and as a financial custodian over the renovation account as a Canadian citizen. The 5,000,000 shares will be in exchange for twelve months of services.

 

For the three and nine months ended September 30, 2018, the Company expenses $16,000 and $52,000, respectively, to the wife of the Company’s CEO for administrative fees, and $12,000 and $36,000 for the three and nine months ended September 30, 2017, respectively. The Company also paid Mrs. Friedman $25,000 for the nine months ended September 30, 2018, for developing and managing the Company’s websites and social media accounts.

 

For the three and nine months ended September 30, 2018, the Company paid $13,400 and $32,400, respectively and $2,500 and $25,500 for the three and six months ended June 30, 2017, respectively, for investor relations services to a company controlled by our CEO.

 

  18  

 

Note 11 – Common and Preferred Stock  

 

C ommon Stock

 

2018 Issuances

 

Date   Principal Conversion   Interest Conversion   Total Conversion   Conversion Price   Shares Issued   Issued to
  2/12/18     $ 69,221     $ 5,779     $ 75,000     $ 0.00564       13,297,872     St Georges
  3/27/18     $ 47,061     $ 2,939     $ 50,000     $ 0.00564       8,865,248     St Georges
  4/23/18     $ 26,234     $ 1,266     $ 27,500     $ 0.00564       4,875,887     St Georges
  6/11/18     $ 32,604     $ 2,396     $ 35,000     $ 0.00564       6,205,674     St Georges
  7/9/18     $ 17,690     $ —       $ 17,690     $ 0.00707       2,500,000     L2
  7/31/18     $ 27,550     $ —       $ 27,550     $ 0.00550       5,000,000     L2
  8/6/18     $ 44,080     $ —       $ 44,080     $ 0.00551       8,000,000     L2
  9/18/18     $ 29,928     $ —       $ 29,928     $ 0.00498       6,000,000     L2
  9/24/18     $ 31,320     $ —       $ 31,320     $ 0.00520       6,000,000     L2
  9/28/18     $ 36,540     $ —       $ 36,540     $ 0.00522       7,000,000     L2
        $ 362,228     $ 12,380     $ 374,608               67,744,681      

 

The 7,000,000 shares recorded on September 28, 2018 are included in common stock to be issued as of September 30, 2018, as they were issued on October 2, 2018.

 

In addition to the above, during the nine months ended September 30, 2018, the Company:

 

On February 26, 2018, the Company agreed to issue 5,000,000 shares of common stock to Dr. Stephen Holt, for his appointment to the advisory board. The Company recorded an expense of $97,500 (based on the market price of the Company’s common stock of $0.0195 per share) and is included in professional and consulting fees in the condensed consolidated statements of operations for the nine months ended September 30, 2018.

 

On June 21, 2018, the Company filed Amended Articles of Incorporation with the State of Delaware increasing the authorized shares of common stock to 1,250,000,000 shares.

 

On June 25, 2018, the Company issued 1,700,000 shares to Mr. Friedman. The Company recorded an expense of $22,950 (based on the market price of the Company’s common stock of $0.0135 per share) for 1,700,000 shares and is included in management fees in the condensed consolidated statements of operations for the nine months ended September 30, 2018.

 

During the nine months ended September 30, 2018, issued 39,251,579 shares of common stock to St. George pursuant to Notices of Exercise of Warrant received. The shares were issued based upon the cashless exercise provision of the warrant. The Company recorded the shares at their par value of $0.0001, with the offset to additional-paid-in-capital.

 

Common stock to be issued

 

During the nine months ended September 30, 2018, the Company reduced the shares of common stock to be issued previously recorded in fiscal year ended December 31, 2017, by 23,202,587 shares. The adjustment was a result of the terms of the SPA, whereby the purchase price of the common stock to be issued is based on 90% of the closing share price 6 months after the SPA. St. George and the Company have agreed to amend the SPA, whereby, the purchase price is 90% of the closing price of the common stock, the day preceding any SPA. During the nine months ended September 30, 2018, the Company received $390,000, pursuant to Stock Purchase Agreements (the “SPA”) with St. George to buy 21,163,815 shares of common stock. As of September 30, 2018, and December 31, 2017, shares of common stock to be issued are 57,553,563 and 52,574,335, respectively.

 

  19  

 

Preferred Stock

 

On June 26, 2015, the Company filed with the Delaware Secretary of State the Amended and Restated Designation Preferences and Rights (the “Certificate of Designation”) of Class B Preferred Stock (the “Series B Preferred Stock”). Pursuant to the Certificate of Designation, 1,000 shares constitute the Series B Preferred Stock. The Series B Preferred Stock and any accrued and unpaid dividends thereon shall, with respect to rights on liquidation, winding up and dissolution, rank senior to the Company’s issued and outstanding common stock and Series A preferred stock.

 

The Series   B  P ref e r red  S tock   has the right to vote in aggregate, on all shareholder matters equal to 51% of the total vote, no matter how many shares of common stock or other voting stock of the Company are issued or outstanding in the future. The Series B Preferred Stock has a right to vote on all matters presented or submitted to the Company’s stockholders for approval in pari passu with the common stockholders, and not as a separate class. The holders of Series B Preferred Stock have the right to cast votes for each share of Series B Preferred Stock held of record on all matters submitted to a vote of common stockholders, including the election of directors. There is no right to cumulative voting in the election of directors. The holders of Series B Preferred Stock vote together with all other classes and series of common stock of the Company as a single class on all actions to be taken by the common stockholders except to the extent that voting as a separate class or series is required by law. As of September 30, 2018, and December 31, 2017, there were 1,000 shares of Class B Preferred Stock outstanding.

 

Warrants and Options

 

On April 14, 2015, in connection with the appointment of Dr. Stephen Holt to the advisory board, the Company agreed the advisor shall receive a non-qualified stock option to purchase 1,000,000 shares (“Option Shares”) of the Company’s common stock at an exercise price equal to $0.05 per share and expiring April 14, 2018. Option Shares of 400,000 vested immediately and 50,000 Option Shares vested each month from April 2015 through March 2016. Accordingly, as of March 31, 2016, 1,000,000 Option Shares have vested and the Company recorded $2,317 as stock compensation expense for the year ended December 31, 2016, based on Black-Scholes.

  

On October 31, 2016, the Company granted (Warrant #1) to St. George the right to purchase at any time on or after November 10, 2016 (the “Issue Date”) until the date which is the last calendar day of the month in which the fifth anniversary of the Issue Date occurs (the “Expiration Date”), a number of fully paid and non-assessable shares (the “Warrant Shares”) of Company’s common stock, equal to $57,500 divided by the Market Price (defined below) as of the Issue Date, as such number may be adjusted from time to time pursuant to the terms and conditions of Warrant #1 to Purchase Shares of Common Stock. The Market Price is equal to the lowest intra-day trade price in the twenty (20) Trading Days immediately preceding the applicable date of exercise, multiplied by sixty percent (60%). The exercise price is the lower of $0.05 and is subject to price adjustments pursuant to the agreement and includes a cashless exercise provision. The Company also issued Warrant #’s 2-9, with each warrant only effective upon St. George funding of the secured notes they issued to the Company. Warrant #’s 2-9 give St. George the right to purchase Warrant Shares equal to $27,500 divided by the Market Price on the funded date. On December 14, 2016, the Company received a payment of $50,000, and accordingly, Warrant #2 became effective. During the year ended December 31, 2017, the Company received the funding on the remaining notes and Warrant #’s 3-9 became effective. During the nine months ended September 30, 2018, the company issued 39,251,579 shares of common stock to St. George pursuant to Notices of Exercise of 4,166,775 Warrants received. The shares were issued based upon the cashless exercise provision of the warrant.

 

  20  

 

The following table summarizes the activity related to warrants of the Company for the nine months ended September 30, 2018, and the year ended December 31, 2017:

 

    Number of Warrants   Weighted-Average Exercise Price per share   Weighted-Average Remaining Life (Years)
Outstanding and exercisable at December 31, 2016     17,926,130     $ 0.0811       4.88  
Warrant issued     40,573,870       0.00564       —    
Warrants exercised     (9,364,108 )     0.00564       —    
Outstanding and exercisable at December 31, 2017     49,135,892       0.00654       4.17  
Warrants issued     6,968,411       0,0176       5.0  
Warrants expired     (1,000,000 )     0.05          
Warrants exercised     (4,166,775 )     0.00564       —    
Outstanding and exercisable September 30, 2018     50,937,528     $ 0.0064       3.30  

 

Note 12 – Income Taxes

 

The Company accounts for income taxes under standards issued by the FASB. Under those standards, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations.

 

No provision for federal income taxes has been recorded due to the available net operating loss carry forwards of approximately $9,255,892 will expire in various years through 2032. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the future tax loss carry forwards.

 

The actual income tax provisions differ from the expected amounts calculated by applying the statutory income tax rate to the Company's loss before income taxes.  The components of these differences are as follows at September 30, 2018 and December 31, 2017:

 

    2018   2017
Net tax loss carry-forwards   $ 9,255,892     $ 7,878,733  
Statutory rate     21.0 %     37.6 %
Expected tax recovery     1,943,737       2,962,404  
Change in valuation allowance     (1,943,737 )     (2,962,404 )
Income tax provision   $ —       $ —    

 

Components of deferred tax asset:        
Non capital tax loss carry forwards   $ 1,943,737     $ 2,962,404  
Less: valuation allowance     (1,943,737 )       (2,962,404 )  
Net deferred tax asset   $ —       $ —    

 

  21  

 

Note 13 – Commitments and Contingencies

 

Office Space

  

In April 2014, the Company entered into a two-year sublease agreement for the use of up to 7,500 square feet with a Colorado based oncology clinical trial and drug testing company and facility presently doing cancer research and testing for established pharmaceutical companies seeking FDA approval for new drugs . Pursuant to the lease, as amended, the Company agreed to pay $3,500 per month for the space. The lease expired in April 2016, and the Company owes the landlord $48,750.

 

In January 2017, the Company signed a five (5) year lease, beginning February 1, 2017, for approximately 6,000 square feet of office space, comprised of two floors, in San Juan, Puerto Rico. Pursuant to the lease, the Company will pay $3,000 per month for the third floor of the building for the first year of the lease. The rent will increase 3% per year on February beginning in 2018 and an additional 3% per year on each successive February 1, during the term of the lease. The landlord agreed that the month of February 2017, the rent was $1,500. The rent for second floor of the building will be $2,000 per month during the term of the lease and the Company does not have any rent payments for the first three months of the lease (February 2017 through April 2017). Through September 30, 2017, the Company calculated the total amount of the rent for the term lease and recorded straight line rent expense of $45,417 and had made payments of $20,516. As of September 30, 2018, the Company has a balance of $24,916 in deferred rent which is included in the consolidated balance sheet. The leases for the second and third floor were cancelled in September 2017 as a result of Hurricane Irma.

 

Rent expense was $22,906 and $36,016 for the three and nine months ended September 30, 2018, and $34,873 and $92,940 for the three and nine months ended September 30, 2017, respectively.

 

Leased Properties

 

On April 28, 2014, the Company executed and closed a ten-year lease agreement for 20 acres of an agricultural farming facility located in South Florida following the approval of the so-called “Charlotte’s Web” legislation, aimed at decriminalizing low grade marijuana specifically for the use of treating epilepsy and cancer patients.  Pursuant to the lease agreement, the Company maintains a first right of refusal to purchase the property for three years. The Company has recorded $38,244 of expense (included in leased property expenses) for the years ended December 31, 2017, and 2016, respectively.  The Company is currently in default of the lease agreement, as rents have not been for the second year of the lease beginning May 2015.

 

On July 11, 2014, the Company signed a ten-year  lease agreement for an additional 40 acres in Pueblo, Colorado. The lease requires monthly rent payments of $10,000 during the first year and is subject to a 2% annual increase over the life of the lease. The lease also provides rights to 50 acres of certain tenant water rights for $50,000 annually plus cost of approximately $2,400 annually. The Company paid the $50,000 in July 2014, and has not used the property and any water and has not paid for any water rights after September 30, 2015. The Company has not recorded any expense for the three and nine months ended September 30, 2018, and 2017. The Company is currently in default of the lease agreement, as rents have not been paid since February 2015.

 

Agreements

 

On April 5, 2017, the Company executed a five (5) year operational and exclusive licensing agreement with a third party who leases a 15,000-sq. ft. approved cultivation facility located in San Juan, Puerto Rico. The Company will be the exclusive funding source, and supervise all infrastructure buildout, equipment lease/finance, security systems and personnel and provide access of seasoned Colorado and California cultivation crews to ensure the facility meets all standard operating procedures as set forth by the Department Of Health of Puerto Rico. Under the agreement, the Company is to receive $12,000 a month in consulting fees, licensing fees on all vaporizer and edible sales, equipment and lighting rental and financing fees along with equity interest in the property. As of September 30, 2018, and December 31, 2017, the Company has invested $170,000 and $110,000, respectively.

 

  22  

 

On August 7, 2017, the Company signed a LOI with Green Acres, whereby in consideration of consulting fees, licensing fees on all vaporizer and edible brands, equipment and lighting rental and financing fees, the Company will provide up to $250,000 of working capital and potentially, up to $3,500,000 for the buyout of Green Acres existing mortgage on their Washington State facility. As of September 30, 2018, and December 31, 2017, the Company has invested $115,000 and $100,000, respectively.

 

On October 5, 2017, the Company agreed to lease from the Company’s CEO, a "420 Style" resort and estate property approximately one hour outside of Quebec City, Canada. The fifteen-acre estate consists of nine (9) guest suites, horse stables, and is within walking distance to a public golf course. A separate structure will serve as a small grow facility run by patient employees and caretakers on the property which may be toured by guests of the facility. Pursuant to the agreement, the Company will pay $8,000 per month in exchange for the Company being entitled to all rents and income generated from the property. For the three and nine months ended September 30, 2018, the Company paid and recorded $24,000 and $72,000, respectively, of expense, included in leased property expense, related party in the condensed consolidated statements of operations, included herein. The Company will be responsible for all costs of the property, including, but not limited to, renovations, repairs and maintenance, insurance and utilities. For the three and nine months ended September 30, 2018, the Company has incurred $33,500 and $133,000, respectively, of renovation expense.

 

Legal & Other

 

On March 2, 2015, the Company, the Company’s CEO and the Company’s CFO at the time were named in a civil complaint filed by Erick Rodriguez (the “Rodriguez Matter”) in the District Court in Clark County, Nevada (the “DCCC”). The complaint alleges that Mr. Rodriguez never received 250,000 shares of Series B preferred stock that were initially approved by the Board of Directors in 2012, subject to the completion of a merger of a company controlled by Mr. Rodriguez. Since the merger was never completed, the shares were never certificated to Mr. Rodriguez. On March 21, 2017, the DCC agreed to Set Aside the Entry of Default against the Defendants. Mr. Rodriguez resigned in June 2013.  On April 12, 2018, an Arbitrator issued a final award to Rodriguez in the amount of $399,291. The Company and the Company’s counsel believe the Arbitrator denied a number of detailed objections to the award, which cited clear mistakes as to Nevada law and to the facts. The Company has retained a Nevada attorney who is an expert in fighting attempts to convert arbitration awards into judgments in Nevada courts, to work with our arbitration counsel. On May 3, 2018, the Arbitrator issued an amended final award of $631,537, inclusive of interest and legal fees. The Company recorded a loss of $232,246 on the legal matter, included in other expenses for the nine months ended September 30, 2018. On September 13, 2018, the motion to vacate the award was denied. On December 10, 2018, the parties agreed to a confidential settlement on the matter.

 

On May 6, 2016, the Company, B. Michael Freidman and Barry Hollander (former CFO) were named as defendants in a Summons/Complaint filed by Justin Braune (the “Plaintiff”) in Palm Beach County Civil Court, Florida (the “PBCCC”). The complaint alleges that Mr. Braune was entitled to shares of common stock of the Company. On December 5, 2016, the PBCCC set aside a court default that had been previously issued. The defendants have answered the complaint, including the defenses that Mr. Braune advised the Company’s transfer agent and the Company in his letter of resignation dated November 4, 2015, clearly stating that he has relinquished all shares of common stock. The Company has filed a counterclaim suit against the Plaintiff, as well as sanctions against the Plaintiff and their counsel.

 

Note 14 – Going Concern

 

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of September 30, 2018, the Company had an accumulated deficit of $25,868,419 and working capital deficit of $3,776,208, inclusive of a derivative liability of $1,911,033. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

  23  

 

Note 15 – Subsequent Events

 

From October 1, 2018 through November 28, 2018, the Company issued 139,411,403 shares of common stock upon the conversion of $454,768 of principal and $4,680 of accrued interest.

 

On October 3, 2018, the Company issued 3,129,980 shares of common stock to St George. The shares were previously recorded as shares to be issued, and have now been certificated.

 

On October 11, 2018, and October 25, 2018, the Company issued 4,300,000 and 5,300,000 shares of common stock, respectively, to St. George pursuant to a Notice of Exercise of Warrant received. The shares were issued based upon the cashless exercise provision of the warrant.

 

On December 10, 2018, Mr. Suneil Singh Mundie was appointed to the Board of Directors (the “BOD”) of the Company. Also, on December 10, 2018, the BOD received a letter of resignation from B. Michael Friedman, notifying the BOD that effective December 11, 2018, he was resigning as CEO of the Company as well as resigning from the BOD of the Company and any subsidiary BOD positions. Effective December 11, 2018, Mr. Mundie was named Interim CEO.

 

On December 10, 2018, the parties involved in the Rodriguez Matter (see Note 13) agreed to a confidential settlement.

 

 

  24  

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and notes thereto for the three and nine months ended September 30, 2018 and 2017.

 

The independent auditor’s reports on our financial statements for the years ended December 31, 2017 and 2016 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 14 to the unaudited condensed consolidated financial statements.

 

While our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our auditor has raised substantial doubt about our ability to continue as a going concern.

 

Results of Operations

 

For the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017

 

Revenues

 

Revenues for the three and nine months ended September 30, 2018, were $1,027 and $1,255, respectively, compared to $24,000 and $48,000 for the three and nine months ended September 30, 2017.

 

Cost of Sales

 

For the three and nine months ended September 30, 2018, cost of sales of $7,508 and $22,620 is comprised of consulting fees, including an allocation of $7,500, and $22,500, respectively, or twenty (20%) percent of the Company’s CEO fees.

 

  25  

 

Operating Expenses

 

Operating expenses were $235,274 and $1,099,739, respectively, for the three and nine months ended September 30, 2018, compared to $394,978 and $1,286,030 for the three and nine months ended September 30, 2017, respectively. The expenses were comprised of:

 

   

Three months ended

September 30,

 

Nine months ended

September 30,

Description   2018   2017   2018   2017
Administration and management fees   $ 41,108     $ 55,900     $ 150,415     $ 162,900  
Stock compensation expense, management     —         —         22,950       300,000  
Stock compensation expense, other     —         24,600       97,500       191,431  
Travel     41,167       52,412       124,610       93,215  
Advertising and marketing     637       11,879       60,376       24,927  
Gain on recapture of reserve on land     —         —         —         (47,502 )
Professional and consulting fees     25,932       148,040       248,057       338,744  
Rent and occupancy costs     22,906       34,873       36,018       92,940  
Leased property for sublease     59,057       9,561       257,123       28,683  
General and other administrative     44,467       57,713       102,690       100,692  
Total   $ 235,274     $ 394,978     $ 1,099,739     $ 1,286,030  

 

Administrative and management fees were comprised of:

 

   

Three months ended

September 30,

 

Nine months ended

September 30,

  Description   2018   2017   2018   2017
  CEO     $ 25,108     $ 37,500     $ 90,000     $ 112,500  
  Staff       16,000       18,400       60,415       50,400  
  Total     $ 41,108     $ 55,900     $ 150,415     $ 627,900  

   

Administration and management fees include $25,108 and $90,000 expensed as fees for our CEO for the three and nine months ended September 30, 2018, respectively, and $37,500 and $112,500 for the three and nine months ended September 30, 2017, respectively. Also included were fees paid for administration services of $16,000 (all related party) and $60,415 ($48,000 related party) for the three and nine months ended September 30, 2018, respectively, compared to $18,400 ($12,000 related party) and $50,400 ($36,000 related party) for the three and nine months ended September 30, 2017, respectively. The related party expenses were fees paid to Mrs. Friedman. The Company has agreed to compensation of $12,500 per month for the Company’s CEO and estimates that administration fees will be approximately $7,600 per month at this time.

 

For the nine months ended September 30, 2018, stock compensation expense management of $22,950 was recorded as on June 25, 2018, the Company issued 1,700,000 shares to Mr. Friedman. The Company recorded the expense of $22,950 (based on the market price of the Company’s common stock of $0.0135 per share) for 1,700,000 shares and is included in management fees in the condensed consolidated statements of operations for the nine months ended September 30, 2018.

 

For nine months ended September 30, 2017, stock compensation expense, management of $300,000, comprised of the Company issuing 10,000,000 shares of common stock to the Company’s CEO. The shares were issued for services performed as the sole Officer and director of the Company since November 2014. The Company valued the shares at $0.03 per share (the market price of the common stock) and recorded stock compensation expense, management, of $300,000 and is included in management fees in the condensed consolidated statements of operations for the nine months ended September 30, 2017.

 

Advertising and marketing fees included $25,000 for the nine months ended September 30, 2018, of related party expenses for fees paid to Mrs. Friedman for developing and managing the Company’s websites and social media accounts.

 

  26  

 

Stock compensation expense, other (included in professional and consulting fees) for the nine months ended September 30, 2018, was a re sult of 5,000,000 shares of common stock issued to Dr. Stephen Holt, for his appointment to the advisory board. The Company recorded an expense of $97,500 (based on the market price of the Company’s common stock of $0.0195 per share). Stock compensation expense, other (included in professional and consulting fees) was $24,600 and $191,431 for the three and nine months ended September 30, 2017, and were comprised of:

 

On January 16, 2017, the Company entered into a Business Consultant Agreement (the “BCA”). Pursuant to the BCA, the Company issued 5,000,000 shares of common stock for services to be provided to the Company related to business development, product marketing, helping identify mergers and acquisition candidates, and will consult with and advise the Company on matters pertaining to business modeling and strategic alliances. The Company valued the shares at $0.03 per share (the market price of the common stock) and recorded stock compensation expense of $150,000,

 

On January 30, 2017, the Company issued 1,000,000 shares of common stock to Venture Equity. The Company valued the shares at $0.03 per share (the market price of the common stock) and cancelled of $13,169 of accrued and unpaid fees owed Venture Equity and recorded stock- based compensation expense of $16,831, and

 

On August 8, 2017, the Company issued 2,000,000 shares of common stock for compensation for services of the Company’s chief operating officer. The Company valued the shares at $0.0123 per share (the market price of the common stock) and for the three and nine months ended September 30, 2017, recorded stock compensation expense, management, of $24,600.

 

Professional and consulting fees (excluding stock compensation expense, other) was $25,932 and $248,057 for the three and nine months ended September 30, 2018, respec tively, compared to $148,040 and $338,744 for the three and nine months ended September 30, 2017, respectively, and is comprised of the following:

 

   

Three months ended

September 30,

 

Nine months ended

September 30,

    2018   2017   2018   2017
Legal fees   $ 10,300     $ 97,590     $ 64,939     $ 169,594  
Consulting     (19,000 )     23,950       56,700       39,950  
Accounting and audit fees     16,000       14,500       59,500       59,500  
Investor relations     5,232       9,500       34,518       44,200  
Investor relations, related party     13,400       2,500       32,400       25,500  
Total   $ 25,932     $ 148,040     $ 248,057     $ 338,744  

 

Rent and occupancy costs were $22,906 and $36,016 for the three and nine months ended September 30, 2018, respectively, compa red to $36,016 and $92,940 for the three and nine months ended September 30, 2017, respectively. The decreases were primarily due to the 2017 periods included

 

a five (5) year lease, beginning February 1, 2017, for approximately 6,000 square feet of office space, comprised of two floors, in San Juan, Puerto Rico. Pursuant to the lease, the Company was to pay $3,000 per month for one floor for the first year of the lease. The rent will increase 3% per year on February beginning in 2018 and an additional 3% per year on each successive February 1, during the term of the lease. The landlord agreed that for the month of February 2017, the rent was $1,500. The rent for the other floor will be $2,000 per month during the term of the lease and the Company does not have any rent payments for the first three months of the lease (February 2017 through April 2017). The Company is straight lining the total lease payments over the term of the lease and for the three and nine months ended September 30, 2017 has included $17,031 and $45,417 of rent expense. There was no rent expense recorded for these leases for the three and nine months ended September 30, 2018.

 

In December 2016, the Company signed a one- year lease for office space in San Juan, Puerto Rico. The lease requires monthly base rent of $800 for the months of December 2016 through February 2017, and $900 per month for the months of March 2017 through November 2017. Effective May 15, 2017, the Company terminated this lease. For the nine months ended September 30, 2017 the Company has included $4,119 of rent expense related to this lease. There was no rent expense recorded for these leases for the three and nine months ended September 30, 2018.

 

  27  

 

On December 1, 2016, the Company signed a one (1) year lease for a corporate apartment in Puerto Rico for $5,500 per month. For the three months and nine months ended September 30, 2017, the Company has included $16,500 and $38,500, respectively, of rent expense related to this lease. There was no rent expense recorded for these leases for the three and nine months ended September 30, 2018.

 

Leased property available for sub-lease and property maintenance costs were $59,057 ($24,000 related) and $257,123 ($72,000 related) for the three and nine months ended September 30, 2 018, respectively, compared to $9,561 and $28,683 for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2018, the Company made lease payments of $24,000 and $72,000 for their lease with the Company’s CEO for, the "420 Style" resort and estate property approximately one hour outside of Quebec City, Canada. For the three and nine months ended September 30, 2018, the Company also had renovation and other expenses of $35,057 and $155,423, respectively, for this property, as well as $29,700 for the nine months ended Sept 30, 2018, for costs associated with acquiring and transferring licenses related to other property the Company leases. The 2017 costs were comprised of leased real estate. On April 28, 2014, the Company executed a 10- year lease agreement for 20 acres of an agricultural farming facility located in South Florida. The Company has recorded $9,561 and $28,683, respectively of expense for the three and nine months ended September 30, 2017. The Company is currently in default of the lease agreement, as rents have not been paid for the second year of the lease beginning May 2015.

 

General and other administrative costs for the three and nine months ended September 30, 2018, were $44,467 and $102,692, respectively, compared to $62,412 and $112,992 for the three and nine months ended September 30, 2017, respectively. The costs are comprised of public company expenses (including transfer agent fees, filing fees, press releases and other) and general office expenses.

 

Other Income (Expense), Net

 

Other expense for the three months ended September 30, 2018 was $1,251,458 and other income for the nine months ended September 30, 2018, was $830,762, compared to other expenses of $1,626,229 and $2,801,563 for the three and nine months ended September 30, 2017, respectively. Other expense for the three months ended September 30, 2018, included interest expense of $1,337,367 and a decrease in the fair value of derivatives of $85,909. Other income for the nine months ended September 30, 2018, included a decrease in the fair value of derivatives of $2,976,297, partially offset by interest expense of $1,854,530, the loss on debt settlement of $58,759 and a loss on legal matter of $232,246. Other expense for the three and nine months ended September 30, 2017, included the increase on the fair value of derivatives of $1,187,676 and $1,691,003, respectively and interest expense of $438,553 and $1,110,560, respectively.

 

A summary of interest expense for each of the periods is as follows:

 

   

Three months ended

September 30,

 

Nine months ended

September 30,

    2018   2017   2018   2017
Interest on face value of all notes   $ 89,325     $ 24,561     $ 143,609     $ 59,432  
Additional true up interest     —         —         —         17,369  
Amortization of note discount     1,227,439       396,392       1,622,702       904,639  
Prepayment fee     —         —         —         65,000  
Amortization of deferred financing fees     20,357       17,600       87,467       64,120  
Other     246       —         752       —    
Total   $ 1,337,367     $ 438,553     $ 1,854,530     $ 1,110,560  

 

Capital Resources and Liquidity

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As of September 30, 2018, we had cash and cash equivalents of $35,321, a decrease of $269,568, from $304,889 as of December 31, 2017. At September 30, 2018, we had current liabilities of $3,896,788 (including $1,911,033 of non-cash derivative liabilities) compared to current assets of $120,580 which resulted in working capital deficit of $3,776,208. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative liabilities and notes payable.

 

  28  

 

Operating Activities

 

For the nine months ended September 30, 2018, net cash used in operating activities was $1,048,835 compared to $782,991 for the nine months ended September 30, 2017.

 

The Company had a net loss for the nine months ended September 30, 2018 of $290,342 primarily attributable to a gain of $3,413,562 in the change of the fair value of derivative liabilities, partially offset by non-cash expenses of stock- based compensation of $120,450, the initial derivative liability expense of $437,368 on new convertible notes and warrants issued and the amortization of discounts and financing fees on convertible notes of $1,710,168, loss on debt settlement of $58,759 and loss on legal matter of $232,246.

 

The Company had a net loss for the nine months ended September 30, 2017 of $4,039,592 which included non-cash expenses of stock based compensation of $491,431, the initial derivative liability expense of $962,317 on new convertible notes issued and the amortizations related to convertible notes of $968,758, other non- cash interest expense of $16,094, an increase in fair value of derivative liability of $728,687 reduced by a gain on reversing a previous reserve on land acquired of $47,502 and for the decrease in fair value of the derivative liability of $157,943.

 

Investing Activities

 

During the nine months ended September 30, 2018, net cash used in investing activities was $132,176 compared to $303,788 for the nine months ended September 30, 2017. For the period ending September 30, 2018, the Company purchased furniture and equipment of $57,176 and also expended $75,000 to increase the investment in note receivables related to two separate five- year exclusive licensing and operation agreements. During the nine months ended September 30, 2017, net cash used in investing activities was $303,788. The 2017 period was the result of the Company investing $235,000 pursuant to the operational and licensing agreement between the Company and a third party, paying $41,554 as part of the purchase price to acquire 80 acres in Pueblo Colorado, $17,375 of equipment and $9,859 in furniture and equipment for the Puerto Rico offices.

 

Financing Activities

 

Net cash provided by financing activities was $911,442 and $1,330,693 for the nine months ended September 30, 2018 and 2017, respectively. The 2018 activity was comprised of proceeds received related to the issuance of convertible promissory notes of $729,500 and $390,000 related to Stock Purchase Agreements with St. George. The Company also made payments of $178,058 of principal and accrued interest on convertible promissory notes and $30,000 on notes payable. The 2017 activity was primarily a result of proceeds from the issuance of convertible promissory notes of $1,103,193, $335,000 related to Stock Purchase Agreements with St. George. and payments of $17,500 made on a note payable. 

 

Off Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

 

As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had an accumulated deficit at September 30, 2018, and net cash used in operating activities for the reporting period then ended. These conditions raise substantial doubt about its ability to continue as a going concern.

 

  29  

 

The Company is attempting to produce sufficient revenue; however, the Company’s cash position may not be sufficient to support its daily operations. While the Company believes in the viability of its strategy to produce sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenues and in its ability to raise additional funds.

 

The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Critical Accounting Policies

 

Accounting Policies and Estimates

 

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

  

Basis of Presentation and Principles of Consolidation

 

The accompanying condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present the financial position, results of operations and cash flows for the stated periods have been made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated unaudited financial statements should be read in conjunction with a reading of the Company’s consolidated financial statements and notes thereto. Interim results of operations for the nine months ended September 30, 2018, are not necessarily indicative of future results for the full year. Certain amounts from the 2017 period have been reclassified to conform to the presentation used in the current period.

 

The condensed consolidated unaudited financial statements of the Company  include the consolidated accounts of Agritek and its wholly owned subsidiaries AVHI, Prohibition Products, Inc. (“PPI”), and the American Hemp Trading Company, Inc., a Colorado corporation (dba 77 Acres, Inc.). PPI, a Florida corporation, was originally formed on July 1, 2013 as The American Hemp Trading Company, Inc., a Florida corporation (“Hemp FL”) and on August 27, 2014, Hemp FL changed its name to PPI. All intercompany accounts and transactions have been eliminated in consolidation.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” (“SAB No. 104”). SAB 104 clarifies application of generally accepted accounting principles related to revenue transactions. The Company also follows the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF Issue No. 00-21”), in arrangements with multiple deliverables.

 

The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.

  

  30  

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.

 

Accounts Receivable

 

The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectability is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term. As of September 30, 2018, and December 31, 2017, based on the above criteria, the Company has a full allowance for doubtful accounts of $43,408.

 

Inventory

 

Inventory is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow- moving inventory is made based on management analysis or inventory levels and future sales forecasts.

  

Notes receivable

 

As of September 30, 2018, the Company has recorded notes receivable the following:

 

 

$170,000 pursuant to a five (5) year operational and exclusive licensing agreement with a third party who leases a 15,000-sq. ft. approved cultivation facility located in San Juan, Puerto Rico (see Note 10).

 

 

$115,000 pursuant to a five (5) year operational and exclusive licensing agreement with a third party who leases a 10,000-sq. ft. approved cultivation facility located in Washington State (see Note 10).

  

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed

 

We evaluate long-lived assets and identifiable intangible assets with finite useful lives in accordance with ASC 350-30 and ASC 360 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), and accordingly, management reviews our long-lived assets and identifiable intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize an impairment loss when the sum of the future undiscounted net cash flows expected to be realized from the asset is less than its carrying amount. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Considerable judgment is necessary to estimate the fair value of the assets and accordingly, actual results could vary significantly from such estimates. Our most significant estimates and judgments relating to the long-lived asset impairments include the timing and amount of projected future cash flows.

   

Fair Value of Financial Instruments

 

Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).

 

  31  

 

Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.

 

The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

The three hierarchy levels are defined as follows:

 

Level 1 – Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;

 

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.

 

The Company's financial instruments consist primarily of cash, accounts receivable, notes receivable, accounts payable and accrued expenses, note payable and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.  The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.

 

Earnings (Loss) Per Share

 

Earnings (loss) per share are computed in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. As of September 30, 2018, there were warrants and options to purchase 50,937,528 shares of common stock and the Company’s outstanding convertible debt is convertible into approximately 245,073,504 shares of common stock. These amounts are included in the computation of income per share because their impact is dilutive.

 

Accounting for Stock-Based Compensation 

 

The Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. Stock awards granted to non-employees are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in which services are provided. For the nine months ended September 30, 2018, the Company recorded stock- based compensation of $120,450, respectively (See Note 9), and $24,600 and $491,431 for the three and nine months ended September 30, 2017.

 

  32  

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4. Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow our management to make timely decisions regarding required disclosure. Our President, who serves as our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and he determined that our disclosure controls and procedures were not effective as of June 30, 2018 due to a control deficiency. During the period we did not have additional personnel to allow segregation of duties to ensure the completeness or accuracy of our information. Due to the size and operations of the Company, we are unable to remediate this deficiency until we acquire or merge with another company.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II.  Other Information

 

Item 1 Legal Proceedings

 

On March 2, 2015, the Company, the Company’s CEO and the Company’s CFO at the time were named in a civil complaint filed by Erick Rodriguez in the District Court in Clark County, Nevada (the “DCCC”). The complaint alleges that Mr. Rodriguez never received 250,000 shares of Series B preferred stock that were initially approved by the Board of Directors in 2012, subject to the completion of a merger of a company controlled by Mr. Rodriguez. Since the merger was never completed, the shares were never certificated to Mr. Rodriguez. On March 21, 2017, the DCC agreed to Set Aside the Entry of Default against the Defendants. Mr. Rodriguez resigned in June 2013.  On April 12, 2018, an Arbitrator issued a final award to Rodriguez in the amount of $399,291. The Company and the Company’s counsel believe the Arbitrator denied a number of detailed objections to the award, which cited clear mistakes as to Nevada law and to the facts. The Company has retained a Nevada attorney who is an expert in fighting attempts to convert arbitration awards into judgments in Nevada courts, to work with our arbitration counsel. The Company recorded a loss on legal matter, included in other expenses for the year ended December 31, 2017. On May 3, 2018, the Arbitrator issued an amended final award of $631,537, inclusive of interest and legal fees. The Company recorded a loss of $232,246 on the legal matter, included in other expenses for the nine months ended September 30, 2018. On September 13, 2018, the motion to vacate the award was denied. The case at the District Court level brought up many unique issued for Nevada. The Company feels confident that we can resolve the case and decision within the Nevada Supreme Court and appellate process.

 

On May 6, 2016, the Company, B. Michael Freidman and Barry Hollander (former CFO) were named as defendants in a Summons/Complaint filed by Justin Braune (the “Plaintiff”) in Palm Beach County Civil Court, Florida (the “PBCCC”). The complaint alleges that Mr. Braune was entitled to shares of common stock of the Company. On December 5, 2016, the PBCCC set aside a court default that had been previously issued. The defendants have answered the complaint, including the defenses that Mr. Braune advised the Company’s transfer agent and the Company in his letter of resignation dated November 4, 2015, clearly stating that he has relinquished all shares of common stock. The Company has filed a counterclaim suit against the Plaintiff, as well as sanctions against the Plaintiff and their counsel.

 

  33  

 

Item 1A. Risk Factors

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934 and are not required to provide the information under this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   

During the three months ended September 30, 2018, the Company issued the following shares of common stock upon the conversions of portions of the convertible notes:

 

Date   Principal Conversion   Conversion Price   Shares Issued   Issued to
  7/9/18     $ 17,690     $ 0.00707       2,500,000     L2
  7/31/18     $ 27,550     $ 0.00550       5,000,000     L2
  8/6/18     $ 44,080     $ 0.00551       8,000,000     L2
  9/18/18     $ 29,928     $ 0.00498       6,000,000     L2
  9/24/18     $ 31,320     $ 0.00520       6,000,000     L2
  9/28/18     $ 36,540     $ 0.00522       7,000,000     L2
        $ 187,108               34,500,000      

 

In addition to the above, during the three months ended September 30, 2018, the Company:

 

On July 19, 2018, issued 4,900,000 shares of common stock to St. George pursuant to Notices of Exercise of Warrant received. The shares were issued based upon the cashless exercise provision of the warrant.

 

On September 24, 2018, issued 3,800,000 shares of common stock to St. George pursuant to Notices of Exercise of Warrant received. The shares were issued based upon the cashless exercise provision of the warrant.

 

Item 3. Defaults upon Senior Securities

 

None. 

 

I tem  4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Convertible Debenture Proceeds

  

On July 9, 2018, the Company received proceeds of $50,000 from L2 Capital, pursuant to a convertible promissory note issued on May 8, 2018, in the amount of $55,555. The proceeds received were after disbursements of lender’s legal fees and an original issue discount.

 

On August 10, 2018, the Company received proceeds of $50,000 from L2 Capital, pursuant to a convertible promissory note issued on May 8, 2018, in the amount of $55,555. The proceeds received were after disbursements of lender’s legal fees and an original issue discount.

 

On September 4, 2018, the Company received proceeds of $4,500 from L2 Capital, pursuant to a convertible promissory note issued on May 8, 2018, in the amount of $5,000. The proceeds received were after disbursements of lender’s legal fees and an original issue discount.

 

On September 18, 2018, the Company received proceeds of $50,000 from L2 Capital, pursuant to a convertible promissory note issued on May 8, 2018, in the amount of $55,555. The proceeds received were after disbursements of lender’s legal fees and an original issue discount.

 

  34  

 

Item 6. Exhibits

 

Exhibit    
Number    Description of Exhibit
     
10.1   Form of Convertible Promissory Note by and between Agritek Holdings, Inc. and Vis Vires Group, Inc. dated February 23, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015).
10.2   Form of 8% Convertible Redeemable Note by and between Agritek Holdings, Inc. and LG Capital Funding, LLC dated March 27, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015).
10.3   Form of 8% Convertible Redeemable Note by and between Agritek Holdings, Inc. and GW Holding Group, LLC dated March 30, 2015. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 10-Q with the SEC on May 18, 2015).
10.4+   Employment and Board of Directors Agreement effective March 20, 2015 by and between Agritek Holdings, Inc. and Justin Braune (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on March 20, 2015).
10.5   Deed in Lieu of Foreclosure Agreement dated December 16, 2015, by and among Agritek Holdings, Inc. and Tonaquint, Inc. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on February 12, 2016).
10.6   Replacement Note dated January 5, 2016, issued to LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.2 as filed on Form 8-K with the SEC on February 12, 2016).
10.7   Replacement Note dated January 5, 2016, issued to LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.3 as filed on Form 8-K with the SEC on February 12, 2016).
10.8   Replacement Note dated January 5, 2016, issued to Cerberus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.4 as filed on Form 8-K with the SEC on February 12, 2016).
10.9   Securities Purchase Agreement dated January 19, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.5 as filed on Form 8-K with the SEC on February 12, 2016).
10.10   Convertible Redeemable Note dated January 19, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.6 as filed on Form 8-K with the SEC on February 12, 2016).
10.11   Securities Purchase Agreement dated January 19, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD. (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on February 12, 2016).
10.12   Convertible Redeemable Note dated January 19, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.8 as filed on Form 8-K with the SEC on February 12, 2016).
10.13   Securities Purchase Agreement dated March 23, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD. (Incorporated herein by reference to Exhibit 10.13 as filed on Form 10-Q with the SEC on May 23, 2016).
10.14   Convertible Redeemable Note dated March 23, 2016, by and between Agritek Holdings, Inc. and Cerberus Finance Group, LTD (Incorporated herein by reference to Exhibit 10.14 as filed on Form 10-Q with the SEC on May 23, 2016).
10.15   Securities Purchase Agreement dated December 13, 2016 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on December 19, 2016).
10.16   Convertible Redeemable Note dated December 13, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.2 as filed on Form 8-K with the SEC on December 19, 2016).
10.17   Convertible Redeemable Note Back End dated December 13, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.3 as filed on Form 8-K with the SEC on December 19, 2016).
     

 

  35  

 

10.18   Collateralized Secured Promissory Note dated December 13, 2016, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.4 as filed on Form 8-K with the SEC on December 19, 2016).
10.19   Termination Agreement dated December 13, 2016 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.5 as filed on Form 8-K with the SEC on December 19, 2016).
10.20   Investor Note #1 dated October 31, 2016, by and between Agritek Holdings, Inc. and St. George Investments LLC. (Incorporated herein by reference to Exhibit 10.6 as filed on Form 8-K with the SEC on December 19, 2016).
10.21   Warrant #2 dated October 31, 2016, by and between Agritek Holdings, Inc. and St. George Investments LLC. (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on December 19, 2016).
10.22   Investments LLC. (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on December 19, 2016).
10.23   Securities Purchase Agreement dated January 24, 2017 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on January 31, 2017).
10.24   Convertible Redeemable Note dated January 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.2 as filed on Form 8-K with the SEC on January 31, 2017).
10.25   Convertible Redeemable Note Back End dated January 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.3 as filed on Form 8-K with the SEC on January 31, 2017).
10.26   Collateralized Secured Promissory Note dated January 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.4 as filed on Form 8-K with the SEC on January 31, 2017).
10.27   Securities Purchase Agreement dated January 24, 2017 by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.5 as filed on Form 8-K with the SEC on January 31, 2017).
10.28   Convertible Redeemable Note dated January 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.6 as filed on Form 8-K with the SEC on January 31, 2017).
10.29   Convertible Redeemable Note Back End dated January 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD.  (Incorporated herein by reference to Exhibit 10.7 as filed on Form 8-K with the SEC on January 31, 2017).
10.30   Collateralized Secured Promissory Note dated January 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.8 as filed on Form 8-K with the SEC on January 31, 2017).
10.31   Securities Purchase Agreement dated February 1, 2017 by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD. (Incorporated herein by reference to Exhibit 10.31 as filed on Form 10-K with the SEC on March 31, 2017).
10.32   Convertible Promissory Note dated February 1, 2017, by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD. (Incorporated herein by reference to Exhibit 10.32 as filed on Form 10-K with the SEC on March 31, 2017).
10.33   Securities Purchase Agreement dated February 24, 2017 by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.33 as filed on Form 10-K with the SEC on March 31, 2017).
10.34   Convertible Redeemable Note dated February 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.34 as filed on Form 10-K with the SEC on March 31, 2017).
10.35   Convertible Redeemable Note Back End dated February 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.35 as filed on Form 10-K with the SEC on March 31, 2017).
10.36   Collateralized Secured Promissory Note dated February 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.36 as filed on Form 10-K with the SEC on March 31, 2017).
  36  

 

10.37   Securities Purchase Agreement dated February 24, 2017 by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.37 as filed on Form 10-K with the SEC on March 31, 2017).
10.38   Convertible Redeemable Note dated February 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. (Incorporated herein by reference to Exhibit 10.38 as filed on Form 10-K with the SEC on March 31, 2017).
10.39   Convertible Redeemable Note Back End dated February 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD.  (Incorporated herein by reference to Exhibit 10.39 as filed on Form 10-K with the SEC on March 31, 2017).

  10.40  

Collateralized Secured Promissory Note dated February 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD.  (Incorporated herein by reference to Exhibit 10.40 as filed on Form 10-K with the SEC on March 31, 2017).

  10.41  

Securities Purchase Agreement dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.41 as filed on Form 10-K with the SEC on March 31, 2017).

  10.42  

Convertible Redeemable Note dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.42 as filed on Form 10-K with the SEC on March 31, 2017).

  10.43  

Convertible Redeemable Note Back End dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.43 as filed on Form 10-K with the SEC on March 31 , 2017).

  10.44  

Collateralized Secured Promissory Note dated March 24, 2017, by and between Agritek Holdings, Inc. and LG Capital Funding, LLC. (Incorporated herein by reference to Exhibit 10.44 as filed on Form 10-K with the SEC on March 31, 2017).

  10.45   Securities Purchase Agreement dated April 24, 2017 by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD.

10.46

 

 

  Convertible Redeemable Note dated April 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD.  Convertible Redeemable Note Back End dated April 24, 2017, by and between Agritek Holdings, Inc. and Cerberus Finance Group LTD. 
  10.47   Securities Purchase Agreement, dated May 8, 2018, by and between the Company and Investor (Incorporated herein by reference to Exhibit 10.1 as filed on Form 8-K with the SEC on May 30, 2018).
  10.48  

Promissory Note, dated May, 2018, by and between the Company and Investor (Incorporated herein by reference to Exhibit 10.2 as filed on Form 8-K with the SEC on May 30, 2018).

  10.49   Common Stock Purchase Warrant, dated May 8, 2018, by and between the Company and Investor (Incorporated herein by reference to Exhibit 10.3 as filed on Form 8-K with the SEC on May 30, 2018).  
    10.50*   Convertible Promissory Note dated May 4 2018, by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD..
   10.51*   Securities Purchase Agreement dated May 4, , 2018, by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD.
  10.52*   Convertible Promissory Note dated June 22, 2018, by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD..
  10.53*   Securities Purchase Agreement dated June 22, 2018, by and between Agritek Holdings, Inc. and Power Up Lending Group, LTD.
101.INS* XBRL Instance  
101.SCH* XBRL Taxonomy Extension Schema  
101.CAL* XBRL Taxonomy Extension Calculation Linkbase  
101.DEF* XBRL Taxonomy Extension Definition Linkbase  
101.LAB* XBRL Taxonomy Extension Labels Linkbase  
101.PRE* XBRL Taxonomy Extension Presentation Linkbase  
       

* Filed herewith.

+ Management contract or compensatory plan or arrangement.

  37  

 

 

SIGNATURES

 

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

 

Dated: December 17, 2018

 

AGRITEK HOLDINGS, INC.

 

 

By:    /s/ Suneil Singh Mundie          

Suneil Singh Mundie

Interim Chief Executive Officer (principal executive, principal financial and accounting officer)

 

Agritek Holdings, Inc. (USOTC:AGTK)
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