The
accompanying notes are an integral part of these consolidated financial statements.
NOTE
1 – ORGANIZATION AND NATURE OF THE BUSINESS
Organization
Kaya Holdings, Inc., f/k/a (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. (“NetSpace”). NetSpace acquired 100% of Alternative Fuels
Americas, Inc, (a Florida corporation) in January 2010 in a stock-for-member interest transaction and issued 6,567,247 shares of
common stock and 100,000 shares of Series C convertible preferred stock to existing shareholders. A Certificate of Amendment to
the Certificate of Incorporation was filed in October 2010 changing the Company’s name from NetSpace International Holdings,
Inc. to Alternative Fuels Americas, Inc. A Certificate of Amendment to the Certificate of Incorporation was filed in March 2015
changing the Company’s name from Alternative Fuels Americas, Inc. to Kaya Holdings, Inc.
The Company has two subsidiaries, Alternative Fuels
Americas, Inc. (a Florida corporation) which is wholly-owned and Marijuana Holdings Americas, Inc. (a Florida corporation, “MJAI”),
which is majority-owned. MJAI conducts operations in Oregon through controlling ownership interest in four Oregon limited libilities
companies: MJAI Oregon 1 LLC. , MJAI Oregon 2 LLC, MJAI Oregon 3 LLC and MJAI Oregon 4 LLC
Nature of the Business
In January 2014, KAYS incorporated a subsidiary,
Marijuana Holdings Americas, Inc. a Florida corporation (“MJAI”). Through entities controlled by MJAI, KAYS has focused
on the development of opportunities within the legal recreational and medical marijuana sectors in the United States. In March
2014, MJAI, applied for and was awarded its first license to operate a Medical Marijuana Dispensary (a “MMD”). The
Company developed the Kaya Shack™ brand for its retail operations and on July 3, 2014 opened its first Kaya Shack™
Medical Marijuana Dispensary in Portland, Oregon, thereby becoming the first publicly traded company to own and operate a MMD.
Initial customer acceptance and media coverage was very positive, including many references to KAYS as the “Starbucks of
Medical Marijuana” by television news stations, news print publications and online news sources. In March 2015, the Company
changed its name to Kaya Holdings, Inc. to better reflect its new plan of operations.
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 operation in Salem, Oregon,
the Kaya Shack™ Marijuana Superstore. During 2015, the Company also consolidated its grow operations and manufacturing operations
into a single facility in Portland, Oregon.
In 2016, Oregon began the process to transition
legal marijuana sales from Oregon Health Authority (“OHA”) licensed MMDs and grow operations to Oregon Liquor Control
Commission (“OLCC”) licensed recreational marijuana retailers and producer and processing facilities. Effective January
1, 2017, all retailers of recreational marijuana were required to have a recreational marijuana sales license issued by the OLLC
for each retail outlet operated.
Accordingly, in 2016 the Company applied for OLLC
licenses for its two initial Kaya Shack™ retail outlets (Portland, Oregon and South Salem, Oregon), and also submitted license
applications for its two new locations under construction and development at that time.
In late December 2016, we received our OLCC recreational
license for the South Salem Kaya Shack™ Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #1) and recreational
and medical sales continued without interruption from 2016 through the present at that location.
On March 21, 2017, we received our North Salem
Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #2) a 2,600-square foot Kaya Shack™ Marijuana
Superstore in North Salem, Oregon, whereupon the location opened for business with both recreational and medical sales.
On May 2, 2017, we received our OLCC recreational
license for our Portland Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #3) after a delay of approximately
four months. During that period, we were limited to solely medical sales at the Portland location. Upon receipt of Kaya Shack™
OLCC Marijuana Retailer License #3, recreational sales recommenced at that location.
Our OLCC License for the Central Salem Kaya Shack™
Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #4) has been filed and is pending completion, inspection
and final licensing. We expect to complete construction and licensing during the
third
quarter of 2017 and commence recreational and medical sales at this location as soon as possible thereafter.
NOTE
2 - LIQUIDITY AND GOING CONCERN
The Company’s consolidated financial statements
as of and for the three and six months ended June 30, 2017 have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred
a net income of $2,953,504 for the six months ended June 30, 2017 and a net income of $169,426 for the six months ended June 30,
2016. At June 30, 2017 the Company has a working capital deficiency of $4,468,926 and is totally dependent on its ability to raise
capital. The Company has a plan of operations and acknowledges that its plan of operations may not result in generating positive
working capital in the near future. Even though management believes that it will be able to successfully execute its business plan,
which includes third-party financing and capital issuance, and meet the Company’s future liquidity needs, there can be no
assurances in that regard. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might result from the outcome of this material uncertainty.
Management recognizes that the Company must generate additional funds to successfully develop its operations and activities. Management
plans include:
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the sale of
additional equity and debt securities,
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alliances
and/or partnerships with entities interested in and having the resources to support the further development of the Company’s
business plan,
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business transactions
to assure continuation of the Company’s development and operations,
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development
of a unified brand and the pursuit of licenses to operate recreational and medical marijuana facilities under the branded
name.
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NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis
of Presentation
The
accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP) under the accrual basis of accounting.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Such
estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable
and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets,
estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded
as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.
Making
estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect
of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered
in formulating its estimate could change in the near term due to one or more future non-conforming events. Accordingly, actual
results could differ significantly from estimates.
Risks
and Uncertainties
The
Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks
including the potential risk of business failure.
The
Company has experienced, and in the future expects to continue to experience, variability in its sales and earnings. The factors
expected to contribute to this variability include, among others, (i) the uncertainty associated with the commercialization and
ultimate success of the product, (ii) competition inherent at other locations where product is expected to be sold (iii) general
economic conditions and (iv) the related volatility of prices pertaining to the cost of sales.
Fiscal
Year
The
Company’s fiscal year-end is December 31.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Kaya Holdings, Inc. and its subsidiary, Alternative Fuels Americas,
Inc. (a Florida corporation) and Marijuana Holdings Americas, Inc. (a Florida corporation) which is a majority owned subsidiary
including all wholly owned LLC’s (MJAI Oregon 1 LLC, MJAI Oregon 2 LLC, MJAI Oregon 3 LLC, MJAI Oregon 4 LLC). All inter-company
accounts and transactions have been eliminated in consolidation.
Non-Controlling
Interest
The
company owns 55% of Marijuana Holdings Americas, Inc.
Cash
and Cash Equivalents
Cash
and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions
and all highly liquid investments with an original maturity of three months or less. The Company had no cash equivalents
Inventory
Inventory consists of finished goods purchased, which are valued at the lower of cost or market value,
with cost being determined on the first-in, first-out method. The Company periodically reviews historical sales activity
to determine potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. Total
Value of Finished goods inventory as of June 30, 2017 is $151,900 and $83,997 as of December 31, 2016. No allowance was necessary
as of June 30, 2017 and December 31, 2016.
Property
and Equipment
Property
and equipment is stated at cost, less accumulated depreciation and is reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Depreciation
of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 5-7 years
of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred.
Upon
sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and
any gain or loss is reflected in the statements of operations.
Long-lived
assets
The
Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and
future benefits of its intangible assets, management performs an analysis of the anticipated undiscounted future net cash flow
of the individual assets over the remaining amortization period. The Company recognizes an impairment loss if the carrying value
of the asset exceeds the expected future cash flows.
Operating
Leases
We
lease our retail stores under non-cancellable operating leases. Most store leases include tenant allowances from landlords, rent
escalation clauses and/or contingent rent provisions. We recognize rent expense on a straight-line basis over the lease term,
excluding contingent rent, and record the difference between the amount charged to expense and the rent paid as a deferred rent
liability.
Deferred
Rent and Tenant Allowances
Deferred
rent is recognized when a lease contains fixed rent escalations. We recognize the related rent expense on a straight-line basis
starting from the date of possession and record the difference between the recognized rental expense and cash rent payable as
deferred rent. Deferred rent also includes tenant allowances received from landlords in accordance with negotiated lease terms.
The tenant allowances are amortized as a reduction to rent expense on a straight-line basis over the term of the lease starting
at the date of possession.
Earnings
Per Share
In
accordance with ASC 260, Earnings per Share, the Company calculates basic earnings per share by dividing net income (loss) by
the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed if the Company
has net income; otherwise it would be antidilutive, and would result from the conversion of a convertible note.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting
for Uncertainty in Income Taxes. Under this method, deferred income taxes are determined based on the estimated future tax effects
of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws.
Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing
for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future
taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning
strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances
are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.
ASC
740-10 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant
tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not”
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority.
Fair
Value of Financial Instruments
The
Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance
on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability,
as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that
market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes
a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation
techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
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Level
1 – Observable inputs that reflect quoted market prices in active markets for identical
assets or liabilities.
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Level
2 - Inputs reflect quoted prices for identical assets or liabilities in markets that
are not active; quoted prices for similar assets or liabilities in active markets; inputs
other than quoted prices that are observable for the assets or liabilities; or inputs
that are derived principally from or corroborated by observable market data by correlation
or other means.
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Level
3 – Unobservable inputs reflecting the Company’s assumptions incorporated
in valuation techniques used to determine fair value. These assumptions are required
to be consistent with market participant assumptions that are reasonably available.
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The
carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets,
accounts payable & accrued expenses, certain notes payable and notes payable – related party, approximate their fair
values because of the short maturity of these instruments.
The
Company accounts for its derivative liabilities, at fair value, on a recurring basis under level 3. See Note 7.
Embedded
Conversion Features
The
Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to
determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative
at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment
under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration
of any beneficial conversion feature.
Derivative
Financial Instruments
The
Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates
all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain
features that qualify as embedded derivatives.
For
derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its
fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income.
For option-based simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the
derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Beneficial
Conversion Feature
For
conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion
feature” (“BCF”) and related debt discount.
When
the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective
debt instrument (offset to additional paid in capital) and amortized to interest expense over the life of the debt.
Debt
Issue Costs and Debt Discount
The
Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These
costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life
of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original
Issue Discount
For
certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The original issue discount
would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of
the debt.
Extinguishments
of Liabilities
The
Company accounts for extinguishments of liabilities in accordance with ASC 860-10 (formerly SFAS 140) “Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities”. When the conditions are met for extinguishment accounting,
the liabilities are derecognized and the gain or loss on the sale is recognized.
Stock-Based
Compensation - Employees
The
Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions
under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting
Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which
goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value
of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The
measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance
is complete or the date on which it is probable that performance will occur.
If
the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the
Company’s most recent private placement memorandum (based on sales to third parties) (“PPM”), or weekly or monthly
price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially
inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The
fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation
model. The ranges of assumptions for inputs are as follows:
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Expected
term of share options and similar instruments: The expected life of options and similar instruments represents the period
of time the option and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting
Standards Codification the expected term of share options and similar instruments represents the period of time the options
and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments
and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated
value) of the instruments. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected
term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data
to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have
been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees
that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which
to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that
its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses
the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient
historical exercise data to provide a reasonable basis upon which to estimate expected term.
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Expected
volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii)
a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable
for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has
selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.
The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share
options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly
price observations would generally be more appropriate than the use of daily price observations as the volatility calculation
using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes
and lack of consistent trading in the market.
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Expected
annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual
term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend
yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods
within the expected term of the share options and similar instruments.
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Risk-free
rate(s). An entity that uses a method that employs different risk-free rates shall disclose
the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant for periods within the expected term of the
share options and similar instruments.
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Generally,
all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation
rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately
expected to vest.
The
expense resulting from share-based payments is recorded in general and administrative expense in the statements of operations.
Stock-Based
Compensation – Non Employees
Equity
Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The
Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance
of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant
to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument
issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will
occur. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established
in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would
generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a
larger spread between the bid and asked quotes and lack of consistent trading in the market.
The
fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation
model. The ranges of assumptions for inputs are as follows:
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Expected
term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards
Codification the expected term of share options and similar instruments represents the period of time the options and similar
instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s
expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data
to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company
are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share
options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis
upon which to estimate expected term.
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Expected
volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii)
a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable
for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has
selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.
The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share
options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly
price observations would generally be more appropriate than the use of daily price observations as the volatility calculation
using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes
and lack of consistent trading in the market.
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Expected
annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual
term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend
yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods
within the expected term of the share options and similar instruments.
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Risk-free
rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the
expected term of the share options and similar instruments.
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Pursuant
to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee
enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments),
then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement
date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement
is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized
as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to
ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return
for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement
for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such
an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof)
of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in
which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides
guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.
Pursuant
to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable
by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee
achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and
in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of
paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share
option and similar instrument that the counterparty has the right to exercise expires unexercised.
Pursuant
to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable
equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received
(that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement
date and no entry should be recorded.
Revenue
Recognition
Revenue
is recorded when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) asset is transferred
to the customer without further obligation, (3) the sales price to the customer is fixed or determinable, and (4) collectability
is reasonably assured.
Cost
of Sales
Cost
of sales represents costs directly related to the purchase of goods and third party testing of the Company’s products.
Related
Parties
The
Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions.
Pursuant
to Section 850-10-20 the related parties include a. affiliates of the Company; b. Entities for which investments in their equity
securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15,
to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and
profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management
of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the management
or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its
own separate interests; and g. Other parties that can significantly influence the management or operating policies of the transacting
parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The
consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements,
expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated or combined financial statements is not required in those statements.
The
disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions
to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such
other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the
dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change
in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties
as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Contingencies
The
Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain
conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment
indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material,
would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed. However, there is no assurance that such matters will not materially and adversely affect the Company’s business,
consolidated financial position, and consolidated results of operations or consolidated cash flows.
Uncertain
Tax Positions
The
Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to
the provisions of Section 740-10-25 for the reporting periods ended December 31, 2016, 2015 and 2014.
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 (i) affiliates of the Company; (ii) 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; (iii) trusts for the benefit of employees, such as pension and
profit-sharing trusts that are managed by or under the trusteeship of management; (iv) principal owners of the Company; (v) management
of the Company; (vi) 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 (vii) 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: (i) the nature of the relationship(s) involved; (ii) 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; (iii) 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 (iv) 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.
Subsequent
Events
The
Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent
events. The Company will evaluate subsequent events through the date when the financial statements are issued.
Pursuant
to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued
when they are widely distributed to users, such as through filing them on EDGAR.
Recently
Issued Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Stock
Compensation, which is intended to simplify the accounting for share based payment award transactions. The new standard will modify
several aspects of the accounting and reporting for employee share based payments and related tax accounting impacts, including
the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings,
as well as the accounting for award forfeitures over the vesting period. The guidance is effective for fiscal years beginning after
December 15, 2016, including interim periods within that year, and will be adopted by the Company in the first quarter of fiscal
2017. The Company anticipates the new standard will result in an increase in the number of shares used in the calculation of diluted
earnings per share and will add volatility to the Company’s effective tax rate and income tax expense. The magnitude of such
impacts will depend in part on whether significant employee stock option exercises occur.
In April 2015, the FASB issued Accounting Standards
Update No. 2015-03, Interest—Imputation of Interest (Topic 83530): Simplifying the Presentation of Debt Issuance Costs (“ASU
2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance
sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and
measurement guidance for debt issuance costs is not affected by ASU 2015-03. ASU 2015-03 is effective for financial statements
issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The
Company does not have any original issue discount.
In July 2015, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory (“ASU 2015-11”), which applies guidance on the subsequent measurement of inventory. ASU 2015-11 states that
an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling
price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. The guidance
excludes inventory measured using last in, first out or the retail inventory method. ASU 2015-11 is effective for interim and annual
reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is not planning to early adopt ASU
2015-11 and is currently evaluating ASU 2015-11 to determine the potential impact to its condensed consolidated financial statements
and related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The ASU will increase transparency and comparability
among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing
arrangements. The ASU will require lessees to recognize in the balance sheet a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the underlying asset for the lease term. The ASU is effective for annual
reporting periods beginning after December 15, 2018 and interim periods within those annual periods. We do not believe the adoption
of this update will have a material impact on our financial statements.
In
August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This
ASU includes specific guidance to address diversity in how certain cash receipts and cash payments are presented and classified
in the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017 and interim
periods within those annual periods. The Company does not expect the adoption of this ASU to have a significant impact on the
consolidated financial statements.
Management
does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying financial statements.
Re-Classifications
Certain amounts in 2016 were reclassified to conform
to the 2017 presentation. These reclassifications had no effect on consolidated net loss for the periods presented.
NOTE
4 – CONVERTIBLE DEBT
These debts have a price adjustment provision. Therefore, the Company accounted for these Notes under
ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation are initially valued and classified
as a derivative liability with an offset to discounts on convertible debt. Discounts have been amortized to interest expense over
the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the
Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%,
trading prices ranging from $.05 per share to $0.49 per share and a conversion price ranging from $0.03 per share to $0.12 per
share. The total derivative liabilities associated with these notes are $13,271,234 at June 30, 2017 and $19,346,348 as of December
31, 2016.
See
Summary Table – Page 17
Convertible
Debt Summary
|
|
|
|
|
|
|
|
Footnote
|
Debt
|
Debt Classification
|
Interest
|
Due
|
|
Ending
|
|
Number
|
Type
|
Current
|
LT
|
Rate
|
Date
|
|
06.30.17
|
|
|
12.31.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
Convertible
|
X
|
|
10.0
|
%
|
1-Jan-17
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
B
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
65,700
|
|
|
$
|
58,556
|
|
C
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
32,850
|
|
|
$
|
29,278
|
|
D
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
209,047
|
|
|
$
|
186,316
|
|
E
|
Convertible
|
X
|
|
12.0
|
%
|
1-Jan-17
|
|
$
|
—
|
|
|
$
|
—
|
|
F
|
Convertible
|
X
|
|
8.0
|
%
|
1-Jan-17
|
|
$
|
—
|
|
|
$
|
—
|
|
G
|
Convertible
|
X
|
|
8.0
|
%
|
1-Jan-17
|
|
$
|
—
|
|
|
$
|
—
|
|
H
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
—
|
|
|
$
|
55,895
|
|
I
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
—
|
|
|
$
|
67,074
|
|
J
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
—
|
|
|
$
|
23,442
|
|
K
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
—
|
|
|
$
|
23,442
|
|
L
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
30,424
|
|
|
$
|
27,116
|
|
M
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
131,236
|
|
|
$
|
116,966
|
|
N
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
55,983
|
|
|
$
|
50,000
|
|
O
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
109,167
|
|
|
$
|
100,000
|
|
P
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
52,767
|
|
|
$
|
50,000
|
|
Q
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
52,050
|
|
|
$
|
50,000
|
|
R
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
203,867
|
|
|
$
|
200,000
|
|
S
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
50,400
|
|
|
$
|
50,000
|
|
T
|
Convertible
|
|
X
|
10.0
|
%
|
1-Jan-19
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
U
|
Convertible
|
X
|
|
|
|
1-Jan-17
|
|
$
|
—
|
|
|
$
|
—
|
|
V
|
Convertible
|
X
|
|
12.0
|
%
|
1-Jan-18
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
W
|
Convertible
|
X
|
|
12.0
|
%
|
1-Jan-18
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
X
|
Convertible
|
X
|
|
12.0
|
%
|
1-Jan-18
|
|
$
|
60,000
|
|
|
$
|
60,000
|
|
Y
|
Convertible
|
X
|
|
12.0
|
%
|
1-Jan-18
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Z
|
Convertible
|
X
|
|
12.0
|
%
|
1-Jan-17
|
|
$
|
—
|
|
|
$
|
—
|
|
AA
|
Convertible
|
X
|
|
6.0
|
%
|
1-Apr-16
|
|
$
|
—
|
|
|
$
|
23,500
|
|
BB
|
Convertible
|
X
|
|
10.0
|
%
|
21-Sep-17
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
CC
|
Convertible
|
X
|
|
10.0
|
%
|
21-Sep-17
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
DD
|
Convertible
|
X
|
|
10.0
|
%
|
21-Sep-17
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
EE
|
Convertible
|
X
|
|
0.0
|
%
|
31-Dec-17
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
KK
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
150,000
|
|
|
$
|
—
|
|
LL
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
600,000
|
|
|
$
|
—
|
|
MM
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
100,000
|
|
|
$
|
—
|
|
NN
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
500,000
|
|
|
$
|
—
|
|
OO
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-19
|
|
$
|
500,000
|
|
|
$
|
—
|
|
PP
|
Convertible
|
|
X
|
8.0
|
%
|
1-Jan-20
|
|
$
|
500,000
|
|
|
$
|
—
|
|
Current Convertible Debt
|
|
|
|
|
|
$
|
875,000
|
|
|
$
|
1,486,585
|
|
Long-Term Convertible Debt
|
|
|
|
|
|
$
|
3,593,490
|
|
|
$
|
750,000
|
|
Total Convertible Debt
|
|
|
|
|
|
$
|
4,468,490
|
|
|
$
|
2,236,585
|
|
FOOTNOTES
FOR CONVERTIBLE DEBT SUMMARY TABLE
(1)
|
|
(A)
At the option of the holder the convertible note
may be converted into shares of the Company’s common stock at the lesser of $0.40 or 20% discount to the market price, as
defined, of the Company’s common stock. The Company is currently in discussions with the lender on a payment schedule. The
outstanding balance of this note is convertible into a variable number of the Company’s common stock: therefore the Company
accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation
are initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts have being
amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible
note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.08% to .87%, volatility
ranging from 134% of 157%, trading prices ranging from $.08 per share to $0.49 per share and a conversion price ranging from $0.05
per share to $0.12 per share. The balance of the convertible note at June 30, 2017 including accrued interest and net of the discount
amounted to $43,075.
|
A
recap of the balance of outstanding convertible debt at June 30, 2017 is as follows:
Principal balance
|
|
|
$
25,000
|
|
Accrued interest
|
|
|
18,075
|
|
Balance maturing for the period ending:
|
|
|
|
|
June 30, 2017
|
|
|
$43,075
|
|
|
|
The Company valued the derivative liabilities at June 30, 2017 at $24,251. The Company
recognized a change in the fair value of derivative liabilities for the three months ended June 30, 2017 of $1,135, which were
credited to operations. In determining the indicated values at June 30, 2017, since the debt is in default the company used
the maximum value these embedded options represent, with a conversion price of $0.12 per share.
|
|
|
|
|
|
|
(B), (C), (D), (H), (I), (J), (K), (L), (M)
On December 31, 2015 the Company renegotiated twelve
(12) convertible and non-convertible notes payable. The Total face value of the notes issued was $888,500. The six month notes
were due on December 31, 2015. The new notes are convertible after January 1, 2016 and are convertible into the Company’s
common stock. The market value of the stock at the date when the debt becomes convertible
was $0.087. The debt which was issued is a result of a financing transaction and contain a beneficial conversion feature. As of
December 31, 2015, the balance was $947,311. The beneficial conversion feature in the amount of $947,311 was expensed as interest
over the term of the note (one year). All these amended debts have a price adjustment provision. Therefore the Company accounted
for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation are
initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts have being
amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible
note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility
ranging from 155% of 221%, trading prices ranging from $.078 per share to $0.1 per share and a conversion price ranging from $0.03
per share to $0.04 per share. The total derivative liabilities associated with these notes are $2,640,030 at December 31, 2015
and $4,718,754 at December 31, 2016, respectively.
|
On January 1, 2017 the Company renegotiated the
nine (9) remaining convertible notes payable (one note was converted during the quarter ended March 31, 2016 and two notes were
converted during the quarter ended December 31, 2016). The total face value of the remaining notes issued was $588,085
.
The due date on the notes was extended to January 1, 2019 and the interest rate was reduced to 8%. The new notes are convertible into the Company’s common stock
at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt became convertible was $0.2675.
As of June 30, 2017, the principal balance was $469,256. As of June 30, 2017, four (4) of the nine notes were converted into common
stock. The face value of the converted notes was $190,575. All these amended debts have a price adjustment provision. Therefore,
the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation are initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts have being amortized to interest expense over the respective term of the related note. In determining the indicated value
of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from
0.05% to 1.08%, volatility ranging from 140% of 221%, trading prices ranging from $.15 per share to $0.22 per share. The total derivative liabilities associated with these five remaining notes are $2,063,743
at June 30, 2017.
|
|
On January 8, 2016 the Company
received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common
shares at $0.03 per share. Note is Due in January of 2017. This note has a price adjustment provision. Therefore, the Company
accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation
is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized
to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued,
the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging
from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. On January 1, 2017, this note was amended to
extend the due date to January 1, 2019 and the interest rate was reduced to 8%. The principal balance as of June 30, 2017 is $55,983.
The derivative liability associated with this note as of June 30, 2017 was $246,246.
|
|
|
On March 31, 2016 the Company
received $100,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common
shares at $0.03 per share. Note is Due in January of 2017. This note has a price adjustment provision. Therefore, the Company
accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation
is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized
to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued,
the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging
from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. On January 1, 2017, this note was amended to
extend the due date to January 1, 2019 and the interest rate was reduced to 8%. The principal balance as of June 30, 2017 is $109,167.
The derivative liability associated with this note as of June 30, 2017 was $480,076.
|
|
|
On July 13, 2016 the Company
received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common
shares at $0.03 per share. Note is Due in January of 2017. This note has a price adjustment provision. Therefore, the Company
accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation
is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized
to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued,
the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging
from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. On January 1, 2017, this note was amended to
extend the due date to January 1, 2019 and the interest rate was reduced to 8%. The principal balance as of June 30, 2017 is $52,767.
The derivative liability associated with this note as of June 30, 2017 was $232,049.
|
|
|
On August 30, 2016 the Company received $50,000 from the issuance of convertible debt.
Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January of
2017. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes
Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading prices
ranging from $.05 per share to $0.49 per share. On January 1, 2017, this note was amended to extend the due date to January 1,
2019 and the interest rate was reduced to 8%. The principal balance as of June 30, 2017 is $52,050. The derivative liability associated
with this note as of June 30, 2017 was $229,018.
|
|
|
On November 3, 2016 the Company received $200,000 from the issuance of convertible
debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January
of 2018. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes
Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices
ranging from $.05 per share to $0.49 per share. On January 1, 2017, this note was amended to extend the due date to January 1,
2019 and the interest rate was reduced to 8%. The principal balance as of June 30, 2017 is $203,867. The derivative liability
associated with this note as of June 30, 2017 was $896,534.
|
|
|
On December 1, 2016 the Company received $50,000 from the issuance of convertible
debt. Interest is stated at 10% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January
of 2018. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes
Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices
ranging from $.05 per share to $0.49 per share. On January 1, 2017, this note was amended to extend the due date to January 1,
2019 and the interest rate was reduced to 8%. The principal balance as of June 30, 2017 is $50,400. The derivative liability associated
with this note as of June 30, 2017 was $221,641.
|
|
|
On December 30, 2016 the Company received $250,000 from the issuance of convertible
debt. Interest is stated at 10% The Note and Interest is convertible into common shares at $0.04 per share. Note is Due in January
of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes
Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices
ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of June 30, 2017 was $793,064.
|
|
|
On March 13, 2016 the Company received $25,000 from the issuance of convertible debt.
Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January of
2017. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes
Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices
ranging from $.05 per share to $.09. The Note and Interest was converted to common shares on September 13, 2016
|
|
|
On September 13, 2016 the Company received $25,000 from the issuance of convertible
debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.045 per share. Note is Due in January
of 2018. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes
Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices
ranging from $.05 per share to $0.49. The derivative liability associated with this note as of June 30, 2017 was $34,367.
|
|
|
On October 16, 2016 the Company received $15,000 from the issuance of convertible
debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January
of 2018. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option
Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging
from $.05 per share to $0.49 per share. The derivative liability associated with this note as of June 30, 2017 was $63,941.
|
|
|
On November 18, 2016 the Company received $60,000 from the issuance of convertible
debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January
of 2018. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option
Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging
from $.05 per share to $0.49 per share. The derivative liability associated with this note as of June 30, 2017 was $253,735.
|
|
|
On December 7, 2016 the Company received $50,000 from the issuance of convertible
debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January
of 2018. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option
Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging
from $.05 per share to $0.49 per share. The derivative liability associated with this note as of June 30, 2017 was $210,409.
|
|
|
On October 1, 2015, the Company renegotiated a convertible notes payable. The original
note was issued March 13, 2015 and due September 30, 2015, with conversion rate of $0.06 per share. The new note has an extended
the due date to January 1, 2017 and are convertible into the Company’s common stock at a conversion rate of $0.045 per share.
This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option
Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging
from $.05 per share to $0.49 per share. This note was converted on September 23, 2016. The remaining balance is zero.
|
|
|
On July 27, 2015 the company
issued a note payable for $28,500 The Company agrees to pay to the Holder $28,500 plus accrued interest pursuant to the following
schedule:
|
|
|
|
|
|
An initial payment of $5,000
is due no later than December 1, 2015. This amount represents the balance of the security deposit due for the lease of Commercial/Manufacturing
Space occupied by MJAI Oregon 1, LLC, a majority-owned subsidiary of the company.
|
|
|
A final payment of $42,700
principal, plus any accrued Interest at 10% is due no later than April 1, 2017. This amount represents the balance of accrued
rent due for the initial monthly lease payments from August 1, 2015 through December 31, 2016
|
|
|
The note is convertible after
March 31, 2016 and is convertible into the Company’s common stock at a conversion rate of $0.10 per share or 20% discount
to the thirty day moving average stock price. This note has a price adjustment provision. Therefore, the Company accounted for
these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note
issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility
ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. This note was paid in full as a result
of a settlement agreement on March 31, 2017 The remaining balance is zero.
|
|
|
On September 23, 2015 the Company received a total of $50,000 from an accredited investor
in exchange for a two year note in the aggregate amount of $50,000 with interest accruing at 10%. The note and interest is convertible
after September 23, 2015 into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the
stock at the date when the debt becomes convertible was $0.089. This note has a price adjustment provision. Therefore, the Company
accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the
convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of June 30, 2017 was $202,764.
|
|
|
On September 23, 2015 the Company received a total of $100,000 from an accredited
investor in exchange for a two year note in the aggregate amount of $100,000 with interest accruing at 10%. The note and interest
is convertible after September 23, 2015 nto the Company’s common stock at a conversion rate of $0.03 per share. The market
value of the stock at the date when the debt becomes convertible was $0.078. This note has a price adjustment provision. Therefore,
the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value
of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from
0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of June 30, 2017 was $45,519.
|
|
|
On September 23, 2015 the Company received a total of $50,000 from an accredited investor
in exchange for a two year note in the aggregate amount of $50,000 with interest accruing at 10%. The note and interest is convertible
after September 23, 2015 into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the
stock at the date when the debt becomes convertible was $0.078. This note has a price adjustment provision. Therefore, the Company
accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the
convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative
liability associated with this note as of June 30, 2017 was $202,764.
|
|
|
At December 31, 2013 the Company was indebted to an affiliated shareholder of the
Company for $840,955, which consisted of $737,100 principal and $103,895 accrued interest, with interest accruing at 10%. On January
2, 2014 the Company entered into a Debt Modification Agreement whereby the total amount of the debt was reduced to $750,000 and
there is no accrued interest or principal due until December 31, 2017. $500,000 of the debt is convertible into 50,000 Series
C Convertible Preferred Shares of AFAI, which if converted are subject to resale restrictions through December 31, 2017. The two-year
note in the aggregate amount of $500,000 is convertible into the Company’s preferred stock at a conversion rate of $10.00
per share of preferred. At a conversion rate of 433.9297 common shares to 1 preferred share, this would result in a total of 21,696,485
common shares issued if all debt was converted. The market value of the stock at the date of issuance of the debt was $0.04. The
debt issued is a result of a financing transaction and contain a beneficial conversion feature valued at $367,859 to be amortized
over the life of the debt. Total amortization for the year ended December 31, 2014 was $183,929. As of December 31, 2014, the
balance of the debt was $500,000. The net balance reflected on the balance sheet is 303,213. 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..
As of June 30, 2017, the balance of the debt was $500,000. The derivative liability associated with this note as of June 30, 2017
was $2,727,041.
|
|
|
The net balance reflected on the balance sheet is $399,090. The remaining $250,000
is not convertible. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet. This note was
modified and restated as of June 20, 2015, see Footnote 9.
|
|
|
On January 4, 2017 the Company received $150,000 from the issuance of convertible
debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.04 per share. Note is Due in January
of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with
an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related
note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with
a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading prices ranging from $.05
per share to $0.49 per share and a conversion price of $0.04 per share. The derivative liability associated with this note as
of June 30, 2017 was $475,337.
|
|
|
On January 20, 2017 the Company received $600,000 from the issuance of convertible
debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.07 per share. Note is Due in January
of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with
an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related
note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with
a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading prices ranging from $.05
per share to $0.49 per share. The derivative liability associated with this note as of June 30, 2017 was $978,737.
|
|
|
On January 31, 2017 the Company received $100,000 from the issuance of convertible
debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.07 per share. Note is Due in January
of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with
an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related
note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with
a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading prices ranging from $.05
per share to $0.49 per share. The derivative liability associated with this note as of June 30, 2017 was $162,776.
|
|
|
On February 7, 2017 the Company received $500,000 from the issuance of convertible
debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.10 per share. Note is Due in January
of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with
an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related
note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with
a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading prices ranging from $.05
per share to $0.49 per share. The derivative liability associated with this note as of June 30, 2017 was $523,004.
|
|
|
On February 21, 2017 the Company received $500,000 from the issuance of convertible
debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.10 per share. Note is Due in January
of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with
an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related
note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with
a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading prices ranging from $.05
per share to $0.49 per share. The derivative liability associated with this note as of June 30, 2017 was $508,544.
|
|
|
On May 11, 2017 the Company received $500,000 from the issuance of convertible debt.
Interest is stated at 8% The Note and Interest is convertible into common shares at $0.05 per share. Note is Due in January of
2020. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded
Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with
an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related
note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with
a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 134% of 157%, trading prices ranging from $.05
per share to $0.49 per share. The derivative liability associated with this note as of June 30, 2017 was $1,286,860.
|
|
|
(GG), (HH), (II), (JJ)(KK)
|
Note
4 Non-Convertible Debt
A-Non-
Related Party
|
|
June
30, 2017
|
|
December
31, 2016
|
Note GG
|
|
|
17,513
|
|
|
|
68,555
|
|
Note HH
|
|
|
16,428
|
|
|
|
68,555
|
|
Note II
|
|
|
62,780
|
|
|
|
65,262
|
|
Note JJ
|
|
|
62,780
|
|
|
|
65,262
|
|
Note KK
|
|
|
19,831
|
|
|
|
31,661
|
|
Total Non-Convertible
Debt
|
|
|
179,332
|
|
|
|
299,295
|
|
|
|
(GG) On September 8, 2015
the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of
$100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid
and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
for a period of five (5) years commencing from the earlier of such time as that certain $100,000 10% promissory note due September
9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017.
|
|
|
(HH) On September 9, 2015
the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of
$100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 3,161,583 paid
and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
for a period of five (5) years commencing from the earlier of such time as that certain $100,000 10% promissory note due September
9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017.
|
|
|
(II) On
May 17, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the
aggregate amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the
company 2,371,187 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant
Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory
note due May 17 2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May
17, 2018.
|
|
|
(JJ) On May 9, 2016 the Company
received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with
interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable
shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five
(5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9, 2018 has been fully
repaid or the start of the Acceleration Period as defined in “The Note” or May 9, 2018
|
|
|
(KK) On September 16, 2016
the Company received a total of $31,661 to be used for equipment in exchange for a two year note in the aggregate amount of $31,661
with interest accruing at 18% per year and a 10% loan fee. The note is due September of 2018 with monthly payments of principal
and interest.
|
B-Related Party
|
|
|
|
|
|
|
|
|
|
Loan payable -
Stockholder, 0%, Due December 31, 2017 (1)
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
(1)
|
At
December 31, 2013 the Company was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100
principal and $103,895 accrued interest, with interest accruing at 10%. On January 2, 2014 the Company entered into a Debt
Modification Agreement whereby the total amount of the debt was reduced to $750,000 and there is no accrued interest or principal
due until December 31, 2017. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares, 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 quarter ended June 30, 2017 was $49,727. As of June 30, 2017, the balance of the debt
was $500,000. The net balance reflected on the balance sheet is $399,090. 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.
|
NOTE
5 – STOCKHOLDERS’ EQUITY
The
Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001, of which 100,000 shares have been designated
as Series C convertible preferred stock (“Series C” or “Series C preferred stock”). The Board has the
authority to issue the shares in one or more series and to fix the designations, preferences, powers and other rights, as it deems
appropriate.
Each
share of Series C has 433.9297 votes on any matters submitted to a vote of the stockholders of the Company and is entitled to
dividends equal to the dividends of 433.9297 shares of common stock. Each share of Series C preferred stock is convertible at
any time at the option of the holder into 433.9297 shares of common stock.
The
Company has 500,000,000 shares of common stock authorized with a par value of $0.001. Each share of common stock has one vote
per share for the election of directors and all other items submitted to a vote of stockholders. The common stock does not have
cumulative voting rights, preemptive, redemption or conversion rights.
In
February of 2017, the Company issued 6,352,500 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor
that is a current shareholder of the company. As a conversion of four (4) Notes Payable with a total value of $190,575 the Notes
Payable were due January 1, 2019.
In
June of 2017, the Company issued 987,632 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is
a current shareholder of the company. The restricted common shares were issued as payment of interest of $29,638.
NOTE
6- DERIVATIVE LIABILITIES
The
Company identified conversion features embedded within convertible debt and issued in 2013 and subsequent periods. The Company
has determined that the features associated with the embedded conversion option, in the form a ratchet provision, should be accounted
for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available
to settle all potential future conversion transactions.
Additionally, due to a recognition of tainting
(due to shares not being held in reserve in 2014), all convertible notes are considered to have a derivative liability. Therefore
the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component
of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt.
Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of
the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05%
to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion
price ranging from $0.03 per share to $0.12 per share.
As
a result of the application of ASC No. 815, the fair value of the ratchet feature related to convertible debt and warrants is
summarized as follow:
Balance as of December 31, 2016
|
|
$
|
19,346,348
|
|
Initial Derivative Value
|
|
|
15,845,993
|
|
Change in Derivative
Values
|
|
|
(20,854,326
|
)
|
Conversion or amendment
|
|
|
(1,066,781
|
)
|
Balance as of June 30, 2017
|
|
$
|
13,271,234
|
|
The
fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following
management assumptions as June 30, 2017:
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 a derivative expense of $1,267,988
and $-0- for the three months ended June 30, 2017 and 2016 respectively and $15,845,993 and $129,340 for the six months ended
June 30, 2017 and 2016.
The Company recorded a change in the value of embedded
derivative liabilities income/(expense) of $ 8,158,643 and $282,563 for the three months ended June 30, 2017 and 2016, respectively
and $20,854,326 and $1,713,670 for the six months ended June 30, 2017 and 2016
NOTE 7- DEBT DISCOUNT
The Company recorded the debt discount to the extent
of the gross proceeds raised, and expensed immediately the remaining fair value of the derivative liability, as it exceeded the
gross proceeds of the note.
Debt discount amounted to $2,993,385 as of June
30, 2017 and $863,860 as of December 31, 2016.
The Company recorded $578,238 and $342,860 for
the three months and $1,504,722 and $7614,133 for the six months ended June 30 2017 and June 30, 2016, respectively for amortization
of debt discount expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Party
|
|
|
Related
Party
|
|
|
Totals
|
|
Balance December 31, 2015
|
|
$
|
1,282,108
|
|
|
$
|
400,000
|
|
|
$
|
1,682,108
|
|
Add: New Debt Discount
|
|
|
1,021,829
|
|
|
|
0
|
|
|
|
1,021,829
|
|
Less Repayments/Conversions/Amortization
|
|
|
(1,440,076
|
)
|
|
|
(198,908
|
)
|
|
|
(1,638,984
|
)
|
Balance December 31, 2016
|
|
|
863,860
|
|
|
|
201,092
|
|
|
|
1,064,952
|
|
Add: New Debt Discount
|
|
|
3,534,065
|
|
|
|
—
|
|
|
|
3,534,065
|
|
Less Repayments/Conversions/Amortization
|
|
|
(1,404,540
|
)
|
|
|
(100,182
|
)
|
|
|
(1,504,722
|
)
|
Balance June 30, 2017
|
|
$
|
2,993,385
|
|
|
$
|
100,910
|
|
|
$
|
3,094,295
|
NOTE
8 – RELATED PARTY TRANSACTIONS
The
Company has agreements covering certain of its management personnel. Such agreements provide for minimum compensation levels and
are subject to annual adjustment.
The
Company’s Chief Executive Officer holds 50,000 shares of its Series C preferred stock. These shares can be converted into
21,696,485 shares of the Company’s common stock at his option.
The
Company’s largest stockholder has from time to time provided unsecured loans to the Company, See Note 4 for the detail of
the convertible and non-convertible debt with a face value of $750,000
NOTE 9– DEBT EXTINGUISHMENT
On January 1, 2017, the Company renegotiated nine
(9) convertible notes payable. The
Total face value of the notes issued was $876,468
the notes are due on January 1, 2019. The face value plus accrued interest due of $62,533 resulting in new face amount due of $876,468.
The new notes are convertible after January 1, 2017 and are convertible into the Company’s common stock at a conversion rate
of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.225. The Company recorded
a loss from debt extinguishment of $67,442.
NOTE
10 – 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 $100K, 10% promissory
note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note”
or September 9, 2017.
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 $100K, 10% promissory
note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note”
or September 9, 2017.
On
May 9, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187
paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9,
2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 9, 2018.
On
May 17, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate
amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187
paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”)
for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 17,
2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 17, 2018.
Warrants
issued to Non-Employees
|
|
Warrants
Issued
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contract
Terms Years
|
Balance as of December 31,
2016
|
|
|
|
11,065,540
|
|
|
|
0.0316297
|
|
|
|
1.79
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance as of June 30, 2017
|
|
|
|
11,065,540
|
|
|
|
0.0316297
|
|
|
|
.90
|
|
NOTE
11 – COMMITMENTS AND CONTINGENCIES
The
Company is, from time to time involved in litigation in the normal course of business. While it is not possible at this time to
establish the ultimate amount of liability with respect to contingent liabilities, including those related to legal proceedings,
management is of the opinion that the aggregate amount of any such liabilities, for which provision has not been made, will not
have a material adverse effect on the Company’s financial position.
NOTE 12– SUBSEQUENT EVENTS
The previously reported $5.8 million Financing
Agreement entered into on May 11, 2017 with an institutional investor (the “Investor”) has been amended as of July
31, 2017 (as amended, the $6.3 million Financing Agreement) pursuant to which the Investor has purchased and has agreed to purchase
up to $6.3 million inconvertible notes (the “$6.3 million Notes”).
The $6.3 million Notes are substantially similar
in form and substance to the $2.1 million Notes that were part of the $2.1 million Financing Agreement entered into between the
Company and the Investor in December 2016 and completed in March of 2017 (as well as the approximately $1.2 million in financing
previously received from the Investor in 2014 and 2015), except that the $6.3 million Notes are due and payable on January 1, 2020.
Pursuant to the terms of the $6.3 million Financing
Agreement, an additional $150,000 was delivered to the Company on July 20, 2017, bringing the total amount received by the Company
to $650,000 since its execution on May 11, 2017. The purpose for the increase in the $6.3 million Financing Agreement was to allocate
an additional $500,000 to be used for the targeted acquisition of property in Oregon for the development of a Commercial and Medical
Cannabis Grow Complex and related enterprises, and $500,000 has been escrowed against the purchase of an identified property which
the Company expects to close on the property during the thrid Quarter of 2017
For more information on the $6.3 million Financing
Agreement, please refer to the narrative in Item 2 (above), Management’s Discussion and Analysis of Financial Condition
and Results of Operations.