UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period ended September 30, 2019

OR

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

 

For the transition period from

__________to __________

 

Commission File No.: 333-177532

 

KAYA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware   90-0898007
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)

 

 

915 Middle River Drive

Suite 316

Ft. Lauderdale, Florida 33304

(Address of principal executive offices)

 

(954)-892-6911

(Issuer's telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None        

 

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 past 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 [X] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation ST (�232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X ] No [ ]

 

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

 

 

 

Large Accelerated Filer [ ] Accelerated Filer [ ]
Non-accelerated Filer [ ] Smaller reporting company [X]
  Emerging growth company [X]

 

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 Section 13(a) of the Exchange Act. [ ]

 

 

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

 

As of November 18, 2019, the Issuer had 187,603,812 shares of its common stock outstanding.

  1  

 

 

KAYA HOLDINGS, INC.

 

INDEX TO QUARTERLY REPORT ON FORM 10 Q

 

Part I – Financial Information Page

 

 

Item 1. Condensed Consolidated Financial Statements Page
Condensed Consolidated Balance Sheets at September 30, 2019 (unaudited) and December 31, 2018 (audited)  3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2019 and 2018 (unaudited) 5
Statement of Stockholder’s equity for the nine months ended September 30, 2019 and 2018 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 76
Item 4. Controls and Procedures 76
   
Part II Other Information  
   
Item 1. Legal Proceedings 76
Item 1A. Risk Factors 77
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 77
Item 3. Defaults Upon Senior Securities 78
Item 4. Mine Safety Disclosures 78
Item 5. Other Information 78
Item 6. Exhibits 78
Signatures 79

 

 

  2  

 

Kaya Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

September 30, 2019 (Unaudited) and December 31, 2018

 

ASSETS
    (Unaudited)   (Audited)
    September 30, 2019   December 31, 2018
CURRENT ASSETS:                
Cash and equivalents   $ 11,079     $ 111,512  
Inventory-net of allowance     121,916       131,542  
Prepaid expenses     10,274       20,541  
Total current assets     143,269       263,595  
                 
NON-CURRENT ASSETS:                
Right-of-use asset - operating lease     337,628       —    
Property and equipment, net     2,196,596       2,348,780  
Deposits     31,523       31,523  
Total other assets     2,565,747       2,380,303  
                 
Total assets   $ 2,709,016     $ 2,643,898  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)                
                 
CURRENT LIABILITIES:                
Accounts payable and accrued expense   $ 695,590     $ 562,016  
Accounts payable and accrued expense-related parties     8,137       7,737  
Accrued interest     1,004,247       659,169  
Right-of-use liabiliy - operating lease     195,986       —    
Convertible notes payable-net of discount     352,506       2,894,294  
Notes payable     9,312       9,312  
Derivative liabilities     9,164,912       19,783,034  
Total current liabilities     11,430,690       23,915,562  
                 
LONG TERM LIABILITIES:                
Convertible notes payable-related party-net of discount     500,000       500,000  
Convertible notes payable-net of discount     4,940,906       1,283,557  
Notes payable-related party     250,000       250,000  
Right-of-use liabiliy - operating lease     146,029       —    
Total long term liabilities     5,836,935       2,033,557  
                 
Total liabilities     17,267,625       25,949,119  
                 
STOCKHOLDERS' EQUITY (DEFICIT):                
Convertible preferred stock, Series C, par value $.001; 10,000,000 shares authorized;                
49,900 and 49,900 issued and outstanding at September 30, 2019 and December 31, 2018     50       50  
, respectively                
Common stock , par value $.001;  500,000,000 shares authorized;                
173,598,080 shares issued as of September 30, 2019 and                
  165,812,128 shares issued as of December 31, 2018     173,598       165,812  
Subscriptions payable     163,630       397,209  
Additional paid in capital     17,401,555       17,100,137  
Accumulated deficit     (30,995,734 )     (39,924,912 )
Non-controlling interest     (1,301,708 )     (1,043,517 )
Net stockholders' equity/(deficit)     (14,558,609 )     (23,305,221 )
                 
Total liabilities and stockholders' equity/(deficit)   $ 2,709,016     $ 2,643,898  

           

 

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

  3  

 

    

Kaya Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

                 

 

    For the three   For the three   For the nine   For the nine
    months ended   months ended   months ended   months ended
    September 30, 2019   September 30, 2018   September 30, 2019   September 30, 2018
                 
Net sales   $ 208,843     $ 303,888     $ 721,722     $ 850,386  
                                  
Cost of sales     99,460       136,527       337,691       357,538  
                                 
Gross profit     109,383       167,361       384,031       492,848  
                                 
Operating expenses:                                
Professional fees     71,363       511,415       262,332       1,869,474  
Salaries and wages     142,378       155,539       403,248       391,171  
General and administrative     234,085       260,652       694,305       599,898  
Total operating expenses     447,826       927,606       1,359,885       2,860,543  
                                 
Operating loss     (338,443 )     (760,245 )     (975,854 )     (2,367,695 )
                                 
Other income(expense):                                
Interest expense     (137,308 )     (179,676 )     (395,703 )     (463,484 )
Amortization of debt discount     (401,980 )     (783,040 )     (1,115,766 )     (1,907,162 )
Derivative liabilities expense     (64,381 )     (955,759 )     (626,529 )     (2,869,350 )
Gain (loss) on extinguishment of debt     —         (1,054,825 )     (25,000 )     (1,054,825 )
Change in derivative liabilities expense     1,668,486       4,250,351       11,809,651       20,355,496  
Other income (expense)     (50 )     (241 )     188       (241 )
Total other income (expense)     1,064,767       1,276,810       9,646,841       14,060,434  
                                 
Net income (loss)     726,324       516,565       8,670,987       11,692,739  
                                 
Net (loss) attributed to non-controlling interest     (89,583 )     (63,359 )     (258,191 )     (137,913 )
                                 
Net income (loss) attributed to Kaya Holdings, Inc.     815,907       579,924       8,929,178       11,830,652  
                                 
Basic net income (loss) per common share   $ 0.00     $ 0.00     $ 0.05     $ 0.08  
                                 
Weighted average number of common shares outstanding - Basic     173,598,080       154,705,344       171,794,716       144,462,038  
                                 
Diluted net income (loss) per common share   $ 0.00     $ 0.00     $ 0.02     $ 0.08  
                                 
Weighted average number of common shares outstanding - Diluted     432,023,413       154,705,344       430,220,049       144,462,038  

 

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

  4  

 

Kaya Holdings, Inc. and Subsidiaries

Consolidated Statement of Cashflows

(Unaudited)

 

    For the nine   For the nine
    months ended   months ended
    September 30, 2019   September 30, 2018
OPERATING ACTIVITIES:                
Net income/(loss)   $ 8,929,178     $ 11,830,652  
Adjustments to reconcile net loss to net cash used in operating activities:                
Net income/(loss) attributable to non-controlling interest     (258,191 )     (137,913 )
Depreciation     171,852       99,507  
Imputed interest     50,625       22,500  
Loss (Gain) on Extinguishment of Debt     25,000       1,054,825  
Derivative expense     626,529       2,869,350  
Change in derivative liabilities     (11,809,651 )     (20,355,496 )
Amortization of debt discount     1,115,766       1,907,162  
Stock to be issued for services - related parties     —         942,400  
Stock to be issued for services     —         313,510  
Changes in operating assets and liabilities:                
Prepaid expense     10,267       (19,525 )
Inventory     9,626       (18,810 )
Right-of-use asset     300,965       —    
Deposits     —         66,974  
Accrued interest     345,078       280,574  
Accounts payable and accrued expenses     133,769       85,630  
Right-of-use liabilities     (296,578 )     —    
                 
        Net cash used in operating activities     (645,765 )     (1,058,660 )
                 
INVESTING ACTIVITIES:                
Purchase of property and equipment     (19,668 )     (162,828 )
Net cash used in investing activities     (19,668 )     (162,828 )
                 
FINANCING ACTIVITIES:                
Proceeds from Common stock subscription     —         300,000  
Proceeds from convertible debt     565,000       970,000  
Payments on notes payable     —         (51,274 )
        Net cash provided by financing activities     565,000       1,218,726  
                 
NET INCREASE IN CASH     (100,433 )     (2,762 )
                 
CASH BEGINNING BALANCE     111,512       318,462  
                 
CASH ENDING BALANCE   $ 11,079     $ 315,700  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Taxes paid     —         —    
Interest paid     —         —    
                 
NON-CASH TRANSACTIONS AFFECTING OPERATING, INVESTING                
   AND FINANCING ACTIVITIES:                
Reclassification of derivative liability to additional paid in capital     —         1,049,065  
Value of accrued interest payable reclassified as principal     —         7,133  
Adoption of lease standard ASC 842     638,593       —    
Derivative liability on convertible note payable     565,000       —    
Value of common shares issued for conversion of convertible     233,579       —    
notes payable issued from stock payable                
Value of common shares issued for acquisition of fixed assets     —         1,417,200  
Value of common shares issued as payment of debt and interest     —         245,774  
Value of common shares issued as payment of interest     —         45,708  

 

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

  5  

 

Kaya Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

For the nine months ended September 30, 2019 and 2018

(Unaudited)

 

              Additional Paid-in Capital   Accumulated Deficit   Noncontrolling Interest   Total Stockholders'  Equity
                   
                   
   Preferred Stock     Common Stock    Subscription Payable        
  Shares   Amount   Shares   Amount   Amount        
                                   
Balance, December 31, 2017   49,900    $     50     138,993,087    $ 138,993    $ 152,796    $ 12,811,671    $  (44,672,209)    $     (833,710)    $          (32,402,409)
                                   
Imputed interest          -               -                         -                   -                   -                   72,450                         -                         -                             72,450
                                   
Common stock issued pursuant to director compensation policy          -               -              6,200,000            6,200                -                 936,200                         -                         -                           942,400
                                   
Common stock issued for services          -               -              2,100,000            2,100              100              311,310                         -                         -                           313,510
                                   
Common stock issued for cash          -               -              3,000,000            3,000                247,050                         -                         -                           250,050
                                   
Common stock to be issued for acquisition of fixed assets          -               -            12,000,000          12,000                -               1,405,200                         -                         -                         1,417,200
                                   
Common stock issued for debt conversion and interest          -               -              3,419,041            3,418            5,980            1,336,909                         -                         -                         1,346,308
                                   
Reclassification of subscription payable to additional paid-in capital          -               -                         -                   -          (149,890)              149,890                         -                         -                                   -   
                                   
Reclassification of derivative liability related to convertible notes          -               -                         -                   -                   -               1,049,065                         -                         -                         1,049,065
                                   
Payment on subscriptions payable          -               -                         -                   -                   -                      -                            -                         -                                   -
                                   
Net loss          -               -                         -                   -                   -                         -               11,830,652             (137,913)                    11,692,739
                                   
Balance, September 30, 2018   49,900    $     50     165,712,128    $ 165,711    $     8,986    $ 18,319,745    $  (32,841,557)    $     (971,623)    $          (15,318,688)
                                   
                                   
Balance, December 31, 2018   49,900    $     50     165,812,128    $ 165,812    $ 397,209    $ 17,100,137    $  (39,924,912)    $  (1,043,517)    $          (23,305,221)
                                   
Imputed interest            -              -                        -                  -                  -                50,625                           -                        -                          50,625
                                   
Loss on debt extinguishment            -              -                        -                  -                  -                25,000                           -                        -                          25,000
                                   
Common stock issued for debt conversion and interest            -              -           7,785,952            7,786       (233,579)              225,793                           -                        -                                -   
                                   
Net loss            -              -                        -                  -                  -                        -              8,929,178             (258,191)                      8,670,987
                                   
Balance, September 30, 2019   49,900    $     50     173,598,080    $ 173,598    $ 163,630    $ 17,401,555    $  (30,995,734)    $  (1,301,708)    $          (14,558,609)

 

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

  6  

 

NOTE 1 – ORGANIZATION AND NATURE OF THE BUSINESS

 

Organization

 

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

 

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

 

Nature of the Business  

 

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

 

On July 3, 2014 opened its first Kaya Shack™ MMD in Portland, Oregon.  In April 2015, KAYS commenced its own medical marijuana grow operations for the cultivation and harvesting of legal marijuana thereby becoming the first publicly traded U.S. company to own a majority interest in a vertically integrated legal marijuana enterprise in the United States. In October 2015, concurrent with Oregon commencing legal sales of recreational marijuana through MMDs, KAYS opened its second retail outlet in Salem, Oregon, the Kaya Shack™ Marijuana Superstore. During 2015, the Company also consolidated its grow operations and manufacturing operations into a single facility in Portland, Oregon.

 

In 2016, Oregon began the process to transition legal marijuana sales from Oregon Health Authority (“OHA”) licensed MMDs and grow operations to Oregon Liquor Control Commission (“OLCC”) licensed recreational marijuana retailers and producer and processing facilities. Effective January 1, 2017, all retailers of recreational marijuana were required to have a recreational marijuana sales license issued by the OLLC for each retail outlet operated.

 

In 2016 the Company applied for OLLC licenses for its two initial Kaya Shack™ retail outlets (Portland, Oregon and South Salem, Oregon), and also submitted license applications for its two new locations under construction and development at that time.

 

In late December 2016, we received our OLCC recreational license for the South Salem Kaya Shack™ Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #1) and recreational and medical sales continued without interruption from 2016 through the present at that location.

 

On March 21, 2017, we received our North Salem Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #2) a 2,600-square foot Kaya Shack™ Marijuana Superstore in North Salem, Oregon, whereupon the location opened for business with both recreational and medical sales.

 

On May 2, 2017, we received our OLCC recreational license for our Portland Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #3) after a delay of approximately four months. During that period, we were limited to solely medical sales at the Portland location. Upon receipt of Kaya Shack™ OLCC Marijuana Retailer License #3, recreational sales recommenced at that location. Our OLCC License for the Central Salem Kaya Shack™ Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #4) has been filed and is pending completion, inspection and final licensing.

 

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

 

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

  7  

 

 

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

 

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

 

NOTE 2 – LIQUIDITY AND GOING CONCERN

 

The Company’s consolidated financial statements as of September 30, 2019 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net income of $8,929,178 for the nine months ended September 30, 2019 and a net income of $11,830,652 for the nine months ended September 30, 2018. The decrease in net income is due to the changes in derivative liabilities and the company continues to have operating losses. At September 30, 2019 the Company has a working capital deficiency of $11,287,421 and is totally dependent on its ability to raise capital. The Company has a plan of operations and acknowledges that its plan of operations may not result in generating positive working capital in the near future. Even though management believes that it will be able to successfully execute its business plan, which includes third-party financing and capital issuance, and meet the Company’s future liquidity needs, there can be no assurances in that regard. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this material uncertainty. Management recognizes that the Company must generate additional funds to successfully develop its operations and activities. Management plans include:

 

  the sale of additional equity and debt securities,

 

  alliances and/or partnerships with entities interested in and having the resources to support the further development of the Company’s business plan,

 

  business transactions to assure continuation of the Company’s development and operations,

 

  development of a unified brand and the pursuit of licenses to operate recreational and medical marijuana facilities under the branded name.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

 

Basis of Presentation

 

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) under the accrual basis of accounting.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

 

Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future non-conforming events. Accordingly, actual results could differ significantly from estimates.

 

Risks and Uncertainties

 

The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure.  

 

The Company has experienced, and in the future expects to continue to experience, variability in its sales and earnings.  The factors expected to contribute to this variability include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the product, (ii) competition inherent at other locations where product is expected to be sold (iii) general economic conditions and (iv) the related volatility of prices pertaining to the cost of sales. 

     

Fiscal Year

 

The Company’s fiscal year-end is December 31.

 

  8  

 

Principles of Consolidation

 

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

 

Wholly-owned subsidiaries:

  · Alternative Fuels Americas, Inc. (a Florida corporation)

 

  · 34225 Kowitz Road, LLC (an Oregon LLC)

 

Majority-owned subsidiaries:

  · Marijuana Holdings Americas, Inc. (a Florida corporation)

 

  o MJAI Oregon 1 LLC

 

  o MJAI Oregon 2 LLC

 

  o MJAI Oregon 3 LLC

 

  o MJAI Oregon 4 LLC

 

  o MJAI Oregon 5 LLC

 

Non-Controlling Interest

 

The company owns 55% of Marijuana Holdings Americas, Inc.

 

Cash and Cash Equivalents

 

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less. The Company had no cash equivalents.

 

Inventory

 

Inventory consists of finished goods purchased, which are valued at the lower of cost or market value, with cost being determined on the first-in, first-out method.  The Company periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of any anticipated changes in future demand.  Total Value of Finished goods inventory as of September 30, 2019 is $121,916 and $131,542 as of December 31, 2018. No allowance as necessary as of September 30, 2019 and December 31, 2018.

 

Property and Equipment

 

Property and equipment is stated at cost, less accumulated depreciation and is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  

 

Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 5-30 years of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred.

 

Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations.

   

Long-lived assets

 

The Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its intangible assets, management performs an analysis of the anticipated undiscounted future net cash flow of the individual assets over the remaining amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows.

 

Operating Leases

 

We lease our retail stores under non-cancellable operating leases. Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions. We recognize rent expense on a straight-line basis over the lease term, excluding contingent rent, and record the difference between the amount charged to expense and the rent paid as a deferred rent liability.

 

Deferred Rent and Tenant Allowances

 

Deferred rent is recognized when a lease contains fixed rent escalations. We recognize the related rent expense on a straight-line basis starting from the date of possession and record the difference between the recognized rental expense and cash rent payable as deferred rent. Deferred rent also includes tenant allowances received from landlords in accordance with negotiated lease terms. The tenant allowances are amortized as a reduction to rent expense on a straight-line basis over the term of the lease starting at the date of possession.

 

Earnings Per Share

 

In accordance with ASC 260, Earnings per Share, the Company calculates basic earnings per share by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed if the Company has net income; otherwise it would be anti-dilutive, and would result from the conversion of a convertible note.

  9  

 

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes.  Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.

 

ASC 740-10 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

 

Fair Value of Financial Instruments

 

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

 

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

 

  Level 1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.

 

  Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

  Level 3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

 

  Fair Value Measurements at September 30, 2019
    Level 1       Level 2       Level 3  
Assets                      
Cash $              11,079     $       $    
Total assets                11,079                                -                                   -     
Liabilities                      
Convertible debentures, net of discounts of $640,701                            -                                   -                    5,793,412  
Short term debt, net of discounts of $-0-                            -                       9,312                                -     
Derivative liability                            -                                   -                  9,164,912  
Total liabilities                            -                       9,312               14,958,324  
  $ 11,079     $           (9,312)     $      (14,958,324)  
                       
                       
  Fair Value Measurements at December 31, 2018
    Level 1       Level 2       Level 3  
Assets                      
Cash $              111,512     $       $    
Total assets                111,512                                -                                   -     
Liabilities                      
Convertible debentures, net of discounts of $1,191,264                            -                                   -                    4,677,851  
Short term debt, net of discounts of $-0-                            -                       9,312                                -     
Derivative liability                            -                                          -                  19,783,034  
Total liabilities                            -                       9,312               24,460,885  
  $              111,512     $            (9,312)     $       (24,460,885)  

 

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

 

The Company accounts for its derivative liabilities, at fair value, on a recurring basis under level 3. See Note 7.

 

Embedded Conversion Features

 

The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.

 

Derivative Financial Instruments

 

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.

 

For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based simple derivative financial instruments, the Company uses the Binomial option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

 

In July 2017, the FASB issued ASU 2017-11 Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendment also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.

 

Prior to this Update, an equity-linked financial instrument with a down round feature that otherwise is not required to be classified as a liability under the guidance in Topic 480 is evaluated under the guidance in Topic 815, Derivatives and Hedging, to determine whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope exception from derivative accounting. Generally, for warrants and conversion options embedded in financial instruments that are deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement such that the embedded conversion option meets the definition of a derivative), the existence of a down round feature results in an instrument not being considered indexed to an entity’s own stock. This results in a reporting entity being required to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure at fair value initially and at each subsequent reporting date.

 

The amendments in this Update revise the guidance for instruments with down round features in Subtopic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. An entity still is required to determine whether instruments would be classified in equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round features are no longer classified as liabilities and embedded conversion options with down round features are no longer bifurcated.

 

For entities that present EPS in accordance with Topic 260, and when the down round feature is included in an equity-classified freestanding financial instrument, the value of the effect of the down round feature is treated as a dividend when it is triggered and as a numerator adjustment in the basic EPS calculation. This reflects the occurrence of an economic transfer of value to the holder of the instrument, while alleviating the complexity and income statement volatility associated with fair value measurement on an ongoing basis. Convertible instruments are unaffected by the Topic 260 amendments in this Update.

 

The amendments in Part 1 of this Update are a cost savings relative to former accounting. This is because, assuming the required criteria for equity classification in Subtopic 815-40 are met, an entity that issued such an instrument no longer measures the instrument at fair value at each reporting period (in the case of warrants) or separately accounts for a bifurcated derivative (in the case of convertible instruments) on the basis of the existence of a down round feature. For convertible instruments with embedded conversion options that have down round features, applying specialized guidance such as the model for contingent beneficial conversion features rather than bifurcating an embedded derivative also reduces cost and complexity. Under that specialized guidance, the issuer recognizes the intrinsic value of the feature only when the feature becomes beneficial instead of bifurcating the conversion option and measuring it at fair value each reporting period.

 

The amendments in Part II of this Update replace the indefinite deferral of certain guidance in Topic 480 with a scope exception. This has the benefit of improving the readability of the Codification and reducing the complexity associated with navigating the guidance in Topic 480.

 

The Company adopted this new standard on January 1, 2019; however, the Company needs to continue the derivative liabilities due to variable conversion price on some of the convertible instruments. As such, it did not have a material impact on the Company’s consolidated financial statements.

 

Beneficial Conversion Feature

 

For conventional convertible debt where the rate of conversion is below market value, the Company records a "beneficial conversion feature" ("BCF") and related debt discount.

 

When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional paid in capital) and amortized to interest expense over the life of the debt.

 

Debt Issue Costs and Debt Discount

 

The Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt.  These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

 

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Original Issue Discount

 

For certain convertible debt issued, the Company may provide the debt holder with an original issue discount.  The original issue discount would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.

 

Extinguishments of Liabilities

 

The Company accounts for extinguishments of liabilities in accordance with ASC 860-10 (formerly SFAS 140) “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. When the conditions are met for extinguishment accounting, the liabilities are derecognized and the gain or loss on the sale is recognized.

 

Stock-Based Compensation - Employees

 

The Company accounts for its stock-based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  

 

The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.  

 

If the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement memorandum (based on sales to third parties) (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

The fair value of share options and similar instruments is estimated on the date of grant using a Binomial Option Model option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

 

 

Expected term of share options and similar instruments: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments.  Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

 

 

Expected volatility of the entity’s shares and the method used to estimate it.  Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.  The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility.  If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

 

 

Expected annual rate of quarterly dividends.  An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends.  The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.

 

 

Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.

 

Generally, all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest.

 

The expense resulting from share-based payments is recorded in general and administrative expense in the statements of operations.

 

  12  

 

Stock-Based Compensation – Non Employees

 

Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services

 

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).

 

Pursuant to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.  If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

The fair value of share options and similar instruments is estimated on the date of grant using a Binomial option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

 

 

Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments.  The Company uses historical data to estimate holder’s expected exercise behavior.  If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

 

 

Expected volatility of the entity’s shares and the method used to estimate it.  Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.  The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility.  If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

 

Expected annual rate of quarterly dividends.  An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends.  The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.

 

 

Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.

 

Pursuant to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances.

 

Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.

 

Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share option and similar instrument that the counterparty has the right to exercise expires unexercised.

 

Pursuant to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.

 

Revenue Recognition

  

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

 

  13  

 

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

 

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

 

Cost of Sales

 

Cost of sales represents costs directly related to the purchase of goods and third party testing of the Company’s products.

 

Related Parties

 

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

 

Pursuant to Section 850-10-20 the related parties include a. affiliates of the Company; b. Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

The consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements.

 

The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, consolidated financial position, and consolidated results of operations or consolidated cash flows.

 

Uncertain Tax Positions

 

The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the reporting period ended September 30, 2019.

 

Subsequent Events

 

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued.

  

Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

 

Recently Issued Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the effect of recently issued standards that are not yet effective will not have a material effect on its consolidated financial position or results of operations upon adoption.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). Under ASU No. 2016-2, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 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. For public companies, the Company adopted this standard on January 1, 2019 using the modified retrospective method. The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients’, which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs; and all of the new standard’s available transition practical expedients.

 

On adoption, the Company recognized a right of use asset of $638,593, operating lease liabilities of $638,593, based on the present value of the remaining minimum rental payments under current leasing standards for its existing operating lease.

 

  14  

 

The new standard also provides practical expedients for a company’s ongoing accounting. The Company elected the short-term lease recognition exemption for its leases. For those leases with a lease term of 12 months or less, the Company will not recognize ROU assets or lease liabilities.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” to simply the accounting for certain instruments with down round features. The amendments require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Further, companies that provide earnings per share (“EPS”) data will adjust the basic EPS calculation for the effect of the feature when triggered and will also recognize the effect of the trigger within equity. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company adopted this new standard on January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.

 

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following at September 30, 2019 and December 31, 2018:  

 

    September 30, 2019   December 31, 2018
(Unaudited) (Audited)
ATM Machine   $ 11,000     $ 11,000  
Computer     22,736       22,736  
Furniture & Fixtures     49,408       49,408  
HVAC     41,768       25,000  
Land     697,420       697,420  
Leasehold Improvements     333,529       333,529  
Machinery and Equipment     408,133       405,233  
Sign     43,594       43,594  
Structural     1,017,359       1,017,359  
Vehicle     79,744       79,744  
Total     2,704,691       2,685,023  
Less: Accumulated Depreciation     (508,095)       (336,243)  
Property, Plant and Equipment - net   $ 2,196,596     $ 2,348,780  

 

Depreciation expense totaled of $171,852 and $99,507 for the nine months ended September 30, 2019 and 2018, respectively.

 

NOTE 5 – NON-CURRENT ASSETS

 

Other assets consisted of the following at September 30, 2019 and December 31, 2018:

 

   

September 30,

2019

(Unaudited)

 

December 31, 2018

(Audited)

Construction Deposits   $ —       $ —    
Rent Deposits     22,032       22,032  
Security Deposits   $ 9,491     $ 9,491  
Non-Current Assets   $ 31,523     $ 31,523  

 

 

NOTE 6 – CONVERTIBLE DEBT

 

These debts have a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”  The derivative component of the obligation are initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts have been amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.05% to 2.63%, volatility ranging from 84.63% to 243.37%, trading prices ranging from $0.045 per share to $0.41 per share and a conversion price ranging from $0.03 per share to $0.10 per share. The total derivative liabilities associated with these notes were $9,164,912 at September 30, 2019 and $19,783,034 at December 31, 2018.

  15  

 

 

See Below Summary Table

 

Convertible Debt Summary
  Debt Type Debt Classification Interest Rate Due Date  Ending
 CT  LT  9.30.19  12.31.18
               
A Convertible  X   10.0% 1-Jan-17                 25,000  $              25,000
B Convertible    X 8.0% 1-Jan-21                 65,700                 65,700
C Convertible    X 8.0% 1-Jan-21                 32,850                 32,850
D Convertible    X 8.0% 1-Jan-21                209,047                209,047
O Convertible    X 8.0% 1-Jan-21                109,167                109,167
P Convertible    X 8.0% 1-Jan-21                 52,767                 52,767
Q Convertible    X 8.0% 1-Jan-21                 52,050                 52,050
S Convertible    X 8.0% 1-Jan-21                 50,400                 50,400
T Convertible    X 8.0% 1-Jan-21                250,000                250,000
X Convertible  X   8.0% 1-Jan-19                 66,800                 66,800
BB Convertible  X   10.0% 1-Jan-19                 50,000                 50,000
CC Convertible  X   10.0% 1-Jan-19                100,000                100,000
EE Convertible    X 0.0% 31-Dec-21                500,000                500,000
KK Convertible    X 8.0% 1-Jan-21                150,000                150,000
LL Convertible    X 8.0% 1-Jan-21                600,000                600,000
MM Convertible    X 8.0% 1-Jan-21                100,000                100,000
NN Convertible    X 8.0% 1-Jan-21                500,000                500,000
OO Convertible    X 8.0% 1-Jan-21                500,000                500,000
PP Convertible    X 8.0% 1-Jan-21                500,000                500,000
QQ Convertible    X 8.0% 1-Jan-21                150,000                150,000
RR Convertible    X 8.0% 1-Jan-21                500,000                500,000
SS Convertible    X 8.0% 1-Jan-21                150,000                150,000
TT Convertible    X 8.0% 1-Jan-21                300,000                300,000
UU Convertible    X 8.0% 1-Jan-21                150,000                150,000
VV Convertible    X 5.0% 31-Jan-20                100,333                100,333
XX Convertible    X 8.0% 1-Jan-21                100,000                100,000
YY Convertible    X 8.0% 1-Jan-21                155,000                155,000
ZZ Convertible    X 8.0% 1-Jan-21                150,000                150,000
AAA Convertible    X 8.0% 1-Jan-21                 95,000                 95,000
BBB Convertible    X 8.0% 1-Jan-21                 80,000                 80,000
CCC Convertible  X   8.0% 1-Jan-20                 25,000                 25,000
DDD Convertible    X 8.0% 1-Jan-21                 70,000                        -   
EEE Convertible    X 8.0% 1-Jan-21                150,000                        -   
FFF Convertible    X 8.0% 1-Jan-21                 15,000                        -   
GGG Convertible    X 8.0% 1-Jan-21                 75,000                        -   
HHH Convertible    X 8.0% 1-Jan-21                 35,000                        -   
III Convertible    X 8.0% 1-Jan-21                 25,000                        -   
JJJ Convertible    X 8.0% 1-Jan-21                 50,000                        -   
KKK Convertible    X 8.0% 1-Jan-21                 20,000                        -   
LLL Convertible    X 8.0% 1-Jan-21                 75,000                        -   
MMM Convertible    X 8.0% 1-Jan-21                 50,000                        -   
Total Convertible Debt                     6,434,114             5,869,114
Less: Discount                      (640,702)            (1,191,263)
Convertible Debt, Net of Discounts        $         5,793,412  $         4,677,851
Convertible Debt, Net of Discounts, Current      $            352,506  $         2,894,294
Convertible Debt, Net of Discounts, Long-term      $         5,440,906  $         1,783,557

 

 

  16  

 

FOOTNOTES FOR CONVERTIBLE DEBT SUMMARY TABLE

 

(A)

 

At the option of the holder the convertible note may be converted into shares of the Company’s common stock at the lesser of $0.40 or 20% discount to the market price, as defined, of the Company’s common stock. The Company is currently in discussions with the lender on a payment schedule. The outstanding balance of this note is convertible into a variable number of the Company’s common stock. Therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”  The derivative component of the obligation are initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts have being amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.18% to 2.63%, volatility ranging from 84.63% to 243.37%, trading prices ranging from $0.065 per share to $0.45 per share and a conversion price ranging from $0.05 per share to $0.41 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $51,521.

 A recap of the balance of outstanding convertible debt at September 30, 2019 is as follows:

 

Principal balance   $ 25,000  
Accrued interest     26,521  
Balance maturing for the period ending:        
September 30, 2019   $ 51,521  

 

The Company valued the derivative liabilities at September 30, 2019 at $24,487. The Company recognized a change in the fair value of derivative liabilities for the nine months ended September 30, 2019 of $2,625 which were charged (credited) to operations.  In determining the indicated values at September 30, 2019, since the debt is in default, the company used the maximum value these embedded options represent, with a trading price of $0.0569, and conversion prices of $0.40 per share. 

 

(B), (C), (D)

 

All these amended debts have a price adjustment provision. Therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts have been amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.05% to 2.59%, volatility ranging from 84.63% to 243.23%, trading prices ranging from $0.065 per share to $0.14 per share and a conversion price ranging from $0.03 per share to $0.04 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. The derivative liability associated with this note as of September 30, 2019 were $465,284.

 

(O)

 

On March 31, 2016 the Company received $100,000 from the issuance of convertible debt. Interest is stated at 12%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.41% to 2.59%, volatility ranging from 84.63% to 157.47%, trading prices ranging from $0.065 per share to $0.27 per share and a conversion price of $0.03 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $133,292. The derivative liability associated with this note as of September 30, 2019 were $165,130.

 

(P)

 

On July 13, 2016 the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.41% to 2.59%, volatility ranging from 84.63% to 157.47%, trading prices ranging from $0.065 per share to $0.27 per share and a conversion price of $0.03 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $64,428. The derivative liability associated with this note as of September 30, 2019 were $79,817.

 

(Q)

 

On August 30, 2016 the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.41% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.065 per share to $0.27 per share a conversion price of $0.03 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $63,553. The derivative liability associated with this note as of September 30, 2019 were $78,733.

 

(S)

 

On December 1, 2016 the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.85% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.065 per share to $0.27 per share and a conversion price of $0.03 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $61,538. The derivative liability associated with this note as of September 30, 2019 were $76,237.

 

(T)

 

On December 30, 2016 the Company received $250,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.08% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.065 per share to $0.27 per share and a conversion price of $0.03 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $305,361. The derivative liability associated with this note as of September 30, 2019 were $378,299.

 

(X)

 

On November 18, 2016 the Company received $60,000 from the issuance of convertible debt. Interest is stated at 10%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.85% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.065 per share to $0.27 per share and a conversion price of $0.03 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $78,481. The derivative liability associated with this note as of September 30, 2019 were $81,179.

 

  17  

 

(BB)

 

On September 23, 2015 the Company received a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate amount of $50,000 with interest accruing at 10%. The note is convertible after September 23, 2015 and is convertible into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078. The debt issued is a result of a financing transaction and contain a beneficial conversion feature. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $58,743. The derivative liability associated with this note as of September 30, 2019 were $60,762.

 

(CC)

 

On September 23, 2015 the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest accruing at 10%. The note is convertible after September 23, 2015 and is convertible into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078. The debt issued is a result of a financing transaction and contain a beneficial conversion feature. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $117,486. The derivative liability associated with this note as of September 30, 2019 were $121,526.

 

(EE)

 

At December 31, 2013 the Company was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100 principal and $103,895 accrued interest, with interest accruing at 10%. On January 2, 2014 the Company entered into a Debt Modification Agreement whereby the total amount of the debt was reduced to $750,000 and there is no accrued interest or principal due until December 31, 2017. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares of Kaya Holdings Inc., which if converted are subject to resale restrictions through December 31, 2015. The two-year note in the aggregate amount of $500,000 is convertible into the Company’s preferred stock at a conversion rate of $10.00 per share of preferred. At a conversion rate of 433.9297 common shares to 1 preferred share, this would result in a total of 21,696,485 common shares issued if all debt was converted. The market value of the stock at the date of issuance of the debt was $0.04. The debt issued is a result of a financing transaction and contain a beneficial conversion feature valued at $500,000 to be amortized over the life of the debt. As of September 30, 2019, the debt discount was amortized in full.

 

On January 1, 2018 the holder of the note extended the due date until December 31, 2021.

 

As of September 30, 2019, the balance of the debt was $500,000. The remaining $250,000 is not convertible. The company has imputed interest on both the convertible debt and the non-convertible debt. The company used an interest rate of 9% for calculation purposes. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet.

 

The derivative liability associated with this note as of September 30, 2019 was $688,334.

 

(KK)

 

On January 4, 2017, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.04 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.85% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.0569 per share to $0.27 per share and a conversion price of $0.03 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $183,049. The derivative liability associated with this note as of September 30, 2019 were $226,773.

 

(LL)

 

On January 20, 2017, the Company received $600,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.07 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.85% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.0569 per share to $0.31 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $730,066. The derivative liability associated with this note as of September 30, 2019 were $904,449.

 

(MM)

 

On January 31, 2017, the Company received $100,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.07 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.87% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.0569 per share to $0.31 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $121,433. The derivative liability associated with this note as of September 30, 2019 were $150,439.

 

(NN)

 

On February 7, 2017, the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.10 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.87% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.0569 per share to $0.31 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $606,388. The derivative liability associated with this note as of September 30, 2019 were $751,230.

 

  18  

 

(OO)

 

On February 21, 2017, the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.10 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.87% to 2.59%, volatility ranging from 84.63% to154.71%, trading prices ranging from $0.0569 per share to $0.30 per share. The balance of the convertible note at September 30, 2019 including accrued interest and net of the discount amounted to $604,833. The derivative liability associated with this note as of September 30, 2019 were $749,302.

 

(PP)

 

On May 11, 2017, the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.05 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.87% to 2.59%, volatility ranging from 84.63% to 139.70%, trading prices ranging from $0.0569 per share to $0.27 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $596,055, net of the discount of $42,750. The derivative liability associated with this note as of September 30, 2019 were $738,428.

 

(QQ)

 

On July 17, 2017, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.05 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.87% to 2.63%, volatility ranging from 84.63% to 139.70%, trading prices ranging from $0.0569 per share to $0.27 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $176,483, net of the discount of $15,390. The derivative liability associated with this note as of September 30, 2019 were $218,638.

 

(RR)

 

On November 1, 2017, the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.49% to 2.63%, volatility ranging from 84.63% to 138.23%, trading prices ranging from $0.0569 per share to $0.27 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $576,721, net of the discount of $62,699. The derivative liability associated with this note as of September 30, 2019 were $714,477.

 

(SS)

 

On December 21, 2017, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.49% to 2.63%, volatility ranging from 84.63% to 131.81%, trading prices ranging from $0.0569 per share to $0.27 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $171,350, net of the discount of $19,665. The derivative liability associated with this note as of September 30, 2019 were $212,278.

 

(TT)

 

On February 5, 2018, the Company received $300,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.49% to 2.63%, volatility ranging from 84.63% to 132.27%, trading prices ranging from $.05 per share to $0.49 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $339,584, net of the discount of $27,626. The derivative liability associated with this note as of September 30, 2019 were $420,696.

 

(UU)

 

On March 23, 2018, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.49% to 2.63%, volatility ranging from 84.63% to 132.27%, trading prices ranging from $0.0569 per share to $0.14 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $168,279, net of the discount of $4,160. The derivative liability associated with this note as of September 30, 2019 were $208,475.

 

  19  

 

(VV)

 

On December 21, 2017 the Company received a total of $80,000 from an accredited investor in exchange for a two year note in the aggregate amount of $80,000 with interest accruing at 10% per year. The note is due January 1, 2019 with monthly payments of principal and interest. On January 30, 2018, the accredited investor advanced an additional $20,000. The total $100,000 including $333 of unpaid interest was exchanged for a convertible note (Note VV). Interest is stated at 5%. The Note and Interest is convertible into common shares at $0.10 per share. Note is Due in January of 2020. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.49% to 2.59%, volatility ranging from 84.63% to 132.27%, trading prices ranging from $0.0569 per share to $0.14 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $108,690, net of the discount of $13,630. The derivative liability associated with this note as of September 30, 2019 were $112,427.

 

(XX)

 

On May 29, 2018, the Company received $100,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.63%, volatility from 84.63% to 127.07%, trading prices ranging from $0.0569 per share to $0.16 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $110,718, net of the discount of $6,873. The derivative liability associated with this note as of September 30, 2019 were $137,164.

 

(YY)

 

On July 18, 2018, the Company received $155,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.81%, volatility from 84.63% to 126.88%, trading prices ranging from $0.0569 per share to $0.13 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $169,914, net of the discount of $23,600. The derivative liability associated with this note as of September 30, 2019 were $210,500.

 

(ZZ)

 

On August 13, 2018, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.81%, volatility from 84.63% to 126.90%, trading prices ranging from $0.0569 per share to $0.13 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $163,578, net of the discount of $16,304. The derivative liability associated with this note as of September 30, 2019 were $202,650.

 

(AAA)

 

On September 24, 2018, the Company received $95,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.83%, volatility from 84.63% to 126.38%, trading price at $0.0569 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $102,725, net of the discount of $2,662. The derivative liability associated with this note as of September 30, 2019 were $127,262.

 

(BBB)

 

On November 23, 2018, the Company received $80,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.81%, volatility from 84.63% to 118.96%, trading price at $0.0569 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $85,453, net of the discount of $8,515. The derivative liability associated with this note as of September 30, 2019 were $105,864.

 

  20  

 

(CCC)

 

On December 21, 2018, the Company received $25,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.05 per share. On January 22, 2019, the ratchet provision was activated due to issuance of another convertible note. As such, the conversion price was decreased from $0.05 per share to $0.03 per share. As the change is greater than 10%, the discount of $25,000 was recorded as a loss on extinguishment. the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.63%, volatility from 84.63% to 105.36%, trading price of ranging from $0.0569 to $0.11 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $26,551, net of the discount of $997. The derivative liability associated with this note as of September 30, 2019 were $27,464.

 

(DDD)

 

On January 22, 2019, the Company received $70,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. Note is due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.59%, volatility from 84.63% to 105.36%, trading price of ranging from $0.0569 to $0.11 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $73,851, net of the discount of $23,644. The derivative liability associated with this note as of September 30, 2019 were $91,491.

 

(EEE)

 

On February 11, 2019, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. Note is due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.48%, volatility from 84.63% to 105.36%, trading price of ranging from $0.0569 to $0.11 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $157,595, net of the discount of $103,706. The derivative liability associated with this note as of September 30, 2019 were $195,237.

 

 

(FFF)

 

On March 20, 2019, the Company received $15,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. Note is due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.40%, volatility from 82.70% to 105.36%, trading price of ranging from $0.0569 to $0.11 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $15,638, net of the discount of $11,119. The derivative liability associated with this note as of September 30, 2019 were $19,373.

 

(GGG)

On April 6, 2019 the Company received $75,000 from the issuance of convertible debt to the Cayman Venture Capital Fund pursuant to the May 2017 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.40%, volatility from 82.70% to 105.36%, trading price of ranging from $0.0569 to $0.11 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $77,910, net of the discount of $54,245. The derivative liability associated with this note as of September 30, 2019 were $96,519.

(HHH)

On April 22, 2019 the Company received $35,000 from the issuance of convertible debt to the High Net Worth Investor pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.40%, volatility from 82.70% to 105.36%, trading price of ranging from $0.0569 to $0.11 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $36,235, net of the discount of $25,968. The derivative liability associated with this note as of September 30, 2019 were $44,890.

(III)

On May 6, 2019 the Company received $25,000 from the issuance of convertible debt to the High Net Worth Investor pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.40%, volatility from 82.70% to 105.36%, trading price of ranging from $0.0569 to $0.11 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $25,805, net of the discount of $18,977. The derivative liability associated with this note as of September 30, 2019 were $31,969.

  21  

 

(JJJ)

On May 21, 2019 the Company received $50,000 from the issuance of convertible debt to the Cayman Venture Capital Fund pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.40%, volatility from 82.70% to 105.36%, trading price of ranging from $0.0569 to $0.11 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $51,447, net of the discount of $38,917. The derivative liability associated with this note as of September 30, 2019 were $63,735.

(KKK)

On June 5, 2019 the Company received $20,000 from the issuance of convertible debt to the High Net Worth Investor pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 2.40%, volatility from 82.70% to 105.36%, trading price of ranging from $0.0569 to $0.11 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $20,513, net of the discount of $15,972. The derivative liability associated with this note as of September 30, 2019 were $25,413.

(LLL)

On July 2, 2019 the Company received $75,000 from the issuance of convertible debt to the Cayman Venture Capital Fund pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 1.75%, volatility from 105.36% to 105.36%, trading price of ranging from $0.0569 to $0.0667 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $76,512, net of the discount of $62,568. The derivative liability associated with this note as of September 30, 2019 were $94,788.

(MMM)

On August 30, 2019 the Company received $50,000 from the issuance of convertible debt to the High Net Worth Investor pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.75% to 1.75%, volatility from 105.36% to 105.36%, trading price of ranging from $0.0569 to $0.0642 per share. The balance of the convertible note at September 30, 2019 including accrued interest amounted to $51,008, net of the discount of $40,714. The derivative liability associated with this note as of September 30, 2019 were $63,192.

NOTE 7 – NON-CONVERTIBLE DEBT

 

A-Non Related Party

 

    September 30,
2019
  December 31, 2018
Note 3     -0-       -0-  
Note 4     -0-       -0-  
Note 5     9,312       9,312  
Note 6     -0-       -0-  
Total Non-Convertible Debt     9,312       9,312  

 

 

(3) On  May 17, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 17, 2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 17, 2018.

 

(4) On May 9, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9, 2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 9, 2018

 

(5) On September 16, 2016 the Company received a total of $31,661 to be used for equipment in exchange for a two year note in the aggregate amount of $31,661 with interest accruing at 18% per year and a 10% loan fee. The note is default as of September 30, 2019.

 

(6) On December 21, 2017 the Company received a total of $80,000 from an accredited investor in exchange for a two year note in the aggregate amount of $80,000 with interest accruing at 10% per year The note is due January 1, 2019 with monthly payments of principal and interest. On January 30, 2018 the accredited investor advanced an additional $20,000. The total $100,000 including $333 of unpaid interest was exchanged for a convertible note (Note VV) due January 1, 2020

 

 

B-Related Party 

               

 

 Loan payable - Stockholder, 0%, Due December 31, 2021 (1)   $ 250,000     $ 250,000  
                 
    $ 250,000     $ 250,000  

 

  22  

 

 

(1)  

At December 31, 2013 the Company was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100 principal and $103,895 accrued interest, with interest accruing at 10%. On January 2, 2014 the Company entered into a Debt Modification Agreement whereby the total amount of the debt was reduced to $750,000 and there is no accrued interest or principal due until December 31, 2017. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares of Kaya Holdings Inc., which if converted are subject to resale restrictions through December 31, 2015. The two-year note in the aggregate amount of $500,000 is convertible into the Company’s preferred stock at a conversion rate of $10.00 per share of preferred. At a conversion rate of 433.9297 common shares to 1 preferred share, this would result in a total of 21,696,485 common shares issued if all debt was converted. The market value of the stock at the date of issuance of the debt was $0.04. The debt issued is a result of a financing transaction and contain a beneficial conversion feature valued at $500,000 to be amortized over the life of the debt. Total amortization for the year ended December 31, 2017 was $201,092. On January 1, 2018 the holder of the note extended the due date until January 1, 2021.

 

As of September 30, 2019, the balance of the debt was $500,000. The remaining $250,000 is not convertible. The company has imputed interest on both the convertible debt and the non-convertible debt. The company used an interest rate of 4% for calculation purposes. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet.

 

Summary Notes Payable Schedule-All Debt

 

Balance December 31, 2018   $ 6,128,424  
New Notes Payable     565,000  
Addition due to amendment     -0-  
Repaid Notes Payable     -0-  
Conversions     -0-  
Balance September 30, 2019   $ 6,693,424  

 

NOTE 8 – STOCKHOLDERS’ EQUITY

 

The Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001, of which 100,000 shares have been designated as Series C convertible preferred stock (“Series C” or “Series C preferred stock”). The Board has the authority to issue the shares in one or more series and to fix the designations, preferences, powers and other rights, as it deems appropriate.

 

Each share of Series C has 433.9297 votes on any matters submitted to a vote of the stockholders of the Company and is entitled to dividends equal to the dividends of 433.9297 shares of common stock. Each share of Series C preferred stock is convertible at any time at the option of the holder into 433.9297 shares of common stock.

 

The Company has 500,000,000 shares of common stock authorized with a par value of $0.001. Each share of common stock has one vote per share for the election of directors and all other items submitted to a vote of stockholders. The common stock does not have cumulative voting rights, preemptive, redemption or conversion rights.

 

In February of 2018 the Company authorized the issuance of 6,200,000 shares of common shares of Kaya Holdings Inc. for employee compensation and consulting fees. The shares were valued at $942,400. As of December 31, 2018, all 6,200,000 shares were issued on July 6, 2018.

 

In February of 2018, the Company authorized the issuance of 138,866 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company. The restricted common shares were issued as payment of interest of $4,166.

 

In February of 2018, the Company authorized the issuance of 277,766 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company. The restricted common shares were issued as payment of interest of $8,333.

 

In February of 2018, the Company authorized the issuance of 633,288 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company. This was a conversion of a Note Payable and Interest with a total value of $28,498, the Note Payable was due January 1, 2019.

 

In February of 2018, the Company authorized the issuance of 563,566 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company. This was a conversion of a Notes Payable and Interest with a total value of $16,907 the Note Payable was due January 1, 2019.

 

In June of 2018, the Company sold 500,000 shares of common stock for gross proceeds of $50,000.

 

In May of 2018 the company filed a form S-8 this Registration Statement covers an additional 10,000,000 shares of common stock, par value $0.001 per share of Kaya Holdings, Inc. (the “Company”), which may be offered pursuant to the Company’s 2011 Stock Incentive Plan (the “Plan”), as amended on November 24, 2014, September 22, 2016 and May 1, 2018.

 

In June of 2018, the Company authorized the issuance of 1,000,000 shares of common shares of Kaya Holdings Inc. for legal service. The shares were valued at $138,500. As of December 31, 2018, all shares were issued on July 6, 2018.

 

  23  

 

On July 6, 2018, the Company issued 1,805,555 shares of common shares of Kaya Holdings Inc. that previously recorded as stock payable in 2017 in satisfaction of promissory note due November 30, 2017 in the amount of $54,166, for principal and accrued but unpaid interest, which is convertible at $0.03 per share. In addition, the Company authorized 3,200,000 shares of Kaya Holdings Inc. for services at value of $301,510. As of December 31, 2018, 1,000,000 shares were unissued and valued at $65,000.

 

In August of 2018, the Company sold 2,500,000 shares of common stock for gross proceeds of $250,000. As of September 30, 2018, all shares were issued on August 24, 2018.

 

In August of 2018, the Company issued total of 12,000,000 shares to acquire the OLCC licensed marijuana production and processing facility, consisting of the building and equipment. The shares were valued at $1,417,200 (See Note 11).

 

In September of 2018, the Company authorized the issuance of 7,785,952 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor of the company. This was a conversion of a Notes Payable and Interest with a total value of $233,579, the Note Payable was due January 1, 2019.

 

In September of 2018 the Company authorized the issuance of 100,000 shares of common shares of Kaya Holdings Inc. for professional service. The shares were valued at $11,200 and the shares were issued on November 27, 2018.

 

On March 5, 2019, total of 7,785,952 shares of common stock had been issued from stock payable to settle the conversion dated on September 16, 2018.

 

NOTE 9 DERIVATIVE LIABILITIES

 

Effective January 1, 2019, an equity-linked financial instrument with a down round feature that otherwise is not required to be classified as a liability under the guidance in Topic 480 is evaluated under the guidance in Topic 815, Derivatives and Hedging, to determine whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope exception from derivative accounting. Generally, for warrants and conversion options embedded in financial instruments that are deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement such that the embedded conversion option meets the definition of a derivative), the existence of a down round feature results in an instrument not being considered indexed to an entity’s own stock. This results in a reporting entity being required to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure at fair value initially and at each subsequent reporting date.

 

However,, due to a recognition of tainting, due to variable conversion price on some of the convertible notes, all convertible notes are considered to have a derivative liability, therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”  The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.05% to 2.63%, volatility ranging from 84.63% to 243.22%, trading prices ranging from $0.045 per share to $0.41 per share and a conversion price ranging from $0.03 per share to $0.10 per share.

 

As a result of the application of ASC No. 815, the fair value of the ratchet feature related to convertible debt and warrants is summarized as follow: 

 

Balance as of December 31, 2018   $ 19,783,034  
Initial     1,191,529  
Change in Derivative Values     (11,809,651 )
Conversion of debt-reclass to APIC     -0-  
Balance as of September 30, 2019   $ 9,164,912  

 

The Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining fair value of the derivative liability, as it exceeded the gross proceeds of the note.  

 

The Company recorded the amortization of debt discount of $401,980 and $1,115,766 for the three and nine months ended September 30, 2019, respectively.

 

The Company recorded derivative liability expense of $64,381 and $626,529 for the three and nine months ended September 30, 2019, respectively.

  

The Company recorded a change in the value of embedded derivative liabilities income of $1,668,486 and $11,809,651 for the three and nine months ended September 30, 2019, respectively.

 

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NOTE 10 – DEBT DISCOUNT

 

The Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining fair value of the derivative liability, as it exceeded the gross proceeds of the note.

 

Debt discount amounted to $640,701 as of September 30, 2019.

 

The Company recorded the amortization of debt discount of $401,980 and $1,115,766 for the three and nine months ended September 30, 2019, respectively.

 

NOTE 11 – RELATED PARTY TRANSACTIONS

 

At December 31, 2014, the Company was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100 principal and $103, 895 accrued interest, with interest accruing at 10%. On January 2, 2014, the Company entered into a Debt Modification Agreement whereby the total amount of the debt was reduced to $750,000 and no interest accrued until December 31, 2015. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares of KAYS. The remaining $250,000 is not convertible.

 

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

 

At December 2017, the company was indebted to Craig Frank, Chairman, CEO and Acting CFO for KAYS, in the amount of $7,737.00 for travel and miscellaneous expenses incurred by Mr. Frank from travel and related activities in Oregon.

 

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

 

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

 

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

 

Bruce Burwick acquired the property for satisfaction of a promissory note due him for $1,433,000.00. The purchase price of $1.3 million for the OLCC licensed marijuana production and processing facility, consisting of the building and equipment was paid for by the issuance of 12 million shares of KAYS restricted stock to the seller at closing. The shares carry a lock-up-restriction that allows for their staged eligibility for resale over a 61-month period from the date of the purchase of the facility by KAYS. Additionally, the seller purchased 2.5 million restricted shares for $250,000 in cash in a private transaction with the Company. The proceeds from the sale of those shares were and are being used for acquisition related expenses, transitional operating costs and facility capital improvements with respect to the production and processing facility we purchased.

 

NOTE 12 – STOCK OPTION PLAN

 

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

 

NOTE 13 – WARRANTS

 

On September 8, 2015 the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $100,000, 10% promissory note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017. As of September 30, 2019, the note was paid in full.

 

On September 9, 2015 the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $100,000, 10% promissory note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017. As of September 30, 2019, the note was paid in full.

 

On May 9, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9, 2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 9, 2018. As of September 30, 2019, the note was paid in full.

 

On May 17, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 17, 2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 17, 2018. As of September 30, 2019, the note was paid in full.

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 Warrants issued to Non-Employees    
           
        Weighted Weighted
        Average Average
      Warrants Exercise Contract
      Issued Price Terms Years
Balance as of December 31, 2018  11,065,540 0.0316297  3.8
Granted     -0- -0-  -0-
Exercised     -0-  -     -   
Expired     -0-     -     -   
Balance as of September 30, 2019  11,065,540 0.0316297  3.55

 

NOTE 14 – COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company has several operating leases for an office and store lease in Fort Lauderdale, Florida and several locations in Oregon under arrangements classified as leases under ASC 842.

 

Effective June 12, 2017, the Company leased the office space in Fort Lauderdale, Florida under a 5-year operating lease expiring June 30, 2022. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $4,017 and culminating in a monthly payment of $4,839. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The lease was terminated on July 3, 2019 and the Company agreed to issue landlord 500,000 shares of common stock as penalty for early termination.

 

Effective June 1, 2019, the Company leased the office space in Fort Lauderdale, Florida under a 2-year operating lease expiring May 31, 2021. The rental payment is $1,802 per month. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease.

 

Effective May 15, 2014, the Company leased an unit in Portland, Oregon under a 5-year operating lease expiring May 15, 2019. In May 2019, the lease had been extended to May 15, 2024. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $2,250 and culminating in a monthly payment of $2,632. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The lease is now on a month-to-month basis.

 

Effective June 1, 2015, the Company leased an unit in Salem, Oregon under a 5-year operating lease expiring May 31, 2020. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $3,584 and culminating in a monthly payment of $4,034. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The lease is now on a month-to-month basis.

 

Effective April 15, 2016, the Company leased an unit in Salem, Oregon under a 5-year operating lease expiring April 15, 2021. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $4,367 and culminating in a monthly payment of $4,915. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The lease is now on a month-to-month basis.

 

Effective April 15, 2016, the Company leased an unit in Salem, Oregon under a 5-year operating lease expiring April 15, 2021. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $4,617 and culminating in a monthly payment of $5,196. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The lease is now on a month-to-month basis.  

 

The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable. The Company used an estimated incremental borrowing rate of 9.32% to estimate the present value of the right of use liability.

 

The Company has right-of-use assets of $463,163 and operating lease liabilities of $469,025 as of September 30, 2019. Operating lease expense for the three and nine months ended September 30, 2019 was $39,997 and $179,322, respectively. The Company had cash used in operating activities related to leases of $38,662 and $140,540 during the three and nine months ended September 30, 2019, respectively.

  

Maturity of Lease Liabilities at September 30, 2019   Amount
  2019 (excluding the nine months ended September 30, 2019)     $ 60,674  
  2020       186,005  
  2021       101,675  
  2022       27,300  
  Later years       —    
  Total lease payments       375,654  
  Less: Imputed interest       (33,639 )
  Present value of lease liabilities     $ 342,015  

 

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NOTE 15 – SUBSEQUENT EVENTS

 

On October 16, 2019 a total of 166,666 shares of common stock were issued to an investor in consideration of settlement of a total of $5,000 in interest owed pursuant to a Note Conversion. The shares have been issued and are in electronic format in an account at the transfer agent pending delivery instructions of the shareholder. For more information see Footnote “BB” to Convertible Debt Summary in Note 6 to the Financials.

 

On October 16, 2019 a total of 333,333 shares of common stock were issued to an investor in consideration of settlement of a total of $10,000 in interest owed pursuant to a Note Conversion. The shares have been issued and are in electronic format in an account at the transfer agent pending delivery instructions of the shareholder. For more information see Footnote “CC” to Convertible Debt Summary in Note 6 to the Financials.

 

On October 16, 2019 a total of 2,805,733 shares of common stock were issued to an investor in consideration of settlement of a total of $84,172.00 in principal and interest owed pursuant to a Note Conversion. The shares have been issued and are in electronic format in an account at the transfer agent pending delivery instructions of the shareholder. For more information see Footnote “X” to Convertible Debt Summary in Note 6 to the Financials.

 

On October 16, 2019 a total of 50,000 shares of restricted Series C Preferred Stock were issued to an affiliated shareholder of the Company in consideration of settlement of a total of $500,000.00 in principal owed pursuant to a Note Conversion. Each Preferred Share is convertible into 433.9297 common shares so the 25,000 Preferred Shares if converted would result in the issuance of 21,696,485 common shares. For more information see Footnote “EE” to Convertible Debt Summary in Note 6 to the Financials.

 

Employee Stock Plan Issuances and Director and Officer Restricted Stock issuances

 

On October 16, 2019 a total of 2,100,000 shares of stock were issued to a total of 12 employees of the Kaya Shack from the KAYS 2011 Employee Stock Plan (the “Plan”) for their service to the Company. The shares are subject to a lockup agreement and absent earlier consent by the Company they not eligible for resale until December 31, 2021.

 

On October 16, 2019, 3,000,000 shares of KAYS stock were issued for W. David Jones's service to the Company during 2018 pursuant to consulting agreements entered into with BMN Consultants on February 19, 2018 via Board Stipulation. The shares are considered to be fully paid when issued.

 

On October 16, 2019, 3,000,000 shares of KAYS restricted stock were issued for Craig Frank's service to the Company during 2018 pursuant to consulting agreements entered into with Tudog Consultants on February 19, 2018 via Board Stipulation. The shares are considered to be fully paid when issued.

 

On October 16, 2019 a total of 300,000 shares of KAYS stock were issued to our three (3) Board Members (100,00 shares each) pursuant to annual compensation schedules for their service to the Company during 2019. The shares are considered to be fully paid when issued.

 

On October 16, 2019 a total of 1,700,000 shares of KAYS stock were issued to 5 individuals (three (3) attorneys and 2 Consultants) from the KAYS 2011 Employee Stock Plan (the “Plan”) for their service to the Company.

 

Other Restricted Stock Issuances

 

On October 16, 2019 the Company issued a former landlord 500,000 shares of restricted stock as settlement for early termination of the lease and forgiveness of all debt owed.

 

On October 16, 2019 the Company issued a charitable organization 100,000 shares of restricted stock as a charitable donation.

 

Other Items

 

On November 4, 2019, KAYS issued a press release announcing that its majority owned subsidiary, Kaya Brands International, Inc. (“KBI”), had executed a memorandum of understanding (“MOU”) setting forth the terms for KBI's acquisition of a 50% ownership interest in Greekkannabis, PC (“GKC”). GKC is an Athens, Greece based cannabis company which has applied for and is awaiting issuance of a medical cannabis cultivation, processing and export license from the Greek government.

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In this Quarterly Report on Form 10-Q, the terms “Kaya Holdings,” “KAYS,” “the Company,” “we,” “us” and “our” refer to Kaya Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.

 

Cautionary Note Regarding Forward Looking Statements

 

Information contained in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the ‘Exchange Act”). These forward-looking statements are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

 

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

 

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

 

Available Information

 

We file annual, quarterly and special reports and other information with the Securities and Exchange Commission (“SEC”) that are available through the SEC’s Electronic Data Gathering Analysis and Retrieval System, known as EDGAR, through the SEC’s website (www.sec.gov). 

 

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

 

Business Overview

 

PART I

 

Item 1. Business.

Overview

Kaya Holdings, Inc., “KAYS” or the “Company” a Delaware corporation, is a vertically integrated legal marijuana enterprise that produces, distributes, and/or sells a full range of premium cannabis products including flower, oils, vape cartridges and cannabis infused confections, baked goods and beverages through a fully integrated group of subsidiaries and companies supporting highly distinctive brands. 

Current Oregon Operations 

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

The Company currently operates a chain of three Kaya Shack™ retail outlets and has developed its own proprietary Kaya Farms™ strains of cannabis, which it grows and produces (together with edibles and other cannabis products) at its Eugene, Oregon Sunstone Farms Indoor Cannabis Grow, Processing & Cannaceutical Facility, which KAYS acquired in October 2018 and is presently operating under a Management Agreement pending transfer of the licenses by the OLCC to the Company, upon completion of a satisfactory compliance review.

 

Additionally, the Company also owns a 26-acre parcel in Lebanon, Linn County, Oregon, which it purchased in August 2017 on which it intends to construct a cannabis cultivation complex, which will initially consist of an 85,000-square foot Kaya Farms™ Greenhouse Grow and Production Facility. The Company maintains a genetics library of over 30 strains of cannabis it has developed and has also formulated various cannabis-infused edibles, marijuana cigarettes and other cannabis derivatives under its proprietary “Kaya” brand names.

 

 

The Company’s business strategy seeks to achieve four fundamentals objectives:

  · maintaining direct access to customers (to own the relationship with end-users);
  · effecting vertical integration to control the supply chain (to control cost, selection and quality);
  · introducing strong brands in tradition and innovative categories (to control asset development); and
  · creating the capacity to expand nationally and internationally as regulations and opportunities permit.

Domestic and International Plans for Expansion

 

The Company is focusing its efforts on expanding its operations both domestically and internationally by:

  · replicating its Kaya Shack™ brand retail outlets through franchising, initially in Canada, where the production and use of marijuana for both medical and recreational purposes is legal nationwide and ultimately into U.S. states where medical and recreational marijuana production and use is legal or expected to become legal in the near term;
  · retaining Franchise Academy, Inc., a franchise consulting group, to assist it, together with Garfinkle Biderman LLP, a Canadian law firm specializing in the franchise arena, in the development, planning, launch and implementation of its retail franchise program in Canada;
  · utilizing its marijuana grow, processing, manufacturing and production facilities (which have the capability to grow and process up to 100,000 pounds of cannabis annually) to support its planned franchised outlets, in order to both maintain quality control and offer customers a consistent customer experience while reducing costs of goods to franchisees;
  · developing, producing and marketing, additional cannabis products, including flower, concentrates, extracts, cannabis-infused edibles, topicals, marijuana cigarettes and other specialty cannabis derivatives using its proprietary Kaya Shack™ and Kaya Farms™ brands edibles, marijuana cigarettes, extracts, and topicals;
  · establishing substantial production and processing facilities in Greece and Israel, where it will seek to grow and export legal medical and recreational cannabis to European and Asian countries, as regulations permit; and
  · ultimately, taking advantage of anticipated regulatory changes to export cannabis and cannabis products from Oregon to other jurisdictions where medical and recreational cannabis use is legal.

 

The Company has formed Kaya Brands International, Inc. (“ Kaya International ”), a new Florida subsidiary, to undertake its planned Canadian retail franchise operations and other planned operations outside the U.S.

 

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Corporate Information

 

Our corporate office is located at 915 Middle River Drive, Suite 316, Fort Lauderdale, Florida, 33304. Our telephone number is 954-892-6911 and our corporate website is www.kayaholdings.com. Information contained on our corporate website does not constitute part of this Memorandum.

 

Market Overview

 

According to Arcview Market Research and its research partner BDS Analytics, over the next 10 years, the legal cannabis industry will see much progress around the globe. Spending on legal cannabis worldwide is expected to hit $57 billion by 2027. The adult-use (recreational) market will cover 67% of the spending; medical marijuana will take up the remaining 33%.

 

The largest single market of cannabis buyers will be in North America, going from $9.2 billion in 2017 to $47.3 billion a decade later. The largest growth spread, however, is predicted within the rest-of-world markets, from $52 million spent in 2017 to a projected $2.5 billion in 2027.

 

While the U.S. market is expected to be dominated by recreational sales, the European market may have greater medical sales due to the inclusion of cannabis in the government subsidized healthcare systems. The European market is expected to be the single largest arena for medical marijuana.

 

The worldwide adult recreational cannabis market remains hampered by the United Nations and its 1961 Single Convention on Narcotic Drugs. The Arcview and BDS report believes nothing will be done to change the U.N. attitude until U.S. federal laws legalize marijuana something many industry experts and pundits believes will happen after the 2020 presidential election.

 

 

Important Industry Considerations

 

  · The initial decision by many U.S. states and Canada to create medical-only cannabis regulations prompted many other countries to act similarly. This increased further after California and Canada legalized adult recreational use.

 

  · South America has some of the most liberal medical cannabis programs. Led by Brazil, Argentina, Peru and Uruguay (the only country in the world in which adult recreational use is legal for all its citizens), the South American medical cannabis market may grow from $125 million in 2018 to $776 million in 2027.

 

  · Germany is poised to be the leader of the European cannabis market, and Italy is expected to be second with $1.2 billion in sales by 2027. Overall, however, the European cannabis market is not expected to grow as stridently as its potential suggests.

 

  · Australia’s legal cannabis market is forecast to grow from $52 million in 2018 to $1.2 billion in 2027, the 5th largest in the world.

 

  · Israel has a small population and a long history of legal medical marijuana use. It continues as a leader with years in the development of cannabis pharmaceuticals.

 

  · Canada is among the few countries where investors have already shown confidence in the future legality of the cannabis industry; they are betting with billions of dollars pouring into public equity investments.

 

Source: www.forbes.com | Legal Cannabis Industry Poised For Big Growth, In North America And Around The World | Thomas Pellechia | March 1, 2018.

 

 

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The Kaya™ Family of Brands

 

Kaya Holdings, Inc., “KAYS” or the “Company” a Delaware corporation, is a vertically integrated legal marijuana enterprise that produces, distributes, and/or sells a full range of premium cannabis products including flower, oils, vape cartridges and cannabis infused confections, baked goods and beverages through a fully integrated group of subsidiaries and companies supporting highly distinctive brands.

 

Currently Operational Brands (2014-2019)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Next Stage Traditional (2019-2021)

 

 

 

 

 

 

 

 

 

 

 

 

 

  32  

 

Next Stage Innovative (2019-2021)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note: The “Next Stage Traditional” and “Next Stage Innovative” brands are all targeted for release over the 6-18 months. The Company is currently awaiting the status of the license transfer at the Kaya Farms Indoor Marijuana Grow, Processing & Cannaceutical Production Facility in Eugene, Oregon, and the pending license issuance of the Kaya Farms Ag Facility in Lebanon, Oregon to finalize the release dates for these brands in Oregon. In the event that the license transfer at the Eugene facility and/or the licensing approval and construction timeline of the Lebanon facility is delayed or experiences difficulties, the Company has sourced other alternatives to expedite the release of the brands and will update shareholders accordingly as to revised brand rollout dates (if any).

 

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The Kaya Shack™ Brand

 

 

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

 

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

 

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

 

Additionally, Kaya Holdings maintains an active fourth OLCC Marijuana Retail License which it is seeking to move to its Eugene, Oregon Kaya Farms Indoor Production and Processing Facility so that the Company may offer a “Kaya Farm Store” and also serve as a retail delivery hub for Eugene, Oregon.

 

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

 

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

 

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

 

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

 

 

 

 

 

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Kaya Shack™ Retail Outlets

 

 

All stores feature a check out stand wrapped to feature the Company’s proprietary brand of pre-rolls, Kaya Buddies. The Buddies program is an exciting and popular pre-roll offering, featuring a wide selection (15-15 strains of pre-rolls) and featuring our special Kaya Saying in each Buddies tube. A glass display case showcases at least 25 strains of marijuana flower, which the stores serve to customers “deli style”, weighing straight from the jar to the customer’s take-out tube. An additional display case with a varied selection of oils, concentrates and topicals rounds out the cannabis product display.

  

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The stores also feature standing display cases with cannabis intended glassware under the Company’s brand Really Happy Glass, as well as a rack of proprietary t-shirt designs marketed under the Company brand Kaya Gear. The store also has a hospitality area that offers free water, coffee, tea and hot cocoa. As required by law, all products containing marijuana are either behind locked glass or behind the counter and out of customer reach.

 

 

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

 

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

 

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

 

 

 

Our second Kaya Shack™ OLCC licensed marijuana store (located in South Salem, Oregon) opened for business on October 17, 2015. The store is located in a strip mall alongside a Caesar’s Pizza, Aaron’s furniture, a convenience store, a tanning salon, and a nail salon. The plaza also has a Subway, a sports bar and a laundromat. The area around the shop is primarily commercial with residential complexes under construction and has a footprint of approximately 2,100 square feet and serves as the model for the Company’s superstores featuring larger display areas and a soon-to-be-opened Pakalolo Juice Company infused fresh fruit smoothies stand.

 

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

 

 

 

 

 

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

 

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Kaya Shack™ Car Fleet and Home Delivery

 

 

 

 

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

 

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

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Kaya Farms™

 

 

Lebanon, Linn County, Oregon Marijuana Grow and Manufacturing Complex

 

 

 

 

 

In early 2015, KAYS commenced its own medical marijuana grow operations for the cultivation and harvesting of legal marijuana thereby becoming the first publicly traded U.S. company to own a majority interest in a vertically integrated legal marijuana enterprise in the United States. Since that time KAYS has operated various grow facilities to feed the Kaya Shack Supply Chain, and in August 2017, KAYS acquired its first property for a large scale facility- a 26-acre parcel in Lebanon, Linn County, Oregon, where we intend to develop an 85,000-square foot Kaya Farms™ Farm and greenhouse facility

 

 

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

 

 

 

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

 

 

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Kaya Farms Indoor Marijuana Grow, Processing & Cannaceutical Production Facility

 

 

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

 

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

 

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

 

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

 

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

 

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

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Kaya Farms™ - Cannabis and Cannabis Products

 

Proprietary Cannabis Strains

 

 

  

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Kaya Farms Proprietary Cannabis Concentrates

 

Fall Production Run - Concentrates & Extracts, Hash Oil

(Note: These Concentrates were produced under contract for Kaya Farms by a third party while we await licensure of Production Facilities)

 

 

 

 

 

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Kaya Buddie™ Strain Specific Cannabis Cigarettes

 

 

 

 

 

 

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

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Domestic and International Expansion

 

The Company is focusing its efforts on expanding its operations both domestically and internationally by:

 

· replicating its Kaya Shack™ brand retail outlets through franchising, initially in Canada, where the production and use of marijuana for both medical and recreational purposes is legal nationwide and ultimately into U.S. states where medical and recreational marijuana production and use is legal or expected to become legal in the near term;

 

· retaining Franchise Academy, Inc., a franchise consulting group, to assist it, together with Garfinkle Biderman LLP, a Canadian law firm specializing in the franchise arena, in the development, planning, launch and implementation of its retail franchise program in Canada;

 

· utilizing its marijuana grow, processing, manufacturing and production facilities (which have the capability to grow and process up to 100,000 pounds of cannabis annually) to support its planned franchised outlets, in order to both maintain quality control and offer customers a consistent customer experience while reducing costs of goods to franchisees;

 

· developing, producing and marketing, additional cannabis products, including flower, concentrates, extracts, cannabis-infused edibles, topicals, marijuana cigarettes and other specialty cannabis derivatives using its proprietary Kaya Shack™ and Kaya Farms™ brands edibles, marijuana cigarettes, extracts, and topicals;

 

· establishing operations in Greece Israel, where it will seek to grow and export legal medical and recreational cannabis to European and Asian countries, as regulations permit; and

 

· ultimately, taking advantage of anticipated regulatory changes to export cannabis and cannabis products from Oregon to other jurisdictions where medical and recreational cannabis use is legal.

 

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Kaya Brands International

 

 

After over five years of conducting “touch the plant” U.S. cannabis operations inside the strict regulatory confines of a public company, KAYS has formed Kaya Brands International, Inc. (“Kaya International” or “KBI”), to leverage its experience and expand into worldwide cannabis markets. KBI’s current operations and initiatives include Canada and Greece, with additional areas under consideration and development .

 

 

Canada

 

 

 

 

 

 

Canadian Franchising:  KAYS has targeted Canada for its first international sale and operation of Kaya Shack™ cannabis store franchises. KAYS has entered into an area representation agreement with The Franchise Academy (a leading Canadian Franchise Development and Sales Group) to implement the Kaya Shack™ Retail Cannabis Store program in Canada (the only G7 country that has legalized both medical and recreational cannabis production, sale and use on a national level). The agreement targets 75-100 Kaya Shack™ Cannabis Retail locations throughout Canada through a multi-year structured rollout, subject to licensing and market conditions.

 

The Franchise Academy (http://www.franchiseacademy.ca) and its founder Shawn Saraga, is a member and national sponsor of the Canadian Franchise Association. With over 15 years of industry experience and having successfully closed over 700 franchise agreements and leases across Canada, the Franchise Academy has the knowledge, expertise, network and dedication to assist select franchisors enter the Canadian market.

 

Additionally, KAYS has retained Toronto, Canada based law firm of Garfinkle Biderman, LLP to prepare the Franchise Disclosure Documents and related items for the sale of Kaya Shack™ cannabis store franchises in Canada. We expect the franchise sale and placement effort throughout Canada to progress over the next 3-24 months. KAYS plans to ultimately expand its franchise operations to the U.S., as regulations and laws permit.

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Greece

 

 

 

 

KAYS has entered into a Memorandum of Understanding (“MOU”) setting forth an agreement in principle for KBI to acquire a 50% ownership interest in Greekkannabis, PC (“GKC”). GKC is a recently formed Athens, Greece based cannabis company which has applied for and is awaiting issuance of a medical cannabis cultivation, processing and export license from the Greek government.

 

The MOU sets forth an agreement in principle, pursuant to which in consideration for KBI providing the necessary expertise related to cannabis cultivation, processing, brand development and other matters, KBI will have the right to acquire a 50% ownership interest in GKC by reimbursing GKC for 50% of its license application costs (with allowances for KBI’s expenses as well). Consummation of the transaction contemplated by the MOU is subject to, among other customary conditions, satisfactory completion by KBI of its due diligence review of GKC, the drafting, execution and delivery of definitive transaction documentation and final license approval and issuance by the Greek government.

 

GKC plans to establish its cannabis cultivation and processing facility on land already identified outside of Athens. Project management envisages 3 stages of development, each comprised of 125,000 square feet of light-deprivation greenhouse cultivation. Each phase is expected to produce 93,600 pounds of premium medical cannabis, for an anticipated total project capacity of not less than 280,0000 pounds annually for distribution throughout Europe and other select markets.

 

In consideration for KBI providing the necessary expertise related to cannabis cultivation, processing, brand development and other matters, GKC has extended an option to KBI to acquire a 50% ownership interest in GKC by reimbursing GKC for 50% of the license application costs (with allowances for KBI’s expenses as well). The agreement is subject to due diligence review by KBI and final licensure by the Greek Authorities.

 

KAYS and KBI are represented in Greece by the Athens based law firm of Dalakos Fassolis Theofanopoulos (https://dftlaw.gr/). The firm has developed a long-established and well-respected commercial legal practice and has developed a wide international network of correspondent relationships with overseas law offices throughout the world.

 

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Growth Strategy

 

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

 

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

 

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

 

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

 

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

 

 

Marketing and Sales

 

The Company will only market its legal marijuana as in compliance with applicable state law. The Company employs a marketing campaign consisting of four cornerstones:

  · Promoting and establishing the Kaya Shack™ brand.

 

  · A positive and active online presence.

 

  · Daily specials and promotions.

 

  · Quirky and fun holiday specials.

  

Our core strategic marketing objectives include:

 

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

 

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

 

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

 

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

 

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Government Regulation

 

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

 

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

 

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

Competition

 

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

 

Employees

 

As of the date as of this Report, our Oregon operations have a total of 12-15 part-time store employees including budtenders, trimmers, growers, and 6 full-time employees, consisting of the Senior Vice President of Cannabis Operations, the Vice President of Marketing and Brand development, the Manager of Kaya Farms and 3 store managers. Additionally, we engage several consultants to assist with daily duties and business plan implementation and execution. Additional employees will be hired and other consultants engaged in the future as our business expands.

 

 

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Results of Operations

 

Three months ended September 30, 2019 compared to three months ended September 30, 2018

 

Revenues

 

We had revenues of $208,843 for the three months ended September 30, 2019 as compared to revenues of $303,888 for the three months ended September 30, 2018. The decrease in revenue for the 2018 quarter to 2019 quarter was due to the normal fluctuation in the market and the fact that we have reduced our footprint in Oregon to three stores as we prepare to concentrate on international expansion to grow the Company.

 

Cost of Goods Sold

 

Our cost of goods sold for the three months ended September 30, 2019 was $99,460 compared to cost of goods sold of $136,527 for the three months ended September 30, 2018. The decrease in cost of goods sold was due to reduced retail operation as a result of the repository of the Company’s Oregon retail operation of three outlets and normal fluctuation in the wholesale cannabis market.

 

Salaries and Wages

 

Salaries and Wages decreased to $142,378 for the three months ended September 30, 2019 from $155,539 for the three months ended September 30, 2018. The reduction in salaries and wages during the current period was due the repositioning of the Company’s Oregon retail operations to three outlets.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased to $234,085 for the three months ended September 30, 2019 from $260,652 for the three months ended September 30, 2018, primarily as a result of the repositioning of the Company’s Oregon retail operations.

 

Professional Fees

 

Professional fees were $71,363 for the three months ended September 30, 2019, as compared to $511,415 for the three months ended September 30, 2018. The decrease was due to the settlement of certain legal disputes. Our professional fees were primarily attributable to accounting, auditing and legal fees associated with maintaining our public markets listing.

 

Interest Expense

 

Interest expense and debt amortization expense decreased to $539,288 for the three months ended September 30, 2019 from $962,716 for the three months ended September 30, 2018. The decrease were due to lesser debt incurred over the past 12 months to acquire land and fund expansion of our operations.

 

Derivative Liabilities Expense

 

Derivative liabilities expense decrease to $64,381 for the three months ended September 30, 2019 from $955,759 for the three months ended September 30, 2018. The decrease were due to change in stock price as well as the volatility factors used in the derivative calculations.

 

Loss on extinguishment of debt

 

Loss on extinguishment of debt was $-0- for the three months ended September 30, 2019 as compared to $1,054,825 for the three months ended September 30, 2018.

 

The loss was due to ratchet provision, which is change in conversion price on one of the convertible notes issued in 2018. 

 

Change in Fair Value of Embedded Derivative Liabilities

 

We had a gain of $1,668,486 from change in fair value of embedded derivative liabilities for the three months ended September 30, 2019, compared to a gain of $4,250,351 from change in fair value of embedded derivative liabilities for the three months ended September 30, 2018. This decrease was due to change in stock price as well as the volatility factors used in the derivative calculations.

 

Net Income attributed to Kaya Holdings Inc.

 

We had net income of $815,905 attributed to Kaya Holdings Inc. for the three months ended September 30, 2019, as compared to net income of $579,924 for the three months ended September 30, 2018.

 

The majority of our net income during the three-month period ending September 30, 2019 was a result of the derivative liabilities associated with our Convertible Debt and a reduction in our stock price as well as the less volatility factors used in the derivative calculations. The net losses attributed to non-controlling interest for the three months ended September 30, 2019 and 2018 were $89,582 and $63,359, respectively. 

 

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Nine months ended September 30, 2019 compared to Nine months ended September 30, 2018

 

Revenues

 

We had revenues of $721,722 for the Nine months ended September 30, 2019, as compared to revenues of $850,386 for the Nine months ended September 30, 2018. The decrease in revenue from the 2018 period to the 2019 period was due to the normal fluctuation in the market and the fact that we have reduced our footprint in Oregon to three stores as we prepare to concentrate on international expansion to grow the Company.

 

Cost of Goods Sold

 

Our cost of goods sold for the Nine months ended September 30, 2019 was $337,691 compared to cost of goods sold of $357,538 for the Nine months ended September 30, 2018. The decrease in cost of goods sold during the current period was due to normal fluctuation in the wholesale cannabis market.

 

Salaries and Wages

 

Salaries and Wages increased $403,248 for the Nine months ended September 30, 2019 from $391,171 for the Nine months ended September 30, 2018. The increase in salaries and wages was due to normal increase in labor cost.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased to $694,305 for the Nine months ended September 30, 2019, as compared to $599,898 for the Nine months ended September 30, 2018. This slight increase reflects the fact that some of the expenses associated with this category have increased over time.

 

Professional Fees

 

Professional fees were $262,332 for the Nine months ended September 30, 2019, as compared to $1,869,474 for the Nine months ended September 30, 2018. The decrease in professional fees was a result of the settlement of certain legal disputes.

 

Interest expense

 

Interest expense and debt amortization expense decreased to $1,511,469 for the Nine months ended September 30, 2019 from $2,370,646 for the Nine months ended September 30, 2018. The decease was due to a decrease in debt incurred over the past 12 months to fund expansion of our operations.

 

Derivative Liabilities Expense

 

Derivative liabilities expense decreased to $626,529 for the Nine months ended September 30, 2019 from $2,869,350 for the Nine months ended September 30, 2018. These decreases were due to change in stock price as well as the volatility factors used in the derivative calculations.

 

Loss on extinguishment of debt

 

Loss on extinguishment of debt was $25,000 for the Nine months ended September 30, 2019 as compared to $1,054,825 for the Nine months ended September 30, 2018. The loss was due to ratchet provision, which is change in conversion price on one of the convertible notes issued in 2018.

 

 Change in Fair Value of Embedded Derivative Liabilities

 

We had a gain of $11,809,651 from change in fair value of embedded derivative liabilities for the nine months ended September 30, 2019, compared to a gain of $20,355,496 from change in fair value of embedded derivative liabilities for the nine months ended September 30, 2018. This decrease was due to change in stock price as well as the volatility factors used in the derivative calculations.

   

Net Income attributed to Kaya Holdings Inc.

 

We incurred net income of $8,929,178 attributed to Kaya Holdings Inc. for the Nine months ended September 30, 2019, as compared to a net income of $11,830,652 or the Nine months ended September 30, 2018.

 

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The majority of our net income during the Nine-month period ending September 30, 2019 was a result of the derivative liabilities associated with our Convertible Debt and a reduction in our stock price as well as the less volatility factors used in the derivative calculations. The net loss attributed to non-controlling interest for the Nine months ended September 30, 2019 and 2018 was $258,191 and $137,913, respectively.

 

Liquidity and Capital Resources

 

May 2017 Financing

 

On May 11, 2017, we entered into a second financing agreement with Cayman Venture Capital Fund (the “Institutional Investor”) which had previously completed approximately $3.3 Million in in financing as listed in the 2018 10-K and previous filings to provide the Company with up to an additional $5.8 million in convertible note funding (the “ May 2017 Notes  ”) through July 31, 2018 (the “ May 2017 Financing Agreement ”). The May 2017 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding available to the Company thereunder to $6.3 million and to extend the time period for such funding to May 31, 2019 and was subsequently amended as of November 15, 2017 and as of March 31, 2018, to further increase the amount of funding available to the Company thereunder to $7.75 million and to provide for the remaining $5.8million in principal amount of May 2017 Notes to be (a) convertible into shares of the Company’s common stock at conversion prices ranging from $0.03 to $0.11 pursuant to the terms of each May 2017 Note as described below; and (b) to extend the time period for such funding to April 30, 2020.

 

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

 

Effective as of January 20, 2019, the Agreement was further amended to: (a) extend the due dates for funding due under the Agreement for each of the remaining trenches (including the $420,000 remaining “$0.03” Notes that were due to expire December 31, 2018) by Nine (9) months; (b) agree to extend the maturity date all then outstanding Company promissory notes held by the Institutional Investor and its affiliate, NWP Finance LTD, from January 1, 2020 to January 1, 2021; and (c) pursuant to price adjustment features in the outstanding Notes held by the Institutional Investor, the Company confirmed that all outstanding Notes with a conversion price greater than $0.03 held by the Institutional Investor would be lowered to $0.03 per share at time of conversion.

 

On July 2, 2019 the Institutional investor completed the purchase of all $420,000 of the remaining “$0.03” Notes that had been extended effective January 20, 2019, and the Agreement was further amended to allow for the purchase of up to $2,000,000 in “0.03” Notes until June 30, 2020 with the understanding that the Agreement will be reevaluated as to pricing and due dates for the approximately $2,900,000 in principal amount of Notes remaining after the $2,000,000 June 30, 2020 0.03 Notes have been subscribed for.

 

As of the date of this Quarterly report, the Institutional Investor has purchased an aggregate of $2,800,000 in principal amount of May 2017 Notes from the Company under the May 2017 Financing Agreement, as amended to date, of which are (i) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (ii) secured by a mortgage lien on the Company’s 26 acre Lebanon, Oregon property (the “ $0.03 Secured Notes ”). Additionally, on October 11, 2019 the Institutional Investor subscribed for 5 Series A Preferred Shares of Kaya Brands International, Inc. for $75,000 which brings their total financings in KAYS and KBI since 2013 to date of just under $7,000,000.

 

January 2018 Financing

 

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

 

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While the January 2018 Financing Agreement granted the HNW Investor the right to acquire additional January 2018 Notes by certain deadlines if additional funding was provided, no additional $0.10 Notes were purchased until the January 2018 Financing Agreement was amended in December, 2018 to allow the HNW investor the right to purchase an additional $25,000 of January 2018 Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.05 per share (the “$0.05 Notes ”). In January 2019 the Agreement was further amended to lower the conversion price of the previously purchased $0.10 Note to $0.05, and to modify terms of the $0.10 Note to make them consistent with the May 2017 Financing Agreement executed with the Institutional Investor, and to allow for the right of the HNW Investor to acquire an additional $200,000 of January 2018 Notes, which are convertible into shares of the Company’s common stock.

 

In March, 2019 the agreement was further amended to lower the conversion prices of both the previously issued and recently offered $200,000.00 of $0.05 Notes to $0.03. As of the date of this Quarterly report, the HNW Investor has purchased a total of $105,000.00 in principal amount of the January 2018 $0.03 Notes and has indicated he will purchase the remaining $95,000 of these Notes.

 

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

 

Use of Proceeds

 

The proceeds from the offer and sale of the $2.1M Notes, the May 2017 Notes and the January 2018 notes and are and will be used to fund the Company’s growth plan, including the expansion of our chain of Kaya Shack™ Marijuana Superstores in Oregon, the acquisition and development of our Lebanon, Oregon legal cannabis cultivation and manufacturing facility, the operation and development of our Eugene, Oregon 12,000 square foot indoor legal marijuana grow and manufacturing facility and the development and introduction of new Kaya Shack™ branded cannabis products.

 

Plan of Operations

 

Management believes that consummation of the proceeds received and expected to be received from the above described financings as well as any other financing transactions that it may enter into, combined with existing and anticipated revenues, has alleviated the Company’s financial difficulties to a significant extent and will allow the Company to meet its anticipated working capital needs for a period of between twelve and eighteen months from the date of this report. However, there can be no assurance that the balance of the $7.75 million financing will be completed, or that management’s belief will be correct and that the Company will not sooner require additional financing to meet its working capital needs prior to achieving profitability or positive cash flow. Moreover, we may not be successful in raising additional capital on commercially reasonable terms, if and when needed, in which case our business, financial condition, cash flows and results of operations may be materially and adversely affected.

 

Note Conversions

 

On March 5, 2019, a total of 7,785,952 shares of common stock were issued to Cayman Venture Capital Fund in consideration of settlement a total of $233,579 in principal and interest pursuant to a Note Conversion. The Note was reported as converted on September 16, 2018 when the documents were submitted but the shares were not issued until March 5, 2019. The shares have now been issued and are in electronic format in an account at the transfer agent pending delivery to the Cayman Venture Capital Fund. For more information see Footnote “R” to Convertible Debt Summary in Note 6 to the Financials.

 

On October 16, 2019 a total of 166,666 shares of common stock were issued to an investor in consideration of settlement of a total of $5,000 in interest owed pursuant to a Note Conversion. The shares have been issued and are in electronic format in an account at the transfer agent pending delivery instructions of the shareholder. For more information see Footnote “BB” to Convertible Debt Summary in Note 6 to the Financials.

 

On October 16, 2019 a total of 333,333 shares of common stock were issued to an investor in consideration of settlement of a total of $10,000 in interest owed pursuant to a Note Conversion. The shares have been issued and are in electronic format in an account at the transfer agent pending delivery instructions of the shareholder. For more information see Footnote “CC” to Convertible Debt Summary in Note 6 to the Financials.

 

On October 16, 2019 a total of 2,805,733 shares of common stock were issued to an investor in consideration of settlement of a total of $84,172.00 in principal and interest owed pursuant to a Note Conversion. The shares have been issued and are in electronic format in an account at the transfer agent pending delivery instructions of the shareholder. For more information see Footnote “X” to Convertible Debt Summary in Note 6 to the Financials.

 

On October 16, 2019 a total of 50,000 shares of restricted Series C Preferred Stock were issued to an affiliated shareholder of the Company in consideration of settlement of a total of $500,000.00 in principal owed pursuant to a Note Conversion. Each Preferred Share is convertible into 433.9297 common shares so the 25,000 Preferred Shares if converted would result in the issuance of 21,696,485 common shares. For more information see Footnote “EE” to Convertible Debt Summary in Note 6 to the Financials.

 

On October 16, 2019 a total of 2,100,000 shares of stock were issued to a total of 12 employees of the Kaya Shack from the KAYS 2011 Employee Stock Plan (the “Plan”) for their service to the Company. The shares are subject to a lockup agreement and absent earlier consent by the Company they not eligible for resale until December 31, 2021.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the direction of Chief Executive Officer and Acting Chief Financial Officer (our principal executive, financial and accounting officer), we evaluated our disclosure controls and procedures as of September 30, 2019. Our Chief Executive Officer and Acting Chief Financial Officer (our principal executive, financial and accounting officer) concluded that our disclosure controls and procedures were not effective as of September 30 , 2019 for the reasons set forth in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive, financial and accounting officer), as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

 

As required by SEC Rule 13a15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive, financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019 . Based on the foregoing, our Chief Executive Officer (our principal executive, financial and accounting officer) concluded that our disclosure controls and procedures were not effective. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Controls

 

There was no change in our internal controls or in other factors that could affect these controls during the quarter ended September 30 , 2019, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. We do not anticipate any changes to our internal controls at this time.

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

As previously reported in our periodic reports filed under the Securities Exchange Act of 1934, in the fourth quarter of 2018, KAYS concluded the purchase of the Eugene, Oregon based Sunstone Farms grow and manufacturing facility, which is licensed by the Oregon Liquor Control Commission (the “ OLCC ”) for both the production (growing) of medical and recreational marijuana flower and the processing of cannabis concentrates/extracts/edibles. The purchase included a 12,000 square foot building housing an indoor grow facility, as well as equipment for growing and extraction activity. The facility can produce in excess of 800 pounds cannabis flower annually as currently outfitted, as well as a substantial amount of manufactured extracts and related cannabis products. KAYS entered into a management agreement with the holder of existing OLCC licenses (“ Sunstone ”) to oversee operations at the facility pending transfer of the license to KAYS, which were aware would be an extended and cumbersome process.

 

At all times since we began the transaction process and on an ongoing basis since the transaction was concluded, we have worked in close cooperation with the OLCC at each stage to both document the transaction, renew the existing licenses and transfer the licenses to us and submitted a substantial volume of paperwork to the OLCC with respect to the foregoing. We communicated with the OLCC on numerous occasions and requested guidance as to how to legally structure and complete the transfer of the licenses to us.

 

In November 2018, we were notified that that the OLCC was doing a Compliance Review, pending the requested transfer of the licenses (which is normal practice) and that they may have issues with how certain aspects of the transaction were structured.

 

We asked the OLCC for guidance with respect to interim operation of the facility and were advised to continue operating as usual. Subsequently, in February and March of 2019, the OLCC issued Conditional Letters of authority so that the facility could continue operations for a period not to exceed one year from the date issued, pending the Sunstone License renewals and processing of the requested license transfers to KAYS.

 

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Notwithstanding the foregoing, in mid-April 2019, we were advised by Sunstone that it had been notified that the OLCC was proposing that Sunstone’s licenses be cancelled, claiming that that Sunstone had not filed paperwork correctly with respect to the transaction or its historical ownership.

 

Sunstone’s attorney has filed a request for a hearing which we have been advised by the OLCC could take over a year to occur and resolve due to the extensive number of licensing matters being processed. A cursory review of the resolution of other sale-related compliance matters listed on the OLCC’s website shows that it is not atypical to for the OLCC to seek revocation of a license, but that often the settlement of that matter includes the sale and transfer of the license which, is what we are seeking. For the record, neither KAYS nor our Oregon OLCC licensed entities were named in OLCC action.

 

The Company notes that in a new and emerging regulatory environment for legal cannabis production and sale, licensing issues such as the present one periodically arise. In fact, as previously reported, the Company has encountered such issues in connection with its Portland, Oregon retail outlet and its planned Lebanon, Oregon grow and production operation, all of which were satisfactorily resolved in the Company’s favor. Accordingly, the Company is cooperating with Sunstone and the OLCC with respect to this matter and is optimistic that once the extensive record of paperwork submitted to and consultation with the OLCC has been reviewed, it will be able secure transfer of the OLCC licenses.

 

Item 1A. Risk Factors.

 

See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

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

 

On July 2, 2019 the Company received $75,000 from the issuance of convertible debt to the Cayman Venture Capital Fund pursuant to the May 2017 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021.

 

 

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All of the foregoing securities were issued pursuant to the exemption from the registration afforded by Section 4 (a) (2) of the Securities act of 1933, as amended and the rules and regulations thereunder.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None

 

Item 6. Exhibits

 

 

 

  Exhibit No.   Description of Exhibit
       
  31.1   Section 302 Certification

 

  32.1   Section 906 Certification  

 

 

 

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Dated: November 19, 2019

 KAYA HOLDINGS, INC.

 

 

By: /s/ Craig Frank

Craig Frank, Chairman, President, Chief Executive Officer and Acting Chief Financial Officer (Principal Executive, Financial and Accounting Officer) 

 

 

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