UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period September 30, 2017ended March 31, 2019

OR

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

 

For the transition period from

__________to __________

 

Commission File No.: 333-177532

 

KAYA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

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

 

888 S. Andrews Avenue

Suite 302

Ft. Lauderdale, Florida 33316

(Address of principal executive offices)

 

(954)-892-6911

(Issuer's telephone number)

305 S. Andrews Avenue, Suite 209, Ft. Lauderdale, Florida 33301

 Former Name or Former Address (If Changed Since Last Report)

 

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

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

 

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

 

 Large accelerated filer[ ]Accelerated filer[ ]
 Non-acceleratedNonaccelerated filer[ ]Smaller reporting company[X]

Emerging growth company [X]

 

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

 

As of November 17, 2017,May 20, 2019, the Issuer had 138,793,087173,598,080 shares of its common stock outstanding.

 
 

 

KAYA HOLDINGS, INC.

 

INDEX TO QUARTERLY REPORT ON FORM 10 Q

 

Part I – Financial Information Page

Part I – Financial InformationPage
Item 1.Condensed Consolidated Financial Statements1 Page
  Condensed Consolidated Balance Sheet1 3
  Condensed Consolidated Statements of Operation3 4
Statement of Stockholder’s equity for three months ended March 31, 2019 and 20185
  Condensed Consolidated Statements of Cash Flows4 8
  Notes to Condensed Consolidated Financial Statements6 9
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations30
Item 3.Quantitative and Qualitative Disclosures About Market Risk56 66
Item 4.Controls and Procedures56 66
  
Part II Other Information 
  
Item 1.Legal Proceedings5767
Item 1A.Risk Factors5767
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds5867
Item 3.Defaults Upon Senior Securities5867
Item 4.Mine Safety Disclosures5867
Item 5.Other Information5967
Item 6.Exhibits5967
  Signatures5968

 

 

 
 

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

 

PART I- FINANCIAL INFORMATION  Cautionary Note Regarding Forward Looking Statements

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

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

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

Item 1. Financial Statements.    Available Information

We file annual, quarterly and special reports and other information with the Securities and Exchange Commission (“SEC”) that can be obtained from the SEC by telephoning 1-800-SEC-0330. The Company’s filings are also available through the SEC’s Electronic Data Gathering Analysis and Retrieval System, known as EDGAR, through the SEC’s website (www.sec.gov).

Kaya Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheet

March 31, 2019 and December 31, 2018

ASSETS
  (Unaudited) (Audited)
  March 31, 2019 December 31, 2018
CURRENT ASSETS:        
Cash and equivalents $113,826  $111,512 
Inventory-net of allowance  118,682   131,542 
Prepaid expenses  13,052   20,541 
Total current assets  245,560   263,595 
         
NON-CURRENT ASSETS:        
Right-of-use asset - operating lease  547,729   —   
Property and equipment, net  2,310,768   2,348,780 
Deposits  31,523   31,523 
Total other assets  2,890,020   2,380,303 
         
Total assets $3,135,580  $2,643,898 
         
         
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)        
         
CURRENT LIABILITIES:        
Accounts payable and accrued expense $587,827  $562,016 
Accounts payable and accrued expense-related parties  7,737   7,737 
Accrued interest  768,496   659,169 
Right-of-use liabiliy - operating lease  547,729   —   
Convertible notes payable-net of discount  315,804   2,894,294 
Notes payable  9,312   9,312 
Derivative liabilities  15,059,992   19,783,034 
Total current liabilities  17,296,897   23,915,562 
         
LONG TERM LIABILITIES:        
Convertible notes payable-related party-net of discount  500,000   500,000 
Convertible notes payable-net of discount  4,209,656   1,283,557 
Notes payable-related party  250,000   250,000 
Total long term liabilities  4,959,656   2,033,557 
         
Total liabilities  22,256,553   25,949,119 
         
STOCKHOLDERS' EQUITY (DEFICIT):        
Convertible preferred stock, Series C, par value $.001; 10,000,000 shares authorized;        
49,900 and 49,900 issued and outstanding at December 31, 2018 and 2017  50   50 
, respectively        
Common stock , par value $.001;  500,000,000 shares authorized;        
173,598,080 shares issued as of March 31, 2019 and        
  165,812,128 shares issued as of December 31, 2018  173,598   165,812 
Subscriptions payable  163,630   397,209 
Additional paid in capital  17,367,805   17,100,137 
Accumulated deficit  (35,675,380)  (39,924,912)
Non-controlling interest  (1,150,676)  (1,043,517)
Net stockholders' equity/(deficit)  (19,120,973)  (23,305,221)
         
Total liabilities and stockholders' equity/(deficit) $3,135,580  $2,643,898 

 

ASSETS
  (Unaudited) (Audited)
  September 30, 2017 December 31, 2016
CURRENT ASSETS:        
Cash and equivalents $285,603   306,884 
Inventory-Net of Allowance  150,936   83,997 
Prepaid Expenses  20,274   4,500 
Total Current Assets  456,813   395,381 
         
OTHER ASSETS:        
Property and equipment, net  893,385   192,964 
Land  506,076   —   
Deposits  81,597   122,024 
Total Other Assets  1,481,058   314,988 
         
Total Assets  1,937,871   710,369 
         
         
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
         
CURRENT LIABILITIES:        
Accounts payable and accrued expense  543,537   506,601 
Accounts payable and accrued expense-related parties  13,586   18,586 
Accrued interest  234,023   142,853 
Notes Payable  89,131     
Notes Payable-Related Party  250,000   —   
Convertible Note Payable-related party-Net of Discount (50,455)  449,545   —   
Convertible Notes Payable-net of discount (21,545)  278,455   721,665 
Derivative liabilities  3,923,015   8,423,354 
Total Current Liabilities  5,781,291   9,813,059 
         
LONG TERM LIABILITIES:        
Convertible Note Payable-related party-Net of Discount  —     298,908 
Derivative liabilities  8,439,135   10,922,994 
Convertible Note Payable-Net of Discount  (2,415,596)  4,784,769   147,833 
Notes Payable  —     267,635 
Notes Payable-Related Party  —     250,000 
Total Long Term Liabilities  13,223,904   11,887,370 
         
Total Liabilities  19,005,195   21,700,429 
         

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

1

3

STOCKHOLDERS' EQUITY (DEFICIT):        
Convertible Preferred Stock, Series C, par value $.001; 10,000,000 shares authorized;        
49,900 and 49,900 issued and outstanding at September 30, 2017  50   50 
and December 31, 2016        
Common stock , par value $.001;  500,000,000 shares authorized;        
131,058,988 shares issued as of September 30, 2017 and        
  117,076,795 shares issued as of December 31, 2016  131,058   117,076 
Additional paid in capital  14,019,989   9,035,740 
Subscriptions payable  —     272,400 
Accumulated Deficit  (30,429,005)  (29,790,416)
Non-controlling Interest  (789,417)  (624,910)
Net Stockholders' Equity/(Deficit)  (17,067,325)  (20,990,060)
Total Liabilities and Stockholders' Equity/(Deficit) $1,937,871 ��$710,369 

Kaya Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unudited)

  For the three For the three
  months ended months ended
  March 31, 2019 March 31, 2018
     
Net sales $263,758  $255,365 
         
Cost of sales  145,512   102,591 
         
Gross profit  118,246   152,774 
         
Operating expenses:        
Professional fees  45,850   1,185,728 
Salaries and wages  146,455   133,440 
General and administrative  243,023   164,088 
Total operating expenses  435,335   1,483,256 
         
Operating loss  (317,089)  (1,330,482)
         
Other income(expense):        
Interest expense  (126,202)  (146,024)
Amortization of debt discount  (347,609)  (579,765)
Derivative liabilities expense  (446,894)  (1,557,197)
Change in derivative liabilities expense  5,404,936   16,361,519 
Loss on extinguishment of debt  (25,000)  — 
Other income (expense)  224   —   
Total other income (expense)  4,459,462   14,078,533 
         
Net income (loss)  4,142,373   12,748,051 
         
Net (loss) attributed to non-controlling interest  107,159  (36,645)
         
Net income (loss) attributed to Kaya Holdings, Inc.  4,249,532   12,711,406 
         
Basic net income (loss) per common share $0.01  $0.09 
         
Weighted average number of common shares outstanding - Basic  289,259,652   139,093,811 
         
Diluted net income (loss) per common share $0.01  $0.04 
         
Weighted average number of common shares outstanding - Diluted  533,492,403   316,199,678 

 

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

4

Kaya Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

For the three months ended March 31, 2019 and 2018

(Unaudited)

       Additional Paid-in Capital Accumulated Deficit Noncontrolling Interest Total Stockholders'  Equity
          
          
  Preferred Stock   Common Stock  Subscription Payable    
 Shares Amount Shares Amount Amount    
                  
                  
Balance, December 31, 2017               49,900  $                   50       138,993,087  $          138,992  $          152,796  $     12,811,671  $    (44,672,209)  $         (833,710)  $    (32,402,410)
                  
Imputed interest                       -                           -                           -                           -                           -                       7,500                        -                           -                       7,500
                  
Common stock issued for debt conversion and interest                       -                           -                   416,632                      417                        -                     12,082                        -                           -                     12,499
                  
Net loss                       -                           -                           -                           -                           -                           -               12,711,406                  36,645            12,748,051
                  
Balance, March 31, 2018               49,900  $                   50       139,409,719  $          139,409  $          152,796  $     12,831,253  $    (31,960,803)  $         (797,065)  $    (19,634,360)
                  

5

Balance, December 31, 2018               49,900  $                   50       165,812,128  $          165,812  $          397,209  $     17,100,137  $    (39,924,912)  $      (1,043,517)  $    (23,305,222)
                  
Imputed interest                         -                          -                          -                          -                          -                  16,875                          -                          -                  16,875
                  
Loss on extinguishment of debt-  -  -  -  -  25,000 -  -  25,000
                  
Common stock issued for debt conversion and interest                         -                          -              7,785,952                    7,786               (233,579)                225,793                          -                          -                        -   
                  
Net loss                         -                          -                          -                          -                          -                          -              4,249,532               (107,159)              4,142,373
                  
Balance, March 31, 2019               49,900  $                   50       173,598,080  $          173,598  $          163,630  $     17,367,805  $    (35,675,380)  $      (1,150,676)  $    (19,120,973)

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

6

Kaya Holdings, Inc. and Subsidiaries

Consolidated Statement of Cashflows

(Unaudited)

  For the three For the three
  months ended months ended
  March 31, 2019 March 31, 2018
OPERATING ACTIVITIES:        
Net income/(loss) $4,249,532  $12,711,407 
Adjustments to reconcile net loss to net cash used in operating activities:        
Net income (loss) attributable to non-controlling interest  (107,159)  36,645 
Depreciation  57,680   19,356 
Imputed interest  16,875   7,500 
Derivative expense  446,894   1,557,197 
Change in derivative liabilities  (5,404,936)  (16,361,519)
Loss on extinguishment of debt  25,000   — 
Amortization of debt discount  347,609   579,765 
Stock issued for interest  —     12,499 
Changes in operating assets and liabilities:        
Prepaid expense  7,489   (15,417)
Inventory  12,860   (18,473)
Right-of-use asset  62,561   —   
Deposits  —     16,174 
Accrued interest  109,327   112,467 
Accounts payable and accrued expenses  25,811   897,880 
Right-of-use liabilities  (62,561)  —   
         
        Net cash used in operating activities  (213,018)  (444,519)
         
INVESTING ACTIVITIES:        
Purchase of property and equipment  (19,668)  (36,788)
Net cash used in investing activities  (19,668)  (36,788)
         
FINANCING ACTIVITIES:        
Proceeds from convertible debt  235,000   470,000 
Payments on notes payable  —     (51,274)
        Net cash provided by financing activities  235,000   418,726 
         
NET INCREASE IN CASH  2,314   (62,580)
         
CASH BEGINNING BALANCE  111,512   318,462 
         
CASH ENDING BALANCE $113,826  $255,882 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Taxes paid  —     —   
Interest paid  —     —   
         
NON-CASH TRANSACTIONS AFFECTING OPERATING, INVESTING        
   AND FINANCING ACTIVITIES:        
Reclassification of derivative liability to additional paid in capital  —     —   
Value of accrued interest payable reclassified as principal  —     7,133 
Adoption of lease standard ASC 842  610,920   —   
Derivative liability on convertible note payable  235,000   —   
Value of common shares issued for conversion of convertible  233,579   —   
notes payable issued from stock payable        

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

2

7

Kaya Holdings, Inc. and Subsidiaries   

Condensed Consolidated Statements of Operations   

(Unaudited)   

  For the three For the three For the Nine For the Nine
  months ended months ended Months Ended Months Ended
  September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
         
Net Sales $320,950  $263,435  $667,601  $754,093 
                 
Cost of Sales  122,788   126,320   272,665   421,002 
                 
Gross Profit  198,162   137,115   394,936   333,091 
                 
Operating Expenses:                
Professional Fees  166,150   815,508   523,551   1,205,293 
Salaries and Wages  131,762   65,358   311,253   216,691 
General and Administrative  367,975   109,417   911,598   338,073 
Total Operating Expenses  665,887   990,283   1,746,402   1,760,057 
                 
Operating Loss  (467,724)  (853,168)  (1,351,465)  (1,426,966)
                 
Other Income(expense):                
Interest Expense  (115,552)  (45,982)  (260,295)  (195,968)
Legal Settlement  (247,500)  —     (247,500)  —   
Amortization of Debt discount  (569,497)  (405,530)  (1,678,899)  (978,208)
Derivative Liabilities Expense  (375,950)  —     (16,221,943)  (129,340)
Gain(Loss) on Extinguishment of Debt  —     —     (67,442)  (126,000)
Change in Derivative Liabilities Expense  1,260,200   181,986   22,114,526   1,895,657 
Total Other Income(Expense)  (48,299)  (269,526)  3,638,447   466,141 
                 
Net income (loss) before Income Taxes  (516,023)  (1,122,694)  2,286,982   (960,825)
                 
Provision for Income Taxes  —     —           
                 
Net income (loss)  (516,023)  (1,122,694)  2,286,982   (960,825)
                 
Net (Loss) attributed to non-controlling interest  62,878   (3,975)  (164,507)  (61,259)
                 
Net income (loss) attributed to Kaya Holdings, Inc.  (578,900)  (1,118,719)  2,451,489   (899,566)
                 
Basic and diluted net loss per common share $(0.00) $(0.01) $0.02  $(0.01)
                 
Weighted average number of common shares outstanding  130,749,488   102,076,923   127,585,695   84,497,017 

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

3

Kaya Holdings, Inc. and Subsidiaries

Consolidated Statement of Cash flows 

(Unaudited)

  For the Nine For the Nine
  Months Ended Months Ended
  September 30, 2017 September 30, 2016
OPERATING ACTIVITIES:        
Net Income/(Loss) $2,286,982   (899,566)
Adjustments to reconcile net loss to net cash used in operating activities:        
Net loss attributable to non-controlling interest  (164,507)  (61,259)
Depreciation  54,403   59,964 
Imputed Interest  30,000   90,000 
Loss (Gain) on Extinguishment of Debt  67,442   126,000 
Derivative Expense  16,221,943   129,340 
Change in derivative liabilities  (22,114,526)  (1,895,656)
Amortization of debt discount  1,678,899   978,208 
Stock issued for services  —     659,650 
Stock issued as contribution  —     —   
Stock issued for interest  29,638   9,000 
Changes in operating assets and liabilities:        
Prepaid Expense  (15,774)  (14,000)
Inventory  (66,939)  40,915 
Rent Deposit  —     —   
Security Deposit  —     —   
Other assets  58,046   (45,943)
Accrued Interest  188,683   104,005 
Accounts payable and accrued expenses  40,582   142,382 
         
        Net cash used in operating activities  (1,705,128)  (576,960)
         
INVESTING ACTIVITIES:        
Purchase of property and equipment  (679,824)  (28,224)
Net cash used in investing activities  (679,824)  (28,224)
         
FINANCING ACTIVITIES:        
Proceeds from Convertible debt  2,500,000   325,000 
Payment on Convertible debt  (23,500)  —   
Proceeds from Notes Payable  —     150,000 
Payments on Note Payable  (112,829)  (52,578)
Proceeds from sales of common stock  —     100,000 
        Net cash provided by (used in) financing activities  2,363,671   522,422 
         

4

NET INCREASE IN CASH  (21,282)  (82,762)
         
CASH BEGINNING BALANCE  306,884   123,907 
         
CASH ENDING BALANCE $285,803   41,145 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Taxes paid  —     —   
Interest paid  —     —   
         
NON-CASH TRANSACTIONS AFFECTING OPERATING, INVESTING        
   AND FINANCING ACTIVITIES:        
Value of common shares issued as payment of debt  95,680   104,727 
Value of common shares issued as payment of debt  190,575   —   
Value of common shares issued as payment of debt and interest  238,739   —   
Value of common shares issues as payment of interest  29,638   9,000 

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

5

Kaya Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2017 (unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF THE BUSINESS

 

Organization

 

Kaya Holdings, Inc., a Delaware corporation (the “Company” or “KAYS” FKA (Alternative Fuels Americas, Inc.), is a holding company. The Company was incorporated in 1993 and has engaged in a number of businesses. Its name was changed on May 11, 2007 to NetSpace International Holdings, Inc. (a Delaware corporation) (“NetSpace”). NetSpace acquired 100% of Alternative Fuels Americas, Inc,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(a Delaware corporation). Certificate of Amendment to the Certificate of Incorporation was filed in March 2015 changing the Company’s name from Alternative Fuels Americas, Inc. (a Delaware corporation) to Kaya Holdings, Inc.

 

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

 

Nature of the Business  

 

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

 

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

 

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

 

Accordingly, inIn 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.

6

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

 

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

8

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

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

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

 

NOTE 2 -– LIQUIDITY AND GOING CONCERN

 

The Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2017March 31, 2019 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net income of $2,436,271 $4,249,532for the ninethree months ended September 30, 2017March 31, 2019 and a net lossincome of $899,566$12,711,406 for the ninethree months ended September 30, 2016.March 31, 2018. The decrease in net income is due to the changes in derivative liabilities and the company continues to have operating losses. At September 30, 2017,March 31, 2019 the Company has a working capital deficiency of $5,147,348$17,051,337 and is totally dependent on its ability to raise capital. The Company has a plan of operations and acknowledges that its plan of operations may not result in generating positive working capital in the near future. Even though management believes that it will be able to successfully execute its business plan, which includes third-party financing and capital issuance, and meet the Company’s future liquidity needs, there can be no assurances in that regard. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this material uncertainty. Management recognizes that the Company must generate additional funds to successfully develop its operations and activities. Management plans include:

 

•the sale of additional equity and debt securities,
•alliances and/or partnerships with entities interested in and having the resources to support the further development of the Company’s business plan,
•business transactions to assure continuation of the Company’s development and operations,
•development of a unified brand and the pursuit of licenses to operate recreational and medical marijuana facilities under the branded name.
the sale of additional equity and debt securities,
alliances and/or partnerships with entities interested in and having the resources to support the further development of the Company’s business plan,
business transactions to assure continuation of the Company’s development and operations,
development of a unified brand and the pursuit of licenses to operate recreational and medical marijuana facilities under the branded name.

 

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

 

Basis of Presentation

 

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

 

Use of Estimates

 

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

 

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

 

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

9

 

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.  

7

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 accompanying 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).and majority-owned subsidiaries. All inter-company accounts and transactionssignificant intercompany balances have been eliminated in consolidation.eliminated.

Wholly-owned subsidiaries:

·Alternative Fuels Americas, Inc. (a Florida corporation)
·34225 Kowitz Road, LLC (an Oregon LLC)

Majority-owned subsidiaries:

·Marijuana Holdings Americas, Inc. (a Florida corporation)
oMJAI Oregon 1 LLC
oMJAI Oregon 2 LLC
oMJAI Oregon 3 LLC
oMJAI Oregon 4 LLC
oMJAI Oregon 5 LLC

 

Non-Controlling Interest

 

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

 

Cash and Cash Equivalents

 

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

 

Inventory

 

Inventory consists of finished goods purchased, which are valued at the lower of cost or market value, with cost being determined on the first-in, first-out method.  The Company periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of any anticipated changes in future demand.  Total Value of Finished goods inventory as of September 30, 2017March 31, 2019 is $150,936$118,682 and $83,997$131,542 as of December 31, 2016.2018. No allowance wasas necessary as of September 30, 2017March 31, 2019 and December 31, 2016.2018.

 

Property and Equipment

 

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

 

Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 5-75-30 years of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred.

 

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

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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.

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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,anti-dilutive, 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.

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

 

•

Level 1 – Observable inputs that reflect quoted market prices in active markets

for identical assets or liabilities.

•

Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets

that are not active; quoted prices for similar assets or liabilities in active

markets; inputs other than quoted prices that are observable for the assets

or liabilities; or inputs that are derived principally from or corroborated by

observable market data by correlation or other means.

•

Level 3 – Unobservable inputs reflecting the Company’s assumptions

incorporated in valuation techniques used to determine fair value.

These assumptions are required to be consistent with market participant

assumptions that are reasonably available.

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

 

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 Fair Value Measurements at December 31, 2018
  Level 1   Level 2   Level 3 
Assets           
Cash$                      113,826  $   $  
Total assets                       113,826                                   -                                      -    
Liabilities           
Convertible debentures, net of discounts of $1,078,654                                 -                                      -                         5,025,458 
Short term debt, net of discounts of $-0-                                 -                            259,312                                   -    
Derivative liability                                 -                                      -                       15,059,992 
Total liabilities                                 -                            259,312                    20,085,450 
 $                      113,826  $                     (259,312)  $                (20,085,450) 
            
            
 Fair Value Measurements at December 31, 2018
  Level 1   Level 2   Level 3 
Assets           
Cash$                      111,512  $   $  
Total assets                       111,512                                   -                                      -    
Liabilities           
Convertible debentures, net of discounts of $1,191,264                                 -                                      -                         4,677,851 
Short term debt, net of discounts of $-0-                                 -                            259,312                                   -    
Derivative liability                                 -                                      -                       19,783,034 
Total liabilities                                 -                            259,312                    24,460,885 
 $                      111,512  $                     (259,312)  $                (24,460,885) 

 

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

 

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

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

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

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

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

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

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

Beneficial Conversion Feature

 

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

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

 

Debt Issue Costs and Debt Discount

 

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

 

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.

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Stock-Based Compensation - Employees

 

The Company accounts for its stock basedstock-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-ScholesBinomial Option Model option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

 

• 

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

• 

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

• 

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

• 

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

 

11

13

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-ScholesBinomial option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

 

• 

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

• 

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

• 

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

• 

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

 

12

14

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

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

 

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

 

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

 

Revenue Recognition

  

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

To confirm, all of our OLCC licensed cannabis retail sales operations are conducted and operated on a “cash and carry” basis- product(s) from our inventory accounts are sold to the customer(s) and the customer settles the account at time of receipt of product via cash payment at our retail store; the transaction is recorded at the time of sale in our point of sale software system. Revenue is only reported after product has been delivered to the customer without further obligation, (3) the sales price toand the customer has paid for the product with cash.

To date the only other revenue we have received is fixed or determinable,for ATM transactions and (4) collectabilityrevenue from this activity is reasonably assured.only reported after we receive payment via check from the ATM service provider company.

 

Cost of Sales

 

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

 

Related Parties

 

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

 

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

 

13

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.

15

 

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, 20152018 and 2014.2017.

 

14

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,From time to time, new accounting pronouncements are issued by the FASB issued ASU 2016-09, Stock Compensation, which is intended to simplify the accounting for share based payment award transactions. The newor other 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 withinsetting bodies that year, and will beare adopted by the Company inas of the first quarterspecified effective date. Unless otherwise discussed, the Company believes that the effect of fiscal 2017. The Company anticipates the new standardrecently issued standards that are not yet effective will result in an increase in the numbernot have a material effect on its consolidated financial position or results 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.operations upon adoption.

 

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest—Imputation of Interest (Topic 83530): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by ASU 2015-03. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. 

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”), which applies guidance on the subsequent measurement of inventory. ASU 2015-11 states that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. The guidance excludes inventory measured using last in, first out or the retail inventory method. ASU 2015-11 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is not planning to early adopt ASU 2015-11 and is currently evaluating ASU 2015-11 to determine the potential impact to its condensed consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “LeasesLeases (Topic 842) (ASU 2016-02).” TheUnder ASU will increase transparency and comparability among entities by recognizing leaseNo. 2016-2, an entity is required to recognize right-of-use assets and lease liabilities on theits balance sheet and disclosingdisclose key information about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, the Company adopted this standard on January 1, 2019 using the modified retrospective method. The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients’, which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs; and all of the new standard’s available transition practical expedients.

On adoption, the Company recognized a right of use asset of $610,290, operating lease liabilities of $610,290, based on the present value of the remaining minimum rental payments under current leasing standards for its existing operating lease.

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

In July 2017, the FASB issued ASU 2017-11,Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” to simply the accounting for certain instruments with down round features. The amendments require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Further, companies that provide earnings per share (“EPS”) data will require lessees to recognize inadjust 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 assetbasic EPS calculation for the lease term.effect of the feature when triggered and will also recognize the effect of the trigger within equity. The ASUstandard is effective for annual reporting periods beginning after December 15, 2018public companies for fiscal years, and interim periods within those annual periods. We dofiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company adopted this new standard on January 1, 2019 and did 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 theCompany’s 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.

16

 

15

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

 

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

  March 31, 2019 December 31, 2018
(Unaudited)(Audited)
ATM Machine $11,000  $11,000 
Computer  22,736   22,736 
Furniture & Fixtures  49,408   49,408 
HVAC  41,768   25,000 
Land  697,420   697,420 
Leasehold Improvements  333,529   333,529 
Machinery and Equipment  408,133   405,233 
Sign  43,594   43,594 
Structural  1,017,359   1,017,359 
Vehicle  79,744   79,744 
Total  2,704,691   2,685,023 
Less: Accumulated Depreciation  (393,923)  (336,243)
Property, Plant and Equipment - net $2,310,768  $2,348,780 

Re-Classifications

Certain amounts in 2016 were reclassified to conform to the 2017 presentation. These reclassifications had no effect on consolidated net lossDepreciation expense totaled of $57,680 and $19,356 for the periods presented.three months ended March 31, 2019 and 2018, respectively.

 

The fair value

NOTE 5 – NON-CURRENT ASSETS

Other assets consisted of the warrants on the date of issuancefollowing at March 31, 2019 and on each re-measurement date of those warrants classified as liabilities is estimated using the Black-Scholes option pricing model using the following assumptions: contractual life according to the remaining terms of the warrants, no dividend yield, weighted average risk-free interest rate of 1.09% at September 30, 2017 and weighted average volatility of 130%. For this liability, the Company developed its own assumptions that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of the Company's various classes of preferred stock, stock price volatility, the contractual term of the warrants, risk free interest rates and dividend yields.December 31, 2018:

  

March 31,

2019

(Unaudited)

 

December 31, 2018

(Audited)

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

 

NOTE 46 – 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 OptionBinomial Options Pricing Model with a risk-free interest rate of ranging from 0.05% to 1.09%2.63%, volatility ranging from 130% of 157%84.63% to 243.37%, trading prices ranging from $.08$0.045 per share to $0.49$0.41 per share and a conversion price ranging from $0.03 per share to $0.12$0.10 per share. The total derivative liabilities associated with these notes are $12,362,150were$15,059,992and $16,088,920 at September 30, 2017March 31, 2019 and $19,346,348 as of December 31, 2016.

2018, respectively.

16

17

See Summary Table – Page 17

 

Convertible Debt Summary
Footnote NumberDebt TypeDebt ClassificationInterest RateDue Date Ending
 Current LT 09.30.17 12.31.16
        
AConvertible X 10.0%1-Jan-17 $25,000 $25,000
BConvertible  X8.0%1-Jan-19 65,700 58,556
CConvertible  X8.0%1-Jan-19 32,850 29,278
DConvertible  X8.0%1-Jan-19 209,047 186,316
FConvertible X 8.0%Converted -    117,113
GConvertible X 8.0%Converted -    117,113
HConvertible  X8.0%Converted -    55,895
IConvertible  X8.0%Converted -    67,074
JConvertible  X8.0%Converted -    23,442
KConvertible  X8.0%Converted -    23,442
LConvertible  X8.0%1-Jan-19 30,424 27,116
MConvertible  X8.0%1-Jan-19 131,236 116,966
NConvertible  X8.0%1-Jan-19 55,983 
OConvertible  X8.0%1-Jan-19 109,167 100,000
PConvertible  X8.0%1-Jan-19 52,767 
QConvertible  X8.0%1-Jan-19 52,050 
RConvertible  X8.0%1-Jan-19 203,867 
SConvertible  X8.0%1-Jan-19 50,400 
TConvertible  X8.0%1-Jan-19 250,000 
VConvertible X 8.0%1-Jan-18 25,000 
WConvertible X 8.0%1-Jan-18 15,000 
XConvertible X 8.0%1-Jan-18 60,000 
YConvertible X 8.0%1-Jan-18 50,000 
ZConvertible X 8.0%Converted -    25,000
AAConvertible X 6.0%Converted -    18,500
BBConvertible X 10.0%1-Jan-19 50,000 50,000
CCConvertible X 10.0%1-Jan-19 100,000 100,000
DDConvertible X 10.0%30-Nov-19 50,000 50,000
EEConvertible X 0.0%31-Dec-17 500,000 500,000
KKConvertible  X8.0%1-Jan-19 150,000 -   
LLConvertible  X8.0%1-Jan-19 600,000 -   
MMConvertible  X8.0%1-Jan-19 100,000 -   
NNConvertible  X8.0%1-Jan-19 500,000 -   
OOConvertible  X8.0%1-Jan-19 500,000 -   
PPConvertible  X8.0%1-Jan-20 500,000 -   
QQConvertible  X8.0%1-Jan-20 150,000 -   
Current Convertible Debt    875,000 1,690,811
Long-Term  Convertible Debt    3,743,490 -   
Total Convertible Debt     $4,618,490 $1,690,811

See Below Summary Table

 

17
Convertible Debt Summary
 Debt TypeDebt ClassificationInterest RateDue Date Ending
 CT LT 3.31.19 12.31.18
        
AConvertible X 10.0%1-Jan-17                25,000 $              25,000
BConvertible  X8.0%1-Jan-21                65,700                65,700
CConvertible  X8.0%1-Jan-21                32,850                32,850
DConvertible  X8.0%1-Jan-21               209,047               209,047
OConvertible  X8.0%1-Jan-21               109,167               109,167
PConvertible  X8.0%1-Jan-21                52,767                52,767
QConvertible  X8.0%1-Jan-21                52,050                52,050
SConvertible  X8.0%1-Jan-21                50,400                50,400
TConvertible  X8.0%1-Jan-21               250,000               250,000
XConvertible X   8.0%1-Jan-19                66,800                66,800
BBConvertible X 10.0%1-Jan-19                50,000                50,000
CCConvertible X 10.0%1-Jan-19               100,000               100,000
EEConvertible    X0.0%31-Dec-21               500,000               500,000
KKConvertible  X8.0%1-Jan-21               150,000               150,000
LLConvertible  X8.0%1-Jan-21               600,000               600,000
MMConvertible  X8.0%1-Jan-21               100,000               100,000
NNConvertible  X8.0%1-Jan-21               500,000               500,000
OOConvertible  X8.0%1-Jan-21               500,000               500,000
PPConvertible  X8.0%1-Jan-21               500,000               500,000
QQConvertible  X8.0%1-Jan-21               150,000               150,000
RRConvertible  X8.0%1-Jan-21               500,000               500,000
SSConvertible  X8.0%1-Jan-21               150,000               150,000
TTConvertible  X8.0%1-Jan-21               300,000               300,000
UUConvertible  X8.0%1-Jan-21               150,000               150,000
VVConvertible  X5.0%31-Jan-20               100,333               100,333
XXConvertible  X8.0%1-Jan-21               100,000               100,000
YYConvertible  X8.0%1-Jan-21               155,000               155,000
ZZConvertible  X8.0%1-Jan-21               150,000               150,000
AAAConvertible  X8.0%1-Jan-21                95,000                95,000
BBBConvertible  X8.0%1-Jan-21                80,000                80,000
CCCConvertible X 8.0%1-Jan-20                25,000                25,000
DDDConvertible  X8.0%1-Jan-21                70,000                       -   
EEEConvertible  X8.0%1-Jan-21               150,000                       -   
FFFConvertible  X8.0%1-Jan-21                15,000                       -   
Total Convertible Debt                6,104,114            5,869,114
Less: Discount               (1,078,654)           (1,191,263)
Convertible Debt, Net of Discounts    $         5,025,460 $         4,677,851
Convertible Debt, Net of Discounts, Current   $            315,804 $         2,894,294
Convertible Debt, Net of Discounts, Long-term   $         4,709,656 $         1,783,557

 

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: thereforestock. 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 OptionBinomial Options Pricing Model with a risk-free interest rate of ranging from 0.08%0.18% to .87%2.63%, volatility ranging from 130% of 157%84.63% to 243.37%, trading prices ranging from $.08$0.065 per share to $0.49$0.45 per share and a conversion price ranging from $0.05 per share to $0.12$0.41 per share. The balance of the convertible note at September 30, 2017March 31, 2019 including accrued interest and net of the discount amounted to $43,075.$49,641.

 

18

A recap of the balance of outstanding convertible debt at March 31, 2019 is as follows:

Principal balance $25,000 
Accrued interest  24,641 
Balance maturing for the period ending:    
March 31, 2019 $49,641 
     

 

The Company valued the derivative liabilities at September 30, 2017 at $23,610. The Company recognized a change in the fair value of derivative liabilities for the three months ended September 30, 2017 of $(640), which were credited to operations.  In determining the indicated values at September 30, 2017, since the debt is in default the company used the maximum value these embedded options represent, with a trading price of $.14, and conversion prices of $0.11 per share.

(B), (C), (D), (H), (I), (J), (K), (L), (M)

On December 31, 2015 the Company renegotiated twelve (12) convertible and non-convertible notes payable. The Total face value of the notes issued was $888,500. The six-month notes were due on December 31, 2015. The new notes are convertible after January 1, 2016 and are convertible into the Company’s common stock at a conversion rate of $0.03The Company valued the derivative liabilities at March 31, 2019 at $21,039. The Company recognized a change in the fair value of derivative liabilities for the three months ended March 31, 2019 of $(823) which were charged (credited) to operations.  In determining the indicated values at March 31, 2019, since the debt is in default, the company used the maximum value these embedded options represent, with a trading price of $0.09, and conversion prices of $0.07 per share. The market value of the stock at the date when the debt becomes convertible was $0.087. All these amended debts have a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”  The derivative component of the obligation are initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts were amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.06%, volatility ranging from 155% of 221%, trading prices ranging from $.078 per share to $0.1 per share and a conversion price ranging from $0.03 per share to $0.04 per share. The total derivative liabilities associated with these notes (one note was converted during the quarter ended March 31, 2016 and two notes were converted during the quarter ended December 31, 2016).was $2,640,030 at December 31, 2015 and $4,718,754 at December 31, 2016, respectively.

On January 1, 2017 the Company renegotiated the nine (9) remaining convertible notes payable The total face value of the remaining notes issued was $588,085. The notes are due on January 1, 2019. The new notes were convertible after January 1, 2017 into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt became convertible was $0.2675. As of September 30, 2017, the principal balance was $469,256. All these amended debts have a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”  The derivative component of the obligation are initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are being amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 221%, trading prices ranging from $.14 per share to $0.22 per share and a conversion price ranging from $0.03 per share per share. The total derivative liabilities associated with these five  remaining notes are $1,927,297 at September 30, 2017.

18

(N)

On January 8, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note was Due in January of 2017  . On January 1, 2017, this note was amended to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $5,983 was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”   The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September 30, 2017 is $55,983. The derivative liability associated with this note as of September 30, 2017 was $229,967.

(O)

On March 31, 2016, the Company received $100,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note was Due in January of 2017. On January 1, 2017, this note was amended to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $9,167 was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”   The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share.The principal balance as of September 30, 2017 is $109,167. The derivative liability associated with this note as of September 30, 2017 was $448,334.

(P)

On July 13, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note was Due in January of 2017. On January 1, 2017, this note was amended to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $2,767 was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”   The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September 30, 2017 is $52,767. The derivative liability associated with this note as of September 30, 2017 was $216,706.

(Q)

On August 30, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note was Due in January of 2017. On January 1, 2017, this note was amended to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $2,050 was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”   In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September 30, 2017 is $52,050. The derivative liability associated with this note as of September 30, 2017 was $213,763.

 

19

(R)(B), (C), (D)

On November 3, 2016, the Company received $200,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January of 2018. On January 1, 2017, this note was amended to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $3,867 was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September 30, 2017 is $203,867. The derivative liability associated with this note as of September 30, 2017 was $837,255.

(S)

On December 1, 2016, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 10% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January of 2018. On January 1, 2017, this note was amended to extend the due date to January 1, 2019 and the interest rate was reduced to 8% and the accrued interest in the amount of $400 was added to the principal of the new note. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”   In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The principal balance as of September 30, 2017 is $50,400. The derivative liability associated with this note as of September 30, 2017 was $206,986.

(T)

On December 30, 2016 the Company received $250,000 from the issuance of convertible debt. Interest is stated at 10% The Note and Interest is convertible into common shares at $0.04 per share. Note is Due in January of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”   In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $731,553.

(U)

On March 13, 2016, the Company received $25,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note was Due in January of 2017. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”   In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $.09. The Note and Interest was converted to common shares on September 13, 2016

(V)

On September 13, 2016 the Company received $25,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.045 per share. Note is Due in January of 2018. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.”   In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49. The derivative liability associated with this note as of September 30, 2017 was $58,970.

20

(W)

On October 16, 2016 the Company received $15,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January of 2018. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $60,417.

(X)

On November 18, 2016 the Company received $60,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January of 2018. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $239,768.

(Y)

On December 7, 2016 the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12% The Note and Interest is convertible into common shares at $0.03 per share. Note is Due in January of 2018. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The Note and Interest was converted to common shares in July of 2017

(Z)

On October 1, 2015, the Company renegotiated a convertible notes payable. The original note was issued March 13, 2015 and due September 30, 2015, with conversion rate of $0.06 per share. The new note had an extended the due date to January 1, 2017 and convertible into the Company’s common stock at a conversion rate of $0.045 per share. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The Note and Accrued interest was converted to common stock on September 23, 2016

(AA)

On July 27, 2015, the Company issued a note payable for $28,500. The Company agrees to pay to the Holder $28,500 plus accrued interest pursuant to the following schedule:

·An initial payment of $5,000 is due no later than December 1, 2015. This amount represents the balance of the security deposit due for the lease of Commercial/Manufacturing Space occupied by MJAI Oregon 1, LLC, an indirect controlled subsidiary of the Company.

·A final payment of $42,700 principal, plus any accrued Interest at 10% is due no later than April 1, 2017. This amount represents the balance of accrued rent due for the initial monthly lease payments from August 1, 2015 through December 31, 2016.

21

The note was convertible after March 31, 2016 and is convertible into the Company’s common stock at a conversion rate of $0.10 per share or 20% discount to the thirty day moving average stock price. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 134% of 157%, trading prices ranging from $.05 per share to $0.49 per share. This note was paid in full as a result of a settlement agreement on March 31, 2017. The remaining balance is zero.

(BB)

On September 23, 2015, the Company received a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate amount of $50,000 with interest accruing at 10%. The note and interest is convertible after September 23, 2015 into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.089. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $184,507. The note has been extended to January 1, 2019

 

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 Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.05% to 2.59%, volatility ranging from 84.63% to 243.23%, trading prices ranging from $0.065 per share to $0.14 per share and a conversion price ranging from $0.03 per share to $0.04 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. The derivative liability associated with this note as of March 31, 2019 and 2018 were $778,808 and $1,265,774, respectively.

(CC)

(O)

 

On September 23, 2015, the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest accruing at 10%. The note and interest is convertible after September 23, 2015 into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $368,997. The note has been extended to January 1, 2019

On March 31, 2016 the Company received $100,000 from the issuance of convertible debt. Interest is stated at 12%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.41% to 2.59%, volatility ranging from 84.63% to 157.47%, trading prices ranging from $0.07 per share to $0.27 per share and a conversion price of $0.03 per share. The accrual interest associated with this note as of March 31, 2019 was $19,747. The derivative liability associated with this note as of March 31, 2019 and 2018 were $276,401 and $449,570, respectively.

 

(DD)

(P)

 

On September 23, 2015, the Company received a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate amount of $50,000 with interest accruing at 10%. The note and interest is convertible after September 23, 2015 into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $184,507. The note has been extended to November 30, 2017

On July 13, 2016 the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.41% to 2.59%, volatility ranging from 84.63% to 157.47%, trading prices ranging from $0.07 per share to $0.27 per share and a conversion price of $0.03 per share. The accrual interest associated with this note as of March 31, 2019 was $9,545. The derivative liability associated with this note as of March 31, 2019 and 2018 were $133,601 and $217,303, respectively.

 

(Q)

(EE) and (FF)

 

At December 31, 2013, the Company was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100 principal and $103,895 accrued interest, with interest accruing at 10%. On January 2, 2014, the Company entered into a Debt Modification Agreement whereby the total amount of the debt was reduced to $750,000 and there is no accrued interest or principal due until December 31, 2017. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares of AFAI, which if converted are subject to resale restrictions through December 31, 2017. The two-year note in the aggregate amount of $500,000 is convertible into the Company’s preferred stock at a conversion rate of $10.00 per share of preferred. At a conversion rate of 433.9297 common shares to 1 preferred share, this would result in a total of 21,696,485 common shares issued if all debt was converted. The market value of the stock at the date of issuance of the debt was $0.04. The remaining $250,000 is not convertible. The company has imputed interest on both the convertible debt and the non-convertible debt. The company used an interest rate of 4% for calculation purposes. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet. This note was modified and restated as of June 20, 2015, see Footnote 9. As of September 30, 2017, the balance of the convertible portion of the debt was $500,000. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share.The derivative liability associated with this convertible portion of the note as of September 30, 2017 was $2,539,521.

22

The net balance reflected on the balance sheet is for the convertible portion net of remaing debt discount is $399,090. The remaining $250,000 is not convertible. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet.

(KK)

On January 4, 2017 the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.04 per share. Note is Due in January of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share and a conversion price of $0.04 per share. The derivative liability associated with this note as of September 30, 2017 was $438,472.

On August 30, 2016 the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.41% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.07 per share to $0.27 per share a conversion price of $0.03 per share. The accrual interest associated with this note as of March 31, 2019 was $9,415. The derivative liability associated with this note as of March 31, 2019 and 2018 were $131,786 and $214,352, respectively.

 

(LL)

(S)

On December 1, 2016 the Company received $50,000 from the issuance of convertible debt. Interest is stated at 12%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.85% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.14 per share to $0.27 per share and a conversion price of $0.03 per share. The accrual interest associated with this note as of March 31, 2019 was $9,117. The derivative liability associated with this note as of March 31, 2019 and 2018 were $127,609 and $207,557, respectively.

 

On January 20, 2017 the Company received $600,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.07 per share. Note is Due in January of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $872,083.

(T)

(MM)

On January 31, 2017 the Company received $100,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.07 per share. Note is Due in January of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.08%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $145,011.

On December 30, 2016 the Company received $250,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.08% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.11 per share to $0.27 per share and a conversion price of $0.04 per share. The accrual interest associated with this note as of March 31, 2019 was $45,333. The derivative liability associated with this note as of March 31, 2019 and 2018 were$633,217and $722,352, respectively.

(NN)

On February 7, 2017 the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.10 per share. Note is Due in January of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $451,464.

(X)

(OO)

On February 21, 2017 the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.10 per share. Note is Due in January of 2019. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $450,129.

On November 18, 2016 the Company received $60,000 from the issuance of convertible debt. Interest is stated at 10%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.85% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.08 per share to $0.27 per share and a conversion price of $0.03 per share. The accrual interest associated with this note as of March 31, 2019 was $8,331. The derivative liability associated with this note as of March 31, 2019 and 2018 were $146,138 and $256,063, respectively.

 

23

19

(PP)

(BB)

On September 23, 2015 the Company received a total of $50,000 from an accredited investor in exchange for a two year note in the aggregate amount of $50,000 with interest accruing at 10%. The note is convertible after September 23, 2015 and is convertible into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078. The debt issued is a result of a financing transaction and contain a beneficial conversion feature. The accrual interest associated with this note as of March 31, 2019 was $6,236. The derivative liability associated with this note as of March 31, 2019 and 2018 were $109,384 and 196,344, respectively.

(CC)

On September 23, 2015 the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest accruing at 10%. The note is convertible after September 23, 2015 and is convertible into the Company’s common stock at a conversion rate of $0.03 per share. The market value of the stock at the date when the debt becomes convertible was $0.078. The debt issued is a result of a financing transaction and contain a beneficial conversion feature. The accrual interest associated with this note as of March 31, 2019 was $12,472. The derivative liability associated with this note as of March 31, 2019 and 2018 were $218,770 and $383,328, respectively.

 

On May 11, 2017 the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.05 per share. Note is Due in January of 2020. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $1,183,165.
(QQ)

(EE)

At December 31, 2013 the Company was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100 principal and $103,895 accrued interest, with interest accruing at 10%. On January 2, 2014 the Company entered into a Debt Modification Agreement whereby the total amount of the debt was reduced to $750,000 and there is no accrued interest or principal due until December 31, 2017. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares of Kaya Holdings Inc., which if converted are subject to resale restrictions through December 31, 2015. The two-year note in the aggregate amount of $500,000 is convertible into the Company’s preferred stock at a conversion rate of $10.00 per share of preferred. At a conversion rate of 433.9297 common shares to 1 preferred share, this would result in a total of 21,696,485 common shares issued if all debt was converted. The market value of the stock at the date of issuance of the debt was $0.04. The debt issued is a result of a financing transaction and contain a beneficial conversion feature valued at $500,000 to be amortized over the life of the debt. Total amortization for the three months ended March 31, 2019 and 2018 were $-0- and $-0-, respectively.

 

On July 17, 2017 the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.05 per share. Note is Due in January of 2020. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share. The derivative liability associated with this note as of September 30, 2017 was $349,668.

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

As of March 31, 2019, the balance of the debt was $500,000. The remaining $250,000 is not convertible. The company has imputed interest on both the convertible debt and the non-convertible debt. The company used an interest rate of 9% for calculation purposes. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet.

The derivative liability associated with this note as of March 31, 2019 and 2018 were $1,548,003 and $2,517,982, respectively.

(KK)

On January 4, 2017, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.04 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.85% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.11 per share to $0.27 per share and a conversion price of $0.04 per share. The accrual interest associated with this note as of March 31, 2019 was $27,033. The derivative liability associated with this note as of March 31, 2019 and 2018 were$379,572and $432,974, respectively.

(LL)

On January 20, 2017, the Company received $600,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.07 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.85% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.11 per share to $0.31 per share. The accrual interest associated with this note as of March 31, 2019 was $106,000. The derivative liability associated with this note as of March 31, 2019 and 2018 were$1,513,718and $819,700, respectively.

(MM)

On January 31, 2017, the Company received $100,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.07 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.87% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.11 per share to $0.31 per share. The accrual interest associated with this note as of March 31, 2019 was $17,422. The derivative liability associated with this note as of March 31, 2019 and 2018 were$251,762and $136,312, respectively.

(NN)

On February 7, 2017, the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.10 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.87% to 2.59%, volatility ranging from 84.63% to 154.71%, trading prices ranging from $0.11 per share to $0.31 per share. The accrual interest associated with this note as of March 31, 2019 was $86,333. The derivative liability associated with this note as of March 31, 2019 and 2018 were$1,257,143and $403,933, respectively.

20

(OO)

On February 21, 2017, the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.10 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.87% to 2.59%, volatility ranging from 84.63% to154.71%, trading prices ranging from $0.11 per share to $0.30 per share. The accrual interest associated with this note as of March 31, 2019 was $84,778. The derivative liability associated with this note as of March 31, 2019 and 2018 were$1,253,808and $402,783, respectively.

(PP)

On May 11, 2017, the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.05 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.87% to 2.59%, volatility ranging from 84.63% to 139.70%, trading prices ranging from $0.11 per share to $0.27 per share. The accrual interest associated with this note as of March 31, 2019 was $76,000. The derivative liability associated with this note as of March 31, 2019 and 2018 were$1,234,988and $1,183,824, respectively.

(QQ)

On July 17, 2017, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.05 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.87% to 2.63%, volatility ranging from 84.63% to 139.70%, trading prices ranging from $0.11 per share to $0.27 per share. The accrual interest associated with this note as of March 31, 2019 was $20,467. The derivative liability associated with this note as of March 31, 2019 and 2018 were$365,494and $351,437, respectively.

(RR)

On November 1, 2017, the Company received $500,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.49% to 2.63%, volatility ranging from 84.63% to 138.23%, trading prices ranging from $0.11 per share to $0.27 per share. The accrual interest associated with this note as of March 31, 2019 was $56,667. The derivative liability associated with this note as of March 31, 2019 and 2018 were $1,193,536 and $2,050,035, respectively.

(SS)

On December 21, 2017, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.49% to 2.63%, volatility ranging from 84.63% to 131.81%, trading prices ranging from $0.11 per share to $0.27 per share. The accrual interest associated with this note as of March 31, 2019 was $15,333. The derivative liability associated with this note as of March 31, 2019 and 2018 were $354,487 and $608,397, respectively.

(TT)

On February 5, 2018, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8% The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.49% to 2.63%, volatility ranging from 84.63% to 132.27%, trading prices ranging from $.05 per share to $0.49 per share. The accrual interest associated with this note as of March 31, 2019 was $27,551. The derivative liability associated with this note as of March 31, 2019 and 2018 were $702,294 and $1,204,431, respectively.

21

(UU)

On March 23, 2018, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.49% to 2.63%, volatility ranging from 84.63% to 132.27%, trading prices ranging from $0.11 per share to $0.14 per share. The accrual interest associated with this note as of March 31, 2019 was $12,263. The derivative liability associated with this note as of March 31, 2019 and 2018 were $347,904 and $596,215, respectively.

(VV)

On December 21, 2017 the Company received a total of $80,000 from an accredited investor in exchange for a two year note in the aggregate amount of $80,000 with interest accruing at 10% per year. The note is due January 1, 2019 with monthly payments of principal and interest. On January 30, 2018, the accredited investor advanced an additional $20,000. The total $100,000 including $333 of unpaid interest was exchanged for a convertible note (Note VV). Interest is stated at 5%. The Note and Interest is convertible into common shares at $0.10 per share. Note is Due in January of 2020. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.49% to 2.59%, volatility ranging from 84.63% to 132.27%, trading prices ranging from $0.11 per share to $0.14 per share. The accrual interest associated with this note as of March 31, 2019 was $5,841. The derivative liability associated with this note as of March 31, 2019 and 2018 were$213,574and $97,743, respectively.

(XX)

On May 29, 2018, the Company received $100,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 1.82% to 2.63%, volatility from 84.63% to 127.07%, trading prices ranging from $0.11 per share to $0.16 per share. The accrual interest associated with this note as of March 31, 2019 was $6,707. The derivative liability associated with this note as of March 31, 2019 and 2018 were $228,788 and $-0-, respectively.

(YY)

On July 18, 2018, the Company received $155,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 2.48% to 2.81%, volatility from 84.63% to 126.88%, trading prices ranging from $0.11 per share to $0.13 per share. The accrual interest associated with this note as of March 31, 2019 was $8,697. The derivative liability associated with this note as of March 31, 2019 and 2018 were $350,979 and $-0-, respectively.

(ZZ)

On August 13, 2018, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 2.48% to 2.81%, volatility from 84.63% to 126.90%, trading prices ranging from $0.11 per share to $0.13 per share. The accrual interest associated with this note as of March 31, 2019 was $7,562. The derivative liability associated with this note as of March 31, 2019 and 2018 were $337,824 and $-0-, respectively.

(AAA)

On September 24, 2018, the Company received $95,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 2.27% to 2.83%, volatility from 84.63% to 126.38%, trading price at $0.11 per share. The accrual interest associated with this note as of March 31, 2019 was $3,915. The derivative liability associated with this note as of March 31, 2019 and 2018 were $212,080 and $-0-, respectively.

22

(BBB)

On November 23, 2018, the Company received $80,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. In January 2019, the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 2.27% to 2.81%, volatility from 84.63% to 118.96%, trading price at $0.11 per share. The accrual interest associated with this note as of March 31, 2019 was $2,244. The derivative liability associated with this note as of March 31, 2019 and 2018 were $176,338 and $-0-, respectively.

(CCC)

On December 21, 2018, the Company received $25,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.05 per share. On January 22, 2019, the ratchet provision was activated due to issuance of another convertible note. As such, the conversion price was decreased from $0.05 per share to $0.03 per share. As the change is greater than 10%, the discount of $25,000 was recorded as a loss on extinguishment. the maturity date of the notes had been extended to January 1, 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 2.27% to 2.63%, volatility from 84.63% to 94.19%, trading price of ranging from $0.10 to $0.11 per share. The accrual interest associated with this note as of March 31, 2019 was $548. The derivative liability associated with this note as of March 31, 2019 and 2018 were $51,391 and $-0-, respectively.

 

(GG), (HH), (II), (JJ)(KK)

(DDD)

On January 22, 2019, the Company received $70,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. Note is due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 2.27% to 2.59%, volatility from 84.63% to 91.36%, trading price of ranging from $0.09 to $0.11 per share. The accrual interest associated with this note as of March 31, 2019 was $1,043. The derivative liability associated with this note as of March 31, 2019 and 2018 were$152,322and $-0-, respectively.

(EEE)

On February 11, 2019, the Company received $150,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. Note is due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 2.27% to 2.48%, volatility from 84.63% to 91.73%, trading price of ranging from $0.09 to $0.11 per share. The accrual interest associated with this note as of March 31, 2019 was $1,578. The derivative liability associated with this note as of March 31, 2019 and 2018 were$324,995and $-0-, respectively.

(FFF)

On March 20, 2019, the Company received $15,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. Note is due in January of 2021. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 2.27% to 2.40%, volatility from 82.70% to 84.63%, trading price of ranging from $0.09 to $0.11 per share. The accrual interest associated with this note as of March 31, 2019 was $36. The derivative liability associated with this note as of March 31, 2019 and 2018 were$32,239and $-0-, respectively.

23

NOTE 5 -7 – NON-CONVERTIBLE DEBT

A-Non-A-Non Related Party

 

  September 30, 2017 December 31, 2016
Note GG  -0-   68,555 
Note HH  -0-   68,555 
Note II  37,780   65,262 
Note JJ  37,780   65,262 
Note KK  13,571   31,661 
Total Non-Convertible Debt  89,131   299,295 

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

 

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

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

 

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

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

24

 

(5) On September 16, 2016 the Company received a total of $31,661 to be used for equipment in exchange for a two year note in the aggregate amount of $31,661 with interest accruing at 18% per year and a 10% loan fee. The note is default as of December 31, 2018.

(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.

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

 

B-Related Party 

(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 

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

 

(1) 

At December 31, 2013 the Company was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100 principal and $103,895 accrued interest, with interest accruing at 10%. On January 2, 2014 the Company entered into a Debt Modification Agreement whereby the total amount of the debt was reduced to $750,000 and there is no accrued interest or principal due until December 31, 2017. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares of AFAI,Kaya Holdings Inc., which if converted are subject to resale restrictions through December 31, 2017.2015. The two-year note in the aggregate amount of $500,000 is convertible into the Company’s preferred stock at a conversion rate of $10.00 per share of preferred. At a conversion rate of 433.9297 common shares to 1 preferred share, this would result in a total of 21,696,485 common shares issued if all debt was converted. The market value of the stock at the date of issuance of the debt was $0.04. The debt issued is a result of a financing transaction and contain a beneficial conversion feature valued at $500,000 to be amortized over the life of the debt. Total amortization for the year ended December 31, 2017 was $201,092. On January 1, 2018 the holder of the note extended the due date until January 1, 2021.

As of December 31, 2018, the balance of the debt was $500,000. The remaining $250,000 is not convertible. The company has imputed interest on both the convertible debt and the non-convertible debt. The company used an interest rate of 4% for calculation purposes. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet. This note was modified and restated as of June 20, 2015, see Footnote 9. As of September 30, 2017, the balance of the convertible portion of the debt was $500,000. This note has a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” In determining the indicated value of the convertible note issued, the Company used the Black Scholes Option Model with a risk-free interest rate of ranging from 0.05% to 1.09%, volatility ranging from 130% of 157%, trading prices ranging from $.05 per share to $0.49 per share.The derivative liability associated with this convertible portion of the note as of September 30, 2017 was $2,539,521.

The net balance reflected on the balance sheet is for the convertible portion net of remaing debt discount is $399,090. The remaining $250,000 is not convertible. The net balance of $250,000 of the non-convertible portion is reflected on the balance sheet.

24

Summary Notes Payable Schedule-All Debt

Balance December 31, 2018 $6,128,424 
New Notes Payable  235,000 
Addition due to amendment  -0- 
Repaid Notes Payable  -0- 
Conversions  -0- 
Balance December 31, 2018 $6,363,424 

 

NOTE 68 – 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.

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In February of 2017,2018 the Company issued 6,352,500 restrictedauthorized the issuance of 6,200,000 shares of common shares of Kaya Holdings Inc. stock to an accredited investor that is a current shareholderfor employee compensation and consulting fees. The shares were valued at $942,400. As of the company. This was a conversion of four (4) Notes Payable with a total value of $190,575 the Notes PayableDecember 31, 2018, all 6,200,000 shares were due January 1, 2019.issued on July 6, 2018.

 

In JuneFebruary of 2017,2018, the Company issued 987,632authorized the issuance of 138,866 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company. The restricted common shares were issued as payment of interest of $29,638.$4,166.

 

In JulyFebruary of 2017,2018, the Company authorized the issuance of 277,766 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company. The restricted common shares were issued 1,760,283as payment of interest of $8,333.

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

In February of 2018, the Company authorized the issuance of 563,566 restricted common shares of Kaya Holdings, Inc. stock to an accredited investor that is a current shareholder of the company. This was a conversion of a Notes Payable and Interest with a total value of $50,000$16,907 the Note Payable was due January 1, 2019.

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

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

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

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

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

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

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

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

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

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NOTE 7-9 DERIVATIVE LIABILITIES

 

The Company identified

Effective January 1, 2019, an equity-linked financial instrument with a down round feature that otherwise is not required to be classified as a liability under the guidance in Topic 480 is evaluated under the guidance in Topic 815, Derivatives and Hedging, to determine whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope exception from derivative accounting. Generally, for warrants and conversion featuresoptions embedded withinin financial instruments that are deemed to have a debt host (assuming the underlying shares are readily convertible debt and issued in 2013 and subsequent periods. The Company has determinedto cash or the contract provides for net settlement such that the features associated with the embedded conversion option meets the definition of a derivative), the existence of a down round feature results in an instrument not being considered indexed to an entity’s own stock. This results in a reporting entity being required to classify the formfreestanding financial instrument or the bifurcated conversion option as a ratchet provision, should be accounted forliability, which the entity must measure 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.initially and at each subsequent reporting date.

 

Additionally,However,, due to a recognition of tainting, (duedue to shares not being held in reserve in 2014),variable conversion price on some of the convertible notes, all convertible notes are considered to have a derivative liability. Thereforeliability, 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 OptionBinomial Options Pricing Model with a risk-free interest rate of ranging from 0.05% to 1.08%2.63%, volatility ranging from 134% of 157%84.63% to 243.22%, trading prices ranging from $.05$0.045 per share to $0.49$0.41 per share and a conversion price ranging from $0.03 per share to $0.12$0.10 per share.

 

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

Balance as of December 31, 2016 $19,346,348 
Initial Derivative Value  16,221,943 
Change in Derivative Values-reclassified to APIC  (22,114,526) 
Conversion or amendment  (1,091,615) 
  $12,362,150 

 

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as September 30, 2017:

Balance as of December 31, 2018 $19,783,034 
Initial  681,894 
Change in Derivative Values  (5,404,936) 
Conversion of debt-reclass to APIC  -0- 
Balance as of March 31, 2019 $15,059,992 

 

The Company recorded athe debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining fair value of the derivative expenseliability, as it exceeded the gross proceeds of $375,950the note.  

The Company recorded the debt discount of $235,000 and $-0  -$550,333 for the three months ended September 30, 2017March 31, 2019 and 2016, respectively2018, respectively.

The Company recorded derivative liability expense of $446,894 and $16,221,943 and $129,340$1,557,197 for the ninethree months ended September 30, 2017March 31, 2019 and 2016.2018, respectively.

  

The Company recorded a change in the value of embedded derivative liabilities income/(expense)income of $ 1,260,200$5,404,936 and $181,986$16,361,519 for the three months ended September 30, 2017March 31, 2019 and 2016, respectively and $22,114,526 and $1,895,657 for the nine months ended September 30, 2017 and 20162018, respectively.

 

NOTE 8-10 – DEBT DISCOUNT

 

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

 

Debt discount amounted to $2,217,596$1,078,654 as of September 30, 2017March 31, 2019 and $863,860$2,590,210 as of DecemberMarch 31, 2016.2018.

 

The Company recorded $569,497$347,609 and $405,530$579,765 for the three months ended March 31, 2019 and $1,678,899 and $978,208 for the nine months ended September 30, 2017 and September 30, 2016,2018, respectively for amortization of debt discount expense. 

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NOTE 911 – RELATED PARTY TRANSACTIONS

 

TheAt December 31, 2014, the Company has agreements covering certainwas indebted to an affiliated shareholder of its management personnel. Such agreements providethe Company for minimum compensation levels$840,955, which consisted of $737,100 principal and are subject$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 annual adjustment.

The Company’s Chief Executive Officer holds$750,000 and no interest accrued until December 31, 2015. $500,000 of the debt is convertible into 50,000 shares of its Series C preferred stock. These shares can be converted into 21,696,485 sharesConvertible Preferred Shares of the Company’s common stock at his option.

KAYS. The Company’s largest stockholder has from time to time provided unsecured loans to the Company, See Note 4 for the detail of the convertible and non-convertible debt with a face value of $750,000 

NOTE 10– DEBT EXTINGUISHMENTremaining $250,000 is not convertible.

 

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

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

In each of 2017 and 2018, the Company renegotiated nine (9) convertible notes payable.issued stock grants to Jordi Arimany and Carrie Schwarz for 100,000 shares of KAYS stock for their service as board members. The Total face valuestock was issued from Treasury as restricted stock and carries a one-year restriction before it can be registered for resale pursuant to Rule 144.

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

In August, 2018 KAYS entered into an agreement with Bruce Burwick, (who subsequently joined the Board of Directors and became an affiliate of the notes issuedCompany) to purchase the Eugene, Oregon based Sunstone Farms grow and manufacturing facility, which is licensed by the OLCC for both the production (growing) of medical and recreational marijuana flower and the processing of cannabis concentrates/extracts/edibles. The purchase includes a 12,000 square foot building housing an indoor grow facility, as well as equipment for growing and extraction activity. KAYS paid Bruce Burwick $1,300,000.00 for the real property and schedule of equipment that was $876,468and is used to operate the notes arefacility.

Bruce Burwick acquired the property for satisfaction of a promissory note due on January 1, 2019.him for $1,433,000.00. The face value plus accrued interest duepurchase price of $62,533 resulting$1.3 million for the OLCC licensed marijuana production and processing facility, consisting of the building and equipment was paid for by the issuance of 12 million shares of KAYS restricted stock to the seller at closing. The shares carry a lock-up-restriction that allows for their staged eligibility for resale over a 61-month period from the date of the purchase of the facility by KAYS. Additionally, the seller purchased 2.5 million restricted shares for $250,000 in new face amount duecash in a private transaction with the Company. The proceeds from the sale of $876,468. The new notes are convertible after January 1, 2017those shares were and are convertible intobeing used for acquisition related expenses, transitional operating costs and facility capital improvements with respect to the production and processing facility we purchased.

NOTE 12 – STOCK OPTION PLAN

In 2011 the Alternative Fuels America, Inc. 2011 Incentive Stock Plan (the “Plan”), which provides for equity incentives to be granted to the Company’s commonemployees, executive officers or directors or to key advisers or consultants. Equity incentives may be in the form of stock at a conversion rate of $0.03 per share. Theoptions with an exercise price not less than the fair market value of the underlying shares as determined pursuant to the 2011 Incentive Stock Plan, restricted stock atawards, other stock based awards, or any combination of the date whenforegoing. The 2011 Incentive Stock Plan is administered by the debt becomes convertible was $0.225. The Company recorded a loss from debt extinguishmentboard of $67,442.

directors.

 

NOTE 1113 – WarrantsWARRANTS

 

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 Companycompany 3,161,583 paid and non-assessable shares of common stockthe 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,$100,000, 10% promissory note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017. The Note and interest has beenAs of December 31, 2018, the note was paid in full as of September 30, 2017.full.

 

On September 9, 2015 the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the Companycompany 3,161,583 paid and non-assessable shares of common stockthe 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,$100,000, 10% promissory note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017. The Note and interest has beenAs of December 31, 2018, the note was paid in full as of September 30, 2017.

full.

 

On May 9, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 2,371,187 paid and non-assessable shares of the Common Stock at the price of $0.0316297 per share (the “Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 9, 2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 9, 2018. As of December 31, 2018, the note was paid in full.

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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

  
      
    WeightedWeighted
    AverageAverage
   WarrantsExerciseContract
   IssuedPriceTerms Years
Balance as of December 31, 201611,065,5400.0316297 1.79
Granted   -- -
Exercised   -    -    -   
Expired   -    -    -   
Balance as of September 30, 2017 11,065,5400.0316297 .66

As of March 31, 2019, the note was paid in full.

 

Warrants issued to Non-Employees

  
      
    WeightedWeighted
    AverageAverage
   WarrantsExerciseContract
   IssuedPriceTerms Years
Balance as of December 31, 2018 11,065,5400.0316297 3.8
Granted  -0--0- -0-
Exercised  -0- -    -   
Expired  -0-    -    -   
Balance as of March 31, 2018 11,065,5400.0316297 3.55

 

NOTE 1214 – 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.

Operating Leases

 

On June 22, 2016, Daniel A. GoldinThe Company has several operating leases for an office and Wally Goldin commenced an actionstore lease in Fort Lauderdale, Florida and several locations in Oregon Circuit Court, Multnomah County, against the Company, MJAI, its direct majority-owned subsidiary, Craig Frank, our Chairman, President and Chief Executive Officer, William David Jones, a consultant to our Company and BMN Capital Group, LLC (the “Action”). The plaintiffs alleged breach of contract, state securities fraud and state racketeering claims against the defendants arising from alleged misrepresentations made in subscription agreements with the Company entered into in October 2015 and January 2016 by Daniel A. Goldin and Wally Goldin, respectively, pursuant to which they each purchased 2,222,222 “restricted” shares of our common stock for $100,000 in a private transaction. In addition, Daniel A. Goldin alleged that the Company breached a purported employment agreement with him pursuant to which he was purportedly to be compensated for working in our Oregon operations through a combination of cash and stock. The plaintiffs are sought in excess of $1.7 million in damages. The Company believed that not only was the Action without merit, but that it had various counterclaims against the plaintiffs, particularly Daniel L. Goldin. The Company defended against the Action and pursued its counterclaims both in the Action and in a separate lawsuit commenced against the plaintiffs in the U.S. District Court for the Southern District of Florida in which the Company alleged fraud by the plaintiffs and sought damages and the return of the common stock issued to the Company’s treasury In September 2017, the parties entered in a settlement agreement, pursuant to which Mr. Goldin waived any rights to a total of 1.2 million shares of common stock (200,000 shares of our common stock which were already issued in his name and an additional 1,000,000 shares which were to be issued) and $40,000 in cash compensation payable to him under the employment agreement. The Company paid the plaintiffs the sum of $247,500, in exchange for the return of the stock and the waiver of claims against any further stock or cash, all litigation was dismissed by the parties and the parties exchanged mutual releases.arrangements classified as leases under ASC 842.

 

Effective June 12, 2017, the Company leased the office space in Fort Lauderdale, Florida under a 5-year operating lease expiring June 30, 2022. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $4,017 and culminating in a monthly payment of $4,839. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The lease is now on a month-to-month basis.

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

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

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

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

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

The Company has right-of-use assets of $547,729 and operating lease liabilities of $547,729 as of March 31, 2019. Operating lease expense for the three months ended March 31, 2019 was $63,536. The Company had cash used in operating activities related to leases of $56,018 during the three months ended March 31, 2019.

Maturity of Lease Liabilities at  March  31, 2019 Amount
 2019 (excluding the three months ended March 31, 2019)  $188,183 
 2020   205,665 
 2021   131,014 
 2022   75,234 
 2023   34,320 
 Later years   —   
 Total lease payments   634,416 
 Less: Imputed interest   (86,687)
 Present value of lease liabilities  $547,729 

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NOTE 13–15 – SUBSEQUENT EVENTS

 

On November 13, 2017 we paid into escrow $247,500 to settle the commitment discussed in Note 12

On November 3, 2017 three convertible notes with the face value of $217,643 were converted into 7,734,099 shares of common stock.

On May 11, 2017, we entered into a financing agreement with an institutional investor (the “Investor”) to provideApril 16, 2019 the Company with up to $5.8 inreceived $75,000 from the issuance of convertible note funding through July 31, 2018 (the “May 2017 Financing Agreement”). The May 2011 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding availabledebt to the Company thereunderCayman Venture Capital Fund pursuant to $6.3 million and to extend the time period for such funding to May 31, 2019 and was additionally amended as of November 15, 2017 to further increase the amount of funding available to the Company thereunder to $7.0 million and to extend the time period for such funding to November 30, 2019.

Funding under the May 2017 Financing Agreement, as amended, takesamended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021.

On April 22, 2019 the formCompany received $35,000 from the issuance of convertible debt to the High Net Worth Investor pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021. 

On May 6, 2019 the Company received $35,000 from the issuance of convertible debt to the High Net Worth Investor pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021. 

On May 16, 2019 the Company initiated paperwork with the OLCC to temporarily close this store (one of the offerthree Kaya Shack outlets in Salem) and salehopes to move this license to its Eugene, Oregon Sunstone Farms legal recreational and medical marijuana production and processing facility where it would be operated as a Kaya Farms Store™ which would allow it to also serve as a delivery hub to service the City of Convertible Notes (the “$7.0 Million Notes”). The $7.0 Million Notes are substantially similar in form and substance to the $2.1 million Notes that were part of the $2.1 million Financing Agreement entered into between the Company and the Investor in December 2016 and completed in March of 2017 (as well as the approximately $1.2 million in financing previously received from the Investor in 2014 and 2015), except that the $7.0 million Notes are due and payable on January 1, 2020.

Eugene.

 

The $7.0 million Notes are substantially similar in form and substance to the $2.1 million Notes that were part of the $2.1 million Financing Agreement entered into between the Company and the Investor in December 2016 and completed in March of 2017 (as well as the approximately $1.2 million in financing previously received from the Investor in 2014 and 2015), except that the $7.0 million Notes are due and payable on January 1, 2020.

Pursuant to the terms of the $7.0 million Financing Agreement, an additional $500,000 was delivered to the Company on November 3, 2017, bringing the total amount received by the Company to $1,150,000 since its execution on May 11, 2017. The purpose for the increase in the $7.0 million Financing Agreement was to allocate an additional $500,000 to be used for the targeted acquisition of property in Oregon for the development of a Commercial and Medical Cannabis Grow Complex and related enterprises, and $500,000 has been used against the purchase of an identified property which the Company closed on the property during the third Quarter of 2017.

For more information on the $7.0 million Financing Agreement, please refer to the narrative in Item 2 (above), Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

 

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

Cautionary Note Regarding Forward-Looking Statements

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

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

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

Business Overview

BackgroundPART I

Item 1. Business.

Overview

Kaya Holdings, was incorporated inInc., “KAYS” or the “Company” a Delaware in 1993 under the name Gourmet Market, Inc. 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 the capital stock of Alternative Fuels Americas, Inc., a Florida corporation, in January 2010 in a stock for stock transaction and issued 100,000 shares of Series C convertible preferred stock to existing shareholders of the Florida corporation. The Company’s name was changed in October 2010 from Netspace International Holdings, Inc. to Alternative Fuels Americas, Inc.

From 2010 through 2014 the Company was engaged in seeking to develop a biofuels business. In January 2015, the Company determined that it was in the best interests of its stockholders to discontinue its biofuel development activities, and to instead leverage its agricultural and business development experience and focus all its resources on the development of legal medical and recreational marijuana opportunities in the United States and in select international markets.

Legal Medical and Recreational Marijuana Operation in Oregon

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

In March 2014, we applied for and were awarded our first license to operate an MMD and on July 3, 2014 opened its first Kaya Shack™ Medical Marijuana Dispensary in Portland, Oregon, thereby becoming the first publicly traded U.S. company to own and operate an 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.

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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 inis a vertically integrated legal marijuana enterprise, which cultivates, produces and retails legal medical and recreational cannabis in the United States. In October 2015, concurrent with Oregon commencing legal sales of recreational marijuana through MMDs, KAYS openedusing its second retail operation in Salem, Oregon, our firstproprietary Kaya Shack™ Marijuana Superstore. Oregon. During 2015,brand.

All of the Company also consolidated its growCompany’s operations and manufacturing operations into a single facility in Portland, Oregon.

Recent Developments

Licensing

In 2016, Oregon beganare licensed by the process to transition legal marijuana sales from Oregon Health Authority (“OHA”) licensed MMDs and grow operations to Oregon Liquor Control Commission (the “OLCC’), which has jurisdiction over legal medical and recreational cannabis grow, production and retail operations. The Company originally commenced operations in Oregon in July 2014, operating medical marijuana dispensaries (“OLCC”MMDs”) licensed recreationalwhen only medical marijuana retailerssales had been legalized. However, this afforded the Company to be in position to rapidly move into the grow, production and producer and processing facilities. Effective January 1, 2017, all retailersretailing of recreational marijuana were required to havewhen legalization of recreational cannabis sales followed shortly thereafter in October 2015.

The Company currently operates a recreational marijuana sales license issued by the OLLC for eachits chain of four 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(including three Kaya Shack™ Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #1)Superstores) in Oregon, has developed its own proprietary Kaya Farms™ strains of cannabis, which it grows and produces (together with edibles and other cannabis derivatives) at its Eugene, Oregon Sunstone Farms legal recreational and medical sales continued without interruption from 2016 through the present at that location.

On March 21,marijuana production and processing manufacturing facility, which it acquired in October 2018. The Company also owns a 26-acre parcel in Lebanon, Linn County, Oregon, which it purchased in August 2017 on which it intends to construct a cultivation and production facility. We filed for zoning and land use approval in early 2018, and after numerous regulatory challenges and delays, we finally received our North Salem Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #2) a 2,600-squarezoning and land use approval in January, 2019 to build an 85,000-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) and 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 fourth quarter of 2017 and commence recreational and medical sales at this location as soon as possible thereafter.

Additional Kaya Shack™ Marijuana Superstores

During 2016 and the first nine months of 2017, the Company focused a significant portion of its efforts on developing two additional Kaya Shack™ Marijuana Superstores, including identifying and leasing suitable locations, completing necessary build out and applying for the requisite OLCC recreational marijuana retailer licenses. In addition to the four Kaya Shack™ retail marijuana stores described above, the Company plans to identify and lease locations for, license and seek to open up to four additional Kaya Shack™ Marijuana Superstores in other Oregon markets over the next 18 to 24 months, as well as explore opportunities in other states to increase its retail footprint. Additionally, the Company is exploring opportunities to further its operation in Oregon and elsewhere through the acquisition of currently licensed and operating retail operations, which can be converted to the Kaya Shack™ model.

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Expansion of Grow and Manufacturing Operations

On March 21, 2017, KAYS announced that it was in the process of expanding itsFarms™ greenhouse grow and manufacturing operations and had retainedproduction facility. The Company maintains a realtor to assist in identifying a suitable 30-60 acre tract of land in Oregon which would permit KAYS to expand its grow operations. As part of this expansion, KAYS ceased operations of its Portland grow facility at the end of March 2017, arranged to maintain its genetics library of over 30 strains of cannabis at an OHA licensed medical grow siteit has developed and contracted with farmershas also formulated various edibles, cannabis derivatives and marijuana cigarettes under the “Kaya” brand name.

Oregon has “paused” the acceptance of new license applications, but the law allows the existing licenses to meet demand until the new facilitybe sold and/or moved from one physical location to another. KAYS is secured, built and fully operational.

In August 2017, we acquiredpresently evaluating how best to utilize these assets to form a 26 acre parcel in Lebanon, Oregon, which KAYS intends to develop as a legal cannabis cultivation and manufacturing facility. KAYS believesnetwork that the acquisition of a property will position the Company for future development, including increased Marijuana Canopy production to the maximum extent allowed by law through use of both greenhouse and outdoor grows, as well as expansion of its production capabilities with brands in oils, vape cartridges, concentrates, a selection of edibles, and infused creams and lotions.

$2.1 Million Financing

In March 2017, the Company completed a $2.1 million financing with an institutional investor (the “Investor”) who had previously furnished KAYS with $1.2 million in financing, pursuant to a financing agreement (the “$2.1M Financing Agreement”) entered into between the Company and the Investor in December 2016. Pursuant to the $2.1M Financing Agreement, the Investor purchased $2.1 million in principal amount of convertible notes (the “$2.1M Notes”) from the Company as follows:

$400,000 in principal amount of $2.1M Notes which are convertible into sharesnot only maximize our penetration of the Company’s common stock at a conversion price of $0.04;

$700,000 in principal amount of $2.1M Notes which are convertible into shares of the Company’s common stock at a conversion price of $0.07; and

$1,000,000 in principal amount of $2.1M Notes which are convertible into shares of the Company’s common stock at a conversion price of $0.10.

The purchase price for the $2.1M Notes is equal to the principal amount thereof. The $2.1M Notes have a term of two years from issuance and bear interest at the rate of eight percent (8%) annum, which accrues and is payable to together with interest at maturity. The Investor may convert the principal amount of the $2.1M Notes (as well as other notes it currently holds as referenced above), together with accruedOregon Cannabis market but unpaid interest thereon, into shares at the applicable conversion price, at any time or from time to time prior to maturity. The conversion price is subject to adjustment for stock splits, stock dividends, recapitalizations and similar transactions. The $2.1M Notes also provide that at no time may they be convertible if the number of shares being issued upon conversion to and then held by the Investor would result in the Investor beneficially owning in excess of 4.99% of the Company’s then outstanding shares of common stock, after giving effect to the proposed conversion.

May 2017 Financing Agreement

On May 11, 2017, we entered into a financing agreement with an institutional investor (the “Investor”) to provide the Company with up to $5.8 million in convertible note funding through July 31, 2018 (the “May 2017 Financing Agreement”). The May 2011 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding available to the Company thereunder to $6.3 million and to extend the time period for such funding to May 31, 2019 and was additionally amended as of November 15, 2017 to further increase the amount of funding available to the Company thereunder to $7.0 million and to extend the time period for such funding to November 30, 2019.

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Funding under the May 2017 Financing Agreement, as amended, takes the form of the offer and sale of Convertible Notes (the “$7.0M Notes”). The $7.0 Notes are substantially similar in form and substance to the $2.1M 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 wellserve as the approximately $1.2 million in financing previously received frombackbone to grow our U.S. Operations across state lines through the Investor in 2014 and 2015), except that the $7.0M Notes are due and payable on January 1, 2020.rollout of proprietary brands.

AsAccordingly, as of the date of the filing of this Quarterly Report, KAYS has initiated paperwork with the Investor has purchased an aggregateOLCC to temporarily close one of $1,150,000the three outlets in principal amountSalem (store #3 in North Salem) and hopes to move that license to its Eugene, Oregon Sunstone Farms legal recreational and medical marijuana production and processing facility where it would be operated as a Kaya Farms Store™ which would allow it to also serve as a delivery hub to service the City of $7.0M Notes fromEugene.

Additionally, the Company under the May 2017 Financing Agreement, as amendedis exploring opportunities to date, of which (a) $500,000 in principal amount of $7.0M Notes are convertible into shares of the Company’s common stock at a conversion price of $0.05 (the “$0.05Notes”); (b) $150,000 in principal amount of $7.0M Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.03 (the “$0.03Notes”); and (c) $500,000 in principal amount of $7.0M Notes, which are (i) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (ii) securedexpand its operations beyond Oregon by a mortgage lien on the 26 acre property acquired by the Company during the third quarter of 2017 (the $0.03 Secured Notes”).

Under the May 2017 Financing Agreement, as amended to date, the Investor has the right to purchase another tranche of $0.03 Notes up to an aggregate of $1,050,000 in principal amount, at any time and from time to time throughMarch 31, 2018.

Provided the Investor has fulfilledreplicating its obligation to purchase the additional $1,050,000 in principal amount of $0.03 Notes from the Company on or before March 31, 2018, the Investor will have the right to purchase another tranche of $0.05 Notes up to an aggregate of $1,000,000 in principal amount, at any time and from time to time through July 31, 2018.

Provided the Investor has fulfilled its obligation to purchase the additional $1,000,000 in principal amount of $0.05 Notes from the Company on or before July 31, 2018, the Investor will have the right to purchase up to an aggregate of $1,600,000 in principal amount of $7.0M Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.08 per share, at any time and from time to time through January 31, 2019 (the “$0.08 Notes”).

Provided the Investor has fulfilled its obligation to purchase all $1,600,000 in principal amount of $0.08 Notes from the Company on or before January 31, 2019, the Investor will have the right to purchase up to an additional $2,200,000 in principal amount of $7.0N Notes from the Company at any time and from time to time through November 30, 2019, which Notes will be convertible into shares of common stock at a conversion price of $0.11.

The proceeds from the offer and sale of the $2.1M and $7.0M Notes are and will be used to fund the Company’s growth plan, including expansion of our chain of Kaya Shack™ Marijuana Superstoresbrand retail outlets through franchising in Oregon, acquisition and development of our Lebanon, Oregonother states where recreational cannabis use is legal cannabis cultivation and manufacturing facility andor expected to become legal in the introduction of new Kaya Shack™ branded cannabis products.near term, as well as in Canada, where it is legal nationwide.

 

Corporate Information

 

Our corporate office is located at 888 South Andrews Avenue, Suite 302, Fort Lauderdale, Florida, 33316 and out33316. Our telephone number is (954) 892-6911. Our website is www.kayaholdings.com. Information contained on our website does not constitute part of this QuarterlyAnnual Report.

 

Market Overview

 

Twenty-nineAccording to research firm Cowen & Co., legal cannabis sales in the U.S. are expected to reach $75 billion by 2030. The industry research firm Arcview, estimates a $22.6 billion legal cannabis market in North America by 2021, with 87% of all sales occurring in the United States. The Arcview forecast assumes a 27% compound annual growth rate, an assumption supported by current rates of growth, while reliant on additional states passing both recreational and medical cannabis laws.

Thirty-three states and the District of Columbia have legalized medical marijuana in some capacity. Additionally, eightten states (Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington State) and Washington, DCthe District of Colombia have approved the implementation of legal recreational marijuana use, with activeuse. The Marijuana Business Factbook 2017, published by industry news source Marijuana Business Daily, estimates that the legal marijuana sector will grow more than 300% from sales of $1.8 billion to $17.1 billion in 2021. The firm estimates that the economic impact of the legal cannabis economies flourishingindustry will exceed $70 billion, placing it almost on par with nutraceuticals and ahead of movie tickets and retail ice cream. According to the Factbook, “to get another idea of just how big the marijuana industry has become, look to employment numbers. The cannabis sector now employs between 165,000-230,000 full and part-time workers….to put this in Colorado, Oregon and Washington. As Melia Robinson of Business Insider stated, “After a historic election cycle, which saw four states pass ballot initiatives legalizing nonmedicalperspective, there are now more marijuana oneindustry workers than there are bakers or massage therapists in five Americans now live in a state where it’s legal to smoke weed without a doctor’s letter.”the United States”.

 

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According to cannabis research firm Arcview, sales of legal marijuana in North America rose by 34% to $6.9 billion in 2016, and based on estimates from investment firm Cowen & Co., U.S. legal sales could reach $50 billion by 2026. For added context, ArcView estimates that North American black market sales totaled $46.4 billion last year.

 

Arcview projects sales will grow at a compound annual growth rate of 25% through 2021, when the North American market is expected to top $20.2 billion in sales. “The only consumer industry categories I’ve seen reach $5 billion in annual spending and then post anything like 25% compound annual growth in the next five years are cable television (19%) in the 1990s and the broadband internet (29%) in the 2000s,” Tom Adams, editor in chief of Arcview Market Research, said in a statement.

Estimates from various sources for the size of the long-term market range from up to an excess of $100 billion if Federal Prohibition is repealed and marijuana sales become legal in all 50 states and Washington D.C. (for perspective beer is approximately a $100 billion market, with wine just under $30 billion and coffee approximately $12 billion).

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The Kaya Shack™ Brand

 

 

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

 

Kaya Holdings operates threefour recreational marijuana retail outlets and medical marijuana dispensaries in Oregon under the Kaya Shack™ brand and anticipates opening its fourth location during the last quarter of 2017. In addition to these four Kaya Shack™ retail marijuana stores, the Company plans to identify and lease locations for, license and seek to open up to four additional Kaya Shack™ Marijuana Superstores in other Oregon markets over the next eighteen to 24 months, as well as explore opportunities in other states to increase its retail footprint. Additionally, the Company is exploring opportunities to further its operation in Oregon and elsewhere through the acquisition of currently licensed and operating retail operations, which can be converted to the Kaya Shack™ model.

brand.

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

 

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

 

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

 

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

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

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Kaya Shack™ Retail Outlets

 

I. KayaShack™, 1719 SE Hawthorne Blvd., Portland, Oregon

 

 

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Located in the trendy Hawthorne district in southeast Portland, the first Kaya Shack™ is approximately 700 square feet and is the model for

All stores feature a check out stand wrapped to feature the Company’s small urban shops.proprietary brand of pre-rolls, Kaya Buddies. The store featuresBuddies program is an 8’exciting and popular pre-roll offering, featuring a wide selection (15-15 strains of pre-rolls) and featuring our special Kaya Saying in each Buddies tube. A glass display case showcasingshowcases at least 25 strains of marijuana flower, anwhich the stores serve to customers “deli style”, weighing straight from the jar to the customer’s take-out tube. An additional 8’ display case with a varied selection of oils, concentrates and topicals and arounds out the cannabis product display.

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

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

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

Our Portland outlet initially operated as an MMD. In connection with the transitionmixed use (commercial and residential) and has a footprint of recreational marijuana retailer licenses from the OHA to the OLCC, we applied for an OLCC license for the facility in 2016. However, issuance of the OLCC license for the Portland, Oregon outlet was delayed because of the need to resolve various local issues with the City of Portland. Accordingly, from January 1, 2017 until May 2, 2017, when we received Kaya ShackTM OLCC Marijuana Retailer License #3 for this location, sales at the Portland, Oregon location were limited to medical marijuana and as such our revenues from this location were impacted.

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

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Our second location (the first Kaya ShackTM Marijuana Superstore) opened for business on October 17, 2015 in South Salem, Oregon in time to take advantage of early recreational sales. Our South Salem Kaya Shack™ Marijuana superstore received Kaya ShackTM OLCC Marijuana Retailer License prior to the January 1, 2017 deadline to do so and both recreational and medical marijuana sales have continued at this location seamlessly.

Located in the southern portion of Oregon’s capital city, Salem, this Kaya Shack™ is approximately 2,100700 square feet and is the model for the Company’s marijuana superstore. The store features an 8’ display case with more than 25 strains of marijuana flower, an additional 8’ display case with a varied selection of oils, concentrates and topicals, an 8’ display case with accessories such as pipes, papers and brand related merchandise, and a standing display case with edibles such as cookies, chocolates, gummies, hard candies and more. The store also has a hospitality area that offers free water, coffee, tea and hot cocoa, and a “third space” sitting area. A fresh juice bar and a production room offering customers a chance to watch as the Company’s branded marijuana cigarettes,small urban shops.

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II. Kaya Buddies™, are produced are being installed.

Shack ™ Marijuana Superstore, South Salem, Oregon.

 

  

 

Our second Kaya Shack™ OLCC licensed marijuana store (located in South Salem, Oregon) opened for business on October 17, 2015. The store is located in a strip mall alongside a Caesar’s Pizza, Aaron’s furniture, a convenience store, a tanning salon, and a nail salon. The plaza also has a Subway, a sports bar and a laundromat. The area around the shop is primarily commercial with residential complexes to be constructed beginning in 2018.

under construction and has a footprint of approximately 2,100 square feet and was our first Kaya ShackTMMarijuana Superstore.

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

 

Our third Kaya Shack™ (located in North Salem, Oregon) received Kaya ShackTM OLCC Marijuana Recreational Retailer License #3commenced operations on March 21, 2017.

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Located in the northern portion of Oregon’s capital city, Salem, this Kaya Shack™ is 2,600 square feet. The store features an 8’ display case with more than 25 strains of marijuana flower, an additional 8’ display case with a varied selection of oils, concentrates and topicals, an 8’ display case with accessories such as pipes, papers and brand related merchandise, and standing display cases with edibles such as cookies, chocolates, gummies, hard candies and more. The store also has a hospitality area that offers free water, coffee, tea and hot cocoa and a “third space” sitting area. The Company plans to install a fresh juice bar, and a glassed-off kitchen facility slated to produce edibles and confections.

The store is located in a strip mall alongside a Starbucks Coffee, laundromat, an Applebee’s restaurant and Adam’s Rib. The plaza also has medical offices and an Applebee’s.offices. The area around the shop is primarily commercial.commercial and has a footprint of approximately 2,600 square feet and utilizes the Kaya Shack™ Marijuana Superstore model. As of the date of the filing of this Quarterly Report, KAYS has initiated paperwork with the OLCC to temporarily close this store (one of the three Kaya Shack outlets in Salem) and hope to move this license to its Eugene, Oregon Sundstone Farms legal recreational and medical marijuana production and processing facility where it would be operating as a Kaya Farms Store™ which would allow it to also serve as a delivery hub to service the City of Eugene.

 

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IV. Kaya ShackTMShack™ Marijuana Superstore, Central Salem, OregonOregon.

 

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We are completing construction of and the OLCC licensing process for ourOur fourth outlet, a third Kaya Shack™ Marijuana Superstore, which will be located(located in Central Salem, Oregon and which we anticipate will open during the last quarter of 2017.

Located in the central portion of Oregon’s capital city, Salem, this Kaya Shack™ is 2,770 square feet. The store features an 8’ display case with more than 25 strains of marijuana flower, an additional 8’ display case with a varied selection of oils, concentrates and topicals, an 8’ display case with accessories such as pipes, papers and brand related merchandise, and standing display cases with edibles such as cookies, chocolates, gummies, hard candies and more. The store also has a hospitality area that offers free water, coffee, tea and hot cocoa. The superstore concept also providesOregon) opened for a “third space” sitting area, a fresh juice bar, and in this location, an area for the production of the Company’s brand of custom glass pipes.

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

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 Plan to Sell Kaya Shack™ Retail Marijuana Store Franchises in Canada

On March 12, 2019 the Company announced that it had hired the Toronto based law firm of Garfinkle Biderman LLP to prepare the legal infrastructure required to enable the Company to sell Kaya Shack™ Franchises in Canada. The Company is currently working with its consulting group to map out Canadian provinces and development plans that consider the current and pending availability of cannabis retail licenses. KAYS will continue to announce details of its Canadian expansion effort as developments unfold.

Kaya Shack™ Car Fleet and Home Delivery

 

 

 

 

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As discussed in

The Company is licensed by the following section, the Company intends to initiate its Kaya Car™ Home Delivery Service during the fourth quarter of 2017, contemporaneously with a grand opening celebrationOLCC for home delivery for all four then OLCC Licensedstores. The Company is interested in developing its delivery service and has a fleet of 4 Kaya Shack™ retail marijuana stores and to commence the to move to the next stage of branding and retail development.

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Kaya Shack™ Home Delivery

 

In February 2017, the Company began the process of filing applications to add Home Delivery Service for three of its Kaya Shack™ retail marijuana stores at the advice of one of their OLCC examiners. As of the date of this Quarterly Report, the Company has received approvals from the OLCC to add Home Delivery to their three currently OLCC licensed locations, and is also applying for and expects to receive approval for Home Delivery licensing at its fourth retail outlet, which is currently under construction.

In addition to providing added value and convenience for our customers, extending visibility and building brand recognition for the Kaya Shack™ brand, we believe that Home Delivery provides greater market penetration, by allowing sales throughout the geographic area that our stores are licensed in. There is no limit to the number of delivery vehicles that can service an individual area using just one store as a home base, so in effect we intend to use this service to construct additional “virtual” Kaya Shacks™ without the added costs of additional brick and mortar locations.

On April 11, 2017, the Company took delivery of its first fourCars (wrapped Fiat 500 cars and spent the summer of 2017 conducting doing test marketing to our target consumers to determine the final version of and begin building the Kaya Shack™ Home Delivery Service fleet. The “winning design” for the cars is featured below with its distinctive Kaya Car™ vehicle wrapping500s featuring the Company’s branding logos and colors and outfitted with safes and security) at the ready, and once the support software enabling compliant delivery is released Kaya Shack™ will commence with its home delivery service. We expect delivery to extend our visibility, assist in building brand awareness, and allow the Company is developing the Kaya Shack™ Delivery App for use by its customers to order “Fast, Free Delivery” of the complete line of both medical and recreational grade Kaya Shack™ cannabis products.

The Company intends to initiate its Kaya Shack™ Home Delivery Service utilizing its initial Kaya Car™ fleet during the fourth quarter of 2017, contemporaneously withservice a grand opening celebration for all four then OLCC Licensed Kaya Shack™ retail marijuana stores and to commence the to move to the next stage of branding and retail development.broader geographic territory. The Company has reserved and is developingdeveloped the website kayadelivers.comwww.kayadelivers.com to advance the growth of its delivery service.

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

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Kaya Farms™ Cannabis and Cannabis Products

 

GeneralLebanon, Linn County,Oregon Marijuana Grow and Manufacturing Complex

On March 21, 2017, KAYS announced that it was in the process of expanding its grow and manufacturing operations and had retained a realtor to assist in identifying a suitable 30-60 acre tract of land in Oregon which would permit KAYS to expand its grow operations. As part of this expansion, KAYS ceased operations of its Portland grow facility at the end of March 2017, arranged to maintain its genetics library of over 30 strains of cannabis at an OHA licensed medical grow site and contracted with farmers to meet demand until the new facility is secured, built and fully operational.

 

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

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

We filed for zoning and land use approval in early 2018, and after numerous regulatory challenges and delays, we finally received zoning and land use approval in early 2019 to build on the property. We are presently in the final planning stages and are awaiting the culmination of the OLCC licensing process to begin construction. Under present laws the property can easily deliver 6-8,000 pounds of cannabis each year; if future regulations permit we believe that we can expand that capability to approximately 80-100,000 pounds of cannabis each year.

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Kaya Farms Indoor Marijuana Grow, Processing & Cannaceutical Production Facility

 

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

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

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

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

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

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

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Kaya Farms™ - Cannabis and Cannabis Products

Kaya Buddie™ Strain Specific Cannabis Cigarettes

 

In 2016 the Company introduced a signature line of strain-specific connoisseur-grade, pre-rolled cannabis cigarettes branded as “Kaya Buddies™Buddies™”..” Kaya Buddies™ cannabis cigarettes have been very well received by medical patients and recreational users, with the Company selling over 100,000 Kaya Buddies™ since launching the brand in January 2016. The brand, marketed under the tagline “Buds with Benefits,”Benefits”, features over 2550 different strains of connoisseur-grade, high quality cannabis and proprietary specialty blends. Many cannabis retailers produce prerolls, but none that we know of offer strain specific preroll made from the buds of the flower.

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Potential Expansion

 

The Kaya Buddies™ cannabis cigarettes, made from 100% cannabis bud only, was launched in mid-March in the Kaya Shack™ stores in Oregon and are targeted to service the exploding legal recreational marijuana market and have consistently been very well received by both older medical patients and recreational users new to cannabis. Although they are first being marketed through our internal retail network they are also being targeted for potential distribution lines to other dispensaries.

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Other Potential Markets

 

We believe that revenues and profitability will be enhanced through our plannedthe opening, directly or through franchisees or licensees, of additional retail outlets utilizing the Kaya Shack™ brand and model in our chain, as well as economies of scale achieved by being a multilocationmulti-location retail chain and being vertically integrated with grow and manufacturing operations. Ultimately, we believe that we can successfully enter other markets as they open up by applying our “brand” retail chain and vertically integrated grow and manufacture model to other states that legalize recreational marijuana use. Where applicable, we will seek

As Oregon has recently placed a moratorium on licensing additional legal marijuana retail outlets, the Company is exploring opportunities to leverage our public company statusexpand its operations beyond Oregon by replicating its Kaya Shack™ brand retail outlets through franchising in other states where recreational cannabis use is legal or expected to finance organic growth and enable acquisitions of existing locations forbecome legal in the Kaya Shack brand,near term, as well as look to acquire and grow additional brands.in Canada, where it has recently been legalized nationwide.

On November 8, 2016, California, Maine, Massachusetts and Nevada voted to legalize recreational marijuana, while Arkansas, Florida and North Dakota approved medical cannabis initiatives. Montana, which legalized medical marijuana in 2004, also passed a measure to set up commercial cultivation operations and dispensaries.

The California recreational cannabis market is by far the largest potential market in the country, and our operations in Oregon allow for a natural progression and expansion down the I-5 corridor into California. Florida could be a potentially large market for us as well, because we believe that KAYS would have a distinct advantage in the state, as it is one of the few Florida-based entities whose management has significant experience in owning and operating MMDs and grow and manufacturing operations. These markets are substantial, and their development could lead to $7-$8 billion in additional annual retail cannabis sales, according to Marijuana Business Daily’s preliminary estimates.

 

Growth Strategy

 

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

 

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

 

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

 

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

 

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

Marketing and Sales

  

The Company will only market its legal marijuana as in compliance with applicable state law.

 

The Company employs a marketing campaign consisting of four cornerstones:

 

Promoting and establishing the Kaya Shack™ brand.

A positive and active online presence.

 49·Promoting and establishing the Kaya Shack™ brand.

 ·A positive and active online presence.

·Daily specials and promotions.

·Quirky and fun holiday specials.

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Daily specials and promotions.

Quirky and fun holiday specials.

 

Our core strategic marketing objectives include:

 

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

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

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

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

Government Regulation

 

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

 

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

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

 

Competition

  

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

  

Employees

 

As of the date of this QuarterlyAnnual Report, our Oregon operations have a total of seventeen (17)15-20 part-time store employees including budtenders, trimmers, growers, and 4 fulltime6 full-time employees, consisting of 3 store managers, a Store Manager, a SalesVice President of Marketing and Marketing Coordinator,Brand development, the DirectorSenior Vice President of Dispensary and GrowCannabis Operations and a Master Grower.Vice President of Cultivation. Additionally, we engage several consultants to assist with daily duties and business plan implementation and execution. Additional employees will be hired and other consultants engaged in the future as our business expands.

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Critical Accounting Estimates

 

The following are deemed to be the most significant accounting estimates affecting us and our results of operations:

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Fair Value of Financial Instruments

The Company follows the provisions of ASC 820. This Topic defines fair value, establishes a measurement framework and expands disclosures about fair value measurements. We apply these provisions to estimate the fair value of our financial instruments including cash, accounts payable and accrued expenses, and notes payable.

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. Our 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.

The Company recognizes 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.

Recently Issued Accounting Pronouncements

There are no recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants (“AICPA”), and the SEC believed by management to have a material impact on the Company’s present or future financial statements.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Results of Operations

Three months ended September 30, 2017March 31, 2019 compared to three months ended September 30, 2016March 31, 2018

 

Revenues

 

We had revenues of $320,950$263,758 for the three months ended September 30, 2017,March 31, 2019 as compared to revenues of $263,345$255,365 for the three months ended September 30, 2016.March 31, 2018. The increase in revenues reflects sales at our three retail outlets, all of which were open and operating duringrevenue is due to the third quarter of 2017, as opposed to only two locations open and operatingnormal fluctuation in the third quarter of 2016.

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Operating Expensesmarket.

 

General and administrative expenses increased to $367,975Cost of Goods Sold

Our cost of goods sold for the three months ended September 30, 2017, from $109,417March 31, 2019 was $145,512 compared to cost of goods sold of $102,591 for the three months ended September 30, 2016. March 31, 2018. The increase in cost of goods sold was due to normal fluctuation in the wholesale cannabis market.

Salaries and wagesWages

Salaries and Wages increased to $131,762$146,455 for the three months ended September 30, 2017 from $65,358March 31, 2019 as compared to $133,440 for the three months ended September 30, 2016.March 31, 2018. The increasesincrease in these expense categories from the 2016 quartersalaries and wages was due to the 2017 quarter reflect ournormal increase in labor cost.

Selling, General and Administrative Expenses

Selling, general and administrative increased level of operations, including construction and licensing of our third Kaya Shack™ Marijuana Superstore (and fourth Kaya Shack™ retail outlet), which is expected to open during the fourth quarter of 2017. Professional fees$243,030 for the three months ended September 30, 2017, decreasedMarch 31, 2019 as compared to $166,150 from $815,508$164,088 for the three months ended September 30, 2016, reflectingMarch 31, 2018. This increase reflects the completion of licensing work with respect to the Company’s third and fourth retail outlets. As a resultfact that some of the significant decrease in professionalexpenses associated with this category have decreased over time.

Professional Fees

Professional fees total operating expenses decreased to $665,887were $45,850 for the three months ended September 30, 2017, from $990,283March 31, 2019, as compared to $1,185,727 for the three months ended September 30, 2016, notwithstandingMarch 31, 2018. The decrease in professional fees was a result of stock issuance in exchange for professional services and the increased level of the Company’s operations. Accordingly, our operating lossshares were valued at market price on issuance date.

Interest Expense

Interest expense and debt amortization expense decreased to $467,724$473,811 for the three months ended September 30, 2017,March 31, 2019 from $853,168$725,789 for the three months ended September 30, 2016.March 31, 2018. These decreases were due to lesser debt incurred over the past 12 months to acquire land and fund expansion of our operations.

 

InterestDerivative Liabilities Expense

Derivative liabilities expense

Interest expense increased decreased to $115,552$446,894 for the three months ended September 30, 2017March 31, 2019 from $45,982$1,557,197 for the three months ended September 30, 2016, reflecting additional debt incurred in the 2017 periodMarch 31, 2018. These decreases were due to fund expansion of our operations. 

Net Loss

After giving effect to an operating loss of $467,724, interest expense of $115,552, amortization of debt discount of $569,497 and derivative liabilities from the conversion of debt of $375,950, offset by other income from a change in derivative liability expense of $1,260,200 (arising from the stabilization of our stock prices which reducedprice as well as the volatility factors used in the derivative calculations), we incurred a net losscalculations.

Loss on extinguishment of $578,900debt

Loss on extinguishment of debt was $25,000 for the three months ended September 30, 2017. This compares with a net loss of $1,122,694March 31, 2019 as compared to $-0- for the three months ended September 30, 2016, after giving effectMarch 31, 2018. The loss was due to an operating loss of $853,168, interest expense of $45,982 and amortization of debt discount of $405,530, offset by other income from aratchet provision, which is change in conversion price on one of the convertible notes issued in 2018.

Change in Fair Value of Embedded Derivative Liabilities

Change in fair value of embedded derivative liability expenseliabilities decreased to $5,404,936 for the three months ended March 31, 2019 from $16,361,519 for the three months ended March 31, 2018. These decreases were due to change in stock price as well as the volatility factors used in the derivative calculations.

Other Income/(Loss)

Other income increased to $224 for the three months ended March 31, 2019 as compared to $-0- for the three months ended March 31, 2018.

Net Income

We incurred net income of $181,986.

$4,274,532 for the three months ended March 31, 2019, as compared to a net income of $12,711,407 for the three months ended March 31, 2018.

 

The majority of our net lossincome during the three-month period ending September 30, 2017March 31, 2018 was a result of the derivative liabilities from the conversion of debtassociated with our Convertible Debt and a reduction in the three months ended September 30, 2017 and from. In addition, as noted above, our revenues were impacted during the 2017 quarter as a result of our inability to process legal recreational marijuana sales at our Portland outlet because of delays in securing OLCC licensing for the facility.

Nine months ended September 30, 2017 compared to nine months ended September 30, 2016

Revenues

We had revenues of $667,601 for the nine months ended September 30, 2017, as compared to revenues of $754,093 for the nine months ended September 30, 2016. The decrease in revenues in the 2017 period from the comparable period in 2016 resulted from the delay in receiving OLCC licensing for our Portland retail outlet until May 2, 2017, which rendered such location unable to process legal recreational sales for the first four calendar months of 2017, which was offset in part by sales from our third retail location (and second Kaya Shack™ Marijuana Superstore), which received its OLCC license and commenced recreational and medical marijuana sales in March 2017.

Operating Expenses

General and administrative increased to $911,598 for the nine months ended September 30, 2017, from $338,073 for the nine months ended September 30, 2016. Salaries and wages increased to $311,253 for the nine months ended September 30, 2017, from $216,691 for the nine months ended September 30, 2016. The increases in these expense categories from the 2016 to the 2017 periods, reflects our increased level of operations, including construction and licensing of two additional Kaya Shack™ Marijuana Superstores, the first of which opened in March 2017 and the second of which is expected to open during the fourth quarter of 2017. Professional fees for the nine months ended September 30, 2017, decreased to $523,551 from $1,205,293 for the nine months ended September 30, 2016, reflecting the completion of licensing work with respect to the Company’s third and fourth retail outlets. The significant increase in general and administrative expenses was offset by the significant decrease in professional fees, resulting in total operating expenses of $1,746,402 for the nine months ended September 30, 2017. This compares to total operating expenses of $1,760,067 for the nine months ended September 30, 2016. Accordingly, our operating loss decreased to $1,351,465 for the nine months ended September 30, 2017, from $1,426,966 for the nine months ended September 30, 2016, notwithstanding the increased level of the Company’s operations.

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Interest expense

Interest expense increased to $260,295 for the nine months ended September 30, 2017, as compared to $195,968 for the nine months ended September 30, 2016, reflecting additional debt incurred in the 2017 period to fund expansion of our operations. 

Net Income (Loss)

After giving effect to an operating loss of $1,351,465, interest expense of $260,295, legal settlement of $247,500, amortization of debt discount of $1,678,899, derivative liabilities expense of $16,221,943 and loss on extinguishment of debt of $67,442, offset by other income from a change in derivative liabilities expense of $22,114,526 (arising from the stabilization of our stock prices which reducedprice as well as the less volatility factors used in the derivative calculations), we had netcalculations. The non-controlling interest for the three months ended March 31, 2019 and 2018 were loss of $107,159 and income of $2,286,982 for the nine months ended September 30, 2017. This compares with a net loss of $960,825 for the nine months ended September 30, 2016, after giving effect to an operating loss of $1,426,966, interest expense of $195,968, amortization of debt discount of $978,288, derivative liabilities expense of $129,340$36,645, respectively.

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Liquidity and loss on extinguishment of debt of $126,000, offset by other income from a change in derivative liabilities expense of $1,895,657 (arising from the stabilization of our stock prices which reduced the volatility factors used in the derivative calculations).  Capital Resources

 

Liquidity and Capital Resources

May 2017 Financing

 

The discussion that follows is derived from our interim unaudited Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 and the interim unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 (“2017”) and 2016 (“2016”).

Overview

During 2017 our cash position decreased by $21,282 to $285,603 and our negative working capital decreased by $407,139 to $1,401,463, excluding derivative liabilities. As of September 30, 2017, our working capital consisted of cash of $285,603; inventories of $150,936; and prepaid expenses of $20,274. Our current liabilities include accounts payable of $147,798 and $13,586, accrued expenses of $395,739 and notes payable of $1,050,000.

The following table sets forth the major sources and uses of cash for the nine months ended September 30, 2017 and 2016:

  2017 2016
Net cash used in operating activities $(1,705,128) $(576,960)
Net cash used in investing activities  (679,824)  (28,224)
Net cash provided by financing activities  2,363,671   522,422 
Net (decrease) increase in cash $(21,281) $(82,762)

Cash Used in Operating Activities

During 2017 we used cash of $1,705,128 (2016 - $576,960) in operating activities. This was made up of the net income (loss) of $2,286,982 (2016 – (899,566)), adjusted for non-cash items such as: Depreciation of $54,403 (2016 - $59,964); Imputed interest of $30,000 (2016 - $90,000); change in derivative liabilities $(22,114,526) (2016 – ($1,895,656)); Derivative expense $16,221,943 (2016 - $129,340); Loss on extinguishment of debt $67,442 (2016-$126,000); amortization of debt discount of $1,678,899 (2016 - $978,208); and shares for interest of $29,638 (2016 - $9,000). Inventory decrease of $66,939 (2016 – an increase of $40,915); a decrease in prepaid expenses of $15,774 (2016 – $14,000); an increase in accrued interest of $188,683 (2016- $104,005); and an increase in accounts payable and accrued expenses of $40,582 (2016 – an increase of $142,382).

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Cash Used in Investing Activities

During 2017 we used cash of $679,824 in investing activities. This amount was spent on the purchase of our 26 acre real property in Lebanon, Oregon, the buildout of location #4 in Salem, Oregon and on furniture and equipment.

During 2016 we used cash of $28,224 in investing activities. A total of $28,224 was spent on furniture and equipment.

Cash Provided by Financing Activities

During 2017 $2,500,000 of convertible debt was issued to provide working capital. The Company used $23,500 to repay convertible debt and $112,829 to repay an equipment note payable and other notes payable.

During 2016 the Company raised a total of $575,000 through the private sale of debt and equity securities and used $52,578 to repay notes payable and $100,000 from the sale of stock.

Additional Capital

As of September 30, 2017, we had cash of $285,602 and a working capital deficiency of $1,401,463, excluding derivative liabilities.

On May 11, 2017, we entered into a second financing agreement with an institutional investorCayman Venture Capital Fund (the “Investor”“Institutional Investor”) which had previously completed approximately $3.3 Million in in financing as listed in the 2018 10-K and previous filings to provide the Company with up to an additional $5.8 million in convertible note funding (the “May 2017 Notes \ ”) through July 31, 2018 (the “May“May 2017 Financing Agreement”)Agreement ”). The May 20112017 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding available to the Company thereunder to $6.3 million and to extend the time period for such funding to May 31, 2019 and was additionallysubsequently amended as of November 15, 2017 and as of March 31, 2018, to further increase the amount of funding available to the Company thereunder to $7.0$7.75 million and to provide for the remaining $5.8million in principal amount of May 2017 Notes to be (a) convertible into shares of the Company’s common stock at conversion prices ranging from $0.03 to $0.11 pursuant to the terms of each May 2017 Note as described below; and (b) to extend the time period for such funding to NovemberApril 30, 2019.2020.

 

FundingPursuant to an additional agreement reached as of March 31, 2018, KAYS and the Institutional Investor agreed that effective as of January 1, 2019, (a) the maturity date of all then outstanding Company promissory notes held by the Institutional Investor and its affiliate, NWP Finance LTD, will be extended from January 1, 2019 to January 1, 2020; (b) all of the $1.75 million in principal amount of May 2017 Notes currently outstanding and the remaining $5.8 million in principal amount of May 2017 Notes which may be issued under the May 2017 Financing Agreement, as amended, takesare to be secured by a mortgage lien on the form of the offer and sale of Convertible Notes (the “$7.0M Notes”). The $7.0 Notes areCompany’s 26-acre Lebanon, Oregon property, substantially similar in form and substance to the $2.1Mmortgage securing the $500,000 in principal amount of $0.03 Secured Notes purchased by the Institutional Investor, with the caveat that the property, improvements or rights to utilize them cannot be directly or indirectly leased, assigned or otherwise pledged to any entity without approval of the Institutional Investor, and in the event that there is a change in control of the Company or its subsidiaries the May 2017 Notes become immediately due and payable; and (c) the Institutional Investor was be granted piggy-back registration rights with respect to shares of the Company’s common stock it may hold or is issuable upon conversion of any Notes it or its Assigns may hold in the event the Company files a Registration Statement on Form S-1 with the Securities and Exchange Commission under the Securities Act of 1933, as amended to sell shares of its common stock or permit the resale by shareholders of previously issued shares of common stock, up to a maximum of 30% of the shares registered under such registration statement.

Moreover, effective as of January 20, 2019, the Agreement was further amended to: (a) extend the due dates for funding due under the Agreement for each of the remaining trenches (including the $420,000 remaining “$0.03” Notes that were part ofdue to expire December 31, 2018) by six (6) months; (b) agree to extend the $2.1 million Financing Agreement entered into betweenmaturity date all then outstanding Company promissory notes held by the Institutional Investor and its affiliate, NWP Finance LTD, from January 1, 2020 to January 1, 2021; and (c) pursuant to price adjustment features in the outstanding Notes held by the Institutional Investor, the Company andconfirmed that all outstanding Notes with a conversion price greater than $0.03 held by the Institutional Investor in December 2016 and completed in Marchwould be lowered to $0.03 per share at time of 2017 (as well as the approximately $1.2 million in financing previously received from the Investor in 2014 and 2015), except that the $7.0M Notes are due and payable on January 1, 2020.conversion.

 

As of the date of this Quarterly Report,Annual report, the Institutional Investor has purchased an aggregate of $1,150,000$2,625,000 in principal amount of $7.0MMay 2017 Notes from the Company under the May 2017 Financing Agreement, as amended to date, of which (a) $500,000 in principal amount of $7.0M Notes are convertible into shares of the Company’s common stock at a conversion price of $0.05 (the “$0.05Notes”); (b) $150,000 in principal amount of $7.0M Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.03 (the “$0.03Notes”); and (c) $500,000 in principal amount of $7.0M Notes, which are (i) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (ii) secured by a mortgage lien on the Company’s 26 acre Lebanon, Oregon property acquired by the Company during the third quarter of 2017 (the $0.03“$0.03 Secured Notes”)Notes ”).

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Cash Used in Investing Activities

 

During 2017 we used cashJanuary 2018 Financing

Effective January 22, 2018, and amended as of $679,825 in investing activities. This amount was spent on the purchase of our 26 acre real property in Lebanon, Oregon, the buildout of location #4 in Salem, Oregon and on furniture and equipment.

During 2016 we used cash of $28,224 in investing activities. A total of $28,224 was spent on furniture and equipment.

Cash Provided by Financing Activities

During 2017 $2,500,000 of convertible debt was issued to provide working capital. The Company used $23,500 to repay convertible debt and $112,829 to repay an equipment note payable and other notes payable.

During 2016 the Company raised a total of $575,000 through the private sale of debt and equity securities and used $52,578 to repay notes payable.

Additional Capital

As of September 30, 2017, we had cash of $285,602 and a working capital deficiency of $1,401,463.

On May 11, 2017,July 31, 2018 we entered into a financing agreement with an institutionala high net worth investor (the “Investor”)“HNW Investor ”) to provide the Company with up to $5.8$1.4 million in convertible note funding (the “January 2018 Notes ”) through July 31, 2018 (the “May 2017“ January 2018 Financing Agreement”Agreement ”). The May 2011Pursuant to the January 2018 Financing Agreement, upon execution of the January 2018 Financing Agreement, the HNW Investor purchased $100,000 in principal amount of January 2018 Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.10 per share (the“$0.10 Notes ”).

While the January 2018 Financing Agreement granted the HNW Investor the right to acquire additional January 2018 Notes by certain deadlines if additional funding was provided, no additional $0.10 Notes were purchased until the January 2018 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding available to the Company thereunder to $6.3 million and to extend the time period for such funding to May 31, 2019 and was additionally amended as of November 15, 2017 to further increase the amount of funding available to the Company thereunder to $7.0 million and to extend the time period for such funding to November 30, 2019.

Funding under the May 2017 Financing Agreement, as amended, takes the form of the offer and sale of Convertible Notes (the “$7.0M Notes”). The $7.0 Notes are substantially similar in form and substance to the $2.1M 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 March2018 to allow the HNW investor the right to purchase an additional $25,000 of 2017 (as well as the approximately $1.2 million in financing previously received from the Investor in 2014 and 2015), except that the $7.0MJanuary 2018 Notes, are due and payable on January 1, 2020.

As of the date of this Quarterly Report, the Investor has purchased an aggregate of $1,150,000 in principal amount of $7.0M Notes from the Company under the May 2017 Financing Agreement, as amended to date, of which (a) $500,000 in principal amount of $7.0M Notes are convertible into shares of the Company’s common stock at a conversion price of $0.05 per share (the “$0.05Notes”); (b) $150,000 in principal amount“$0.05 Notes ”). In January 2019 the Agreement was further amended to lower the conversion price of $7.0Mthe previously purchased $0.10 Note to $0.05, and to modify terms of the $0.10 Note to make them consistent with the May 2017 Financing Agreement executed with the Institutional Investor, and to allow for the right of the HNW Investor to acquire an additional $200,000 of January 2018 Notes, which are convertible into shares of the Company’s common stock at a conversion price of $0.03 per share (the “$0.03Notes”); and (c) $500,000“$0.03 Notes ”).

In March, 2019 the agreement was further amended to lower the conversion prices of the previously issued $0.05 Notes to $0.03. As of the date of this Annual report, the HNW Investor has purchased an additional aggregate of $75,000 in principal amount of $7.0Mthe $0.03 Notes and has indicated he will purchase the remaining $125,000 of the $0.03 Notes.

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

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Use of Proceeds

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

Plan of Operations

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

Note Conversion

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

Future Employee Stock Plan Issuances and Director and Officer Restricted Stock issuances

On December 28, 2018 KAYS informed she staff of the Kaya Shack Operations that they had been allocated a conversion pricetotal of $0.03;2,050,000 shares of stock from the KAYS 2011 Employee Stock Plan (the “Plan”) for their service to the Company. The shares are subject to final approval of and (ii) securedconfirmation by a mortgage lienthe Board of Directors to determine that the potential share issuances are valid according to the terms of the plan and other limitations, and will be reviewed at the next Board Meeting. Upon confirmation of eligibility and issuance from the Board of Directors, the recipients will be issued an account statement evidencing their shares along with instructions as how to effect delivery from the transfer agent.

Pursuant to consulting agreements entered into on February 19, 2018 via Board Stipulation, BMN Consultants is scheduled to receive 3,000,000 shares of KAYS stock in Q-1 from the 26 acre property acquired byKAYS 2011 Employee Stock Plan (the “Plan”) for W. David Jones’s service to the Company during 2019. The shares are considered to be fully paid when issued.

Pursuant to consulting agreements entered into on February 19, 2018 via Board Stipulation, Tudog Consultants is scheduled to receive 3,000,000 shares of KAYS restricted stock in Q-1 for Craig Frank’s service to the third quarterCompany during 2019. The shares are considered to be fully paid when issued.

Pursuant to annual compensation schedules, each of 2017 (the $0.03 Secured Notes”).the three (3) Board Members is scheduled to receive 100,000 shares of KAYS restricted stock in Q-1 for their service to the Company during 2019. The shares are considered to be fully paid when issued.  

The above awards are all subject to final approval of and confirmation by the Board of Directors to determine that the potential share issuances are valid according to the terms of the plan and other qualifications and will be reviewed at the next Board Meeting to be held prior to June 30, 2019.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the direction of Chief Executive Officer and Acting Chief Financial Officer (our principal executive, financial and accounting officer), we evaluated our disclosure controls and procedures as of September 30, 2017.March 31, 2019. Our Chief Executive Officer and Acting Chief Financial Officer (our principal executive, financial and accounting officer) concluded that our disclosure controls and procedures were not effective as of September 30, 2017March 31, 2019 for the reasons set forth in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

 

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

 

 

As required by SEC Rule 13a15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Financial Officer (our principal executive, financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of our fourth fiscal quarter covered by this report.September 30, 2018. Based on the foregoing, our Chief Executive Officer and Acting Chief Financial Officer (our principal executive, financial and accounting officer) concluded that our disclosure controls and procedures were not effective. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future

conditions, regardless of how remote. 

Changes in Internal Controls

 

There was no change in our internal controls or in other factors that could affect these controls during the quarter ended September 30, 2017,March 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. We do not anticipate any changes to our internal controls at this time.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

On June 22, 2016, Daniel A. GoldinAs previously reported in our periodic reports filed under the Securities Exchange Act of 1934, in the fourth quarter of 2018, KAYS concluded the purchase of the Eugene, Oregon based Sunstone Farms grow and Wally Goldin commenced an action inmanufacturing facility, which is licensed by the Oregon Circuit Court, Multnomah County, against the Company, MJAI, its direct majority-owned subsidiary, Craig Frank, our Chairman, President and Chief Executive Officer, William David Jones, a consultant to our Company and BMN Capital Group, LLCLiquor Control Commission (the “ActionOLCC”). for both the production (growing) of medical and recreational marijuana flower and the processing of cannabis concentrates/extracts/edibles. The plaintiffs alleged breach of contract, state securities fraudpurchase included a 12,000 square foot building housing an indoor grow facility, as well as equipment for growing and state racketeering claims against the defendants arising from alleged misrepresentations made in subscription agreements with the Company entered into in October 2015 and January 2016 by Daniel A. Goldin and Wally Goldin, respectively, pursuant to which they each purchased 2,222,222 “restricted” shares of our common stock for $100,000 in a private transaction. In addition, Daniel A. Goldin alleged that the Company breached a purported employment agreement with him pursuant to which he was purportedly to be compensated for working in our Oregon operations through a combination of cash and stock.extraction activity. The plaintiffs are soughtfacility can produce in excess of $1.7 million800 pounds cannabis flower annually as currently outfitted, as well as a substantial amount of manufactured extracts and related cannabis products. KAYS entered into a management agreement with the holder of existing OLCC licenses (“Sunstone”) to oversee operations at the facility pending transfer of the license to KAYS, which were aware would be an extended and cumbersome process.

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

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

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

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

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

The Company believednotes that not only wasin a new and emerging regulatory environment for legal cannabis production and sale, licensing issues such as the Action without merit, but that it had various counterclaims againstpresent one periodically arise. In fact, as previously reported, the plaintiffs, particularly Daniel L. Goldin. The Company defended against the Actionhas encountered such issues in connection with its Portland, Oregon retail outlet and pursued its counterclaims bothplanned Lebanon, Oregon grow and production operation, all of which were satisfactorily resolved in the Action and in a separate lawsuit commenced against the plaintiffs in the U.S. District Court for the Southern District of Florida in whichCompany’s favor. Accordingly, the Company alleged fraud by the plaintiffs and sought damagesis cooperating with Sunstone and the returnOLCC with respect to this matter and is optimistic that once the extensive record of paperwork submitted to and consultation with the OLCC has been reviewed, it will be able secure transfer of the common stock issued to the Company’s treasuryOLCC licenses.

In September 2017, the parties entered in a settlement agreement, pursuant to which Mr. Goldin waived any rights to a total of 1.2 million shares of KAYS stock (200,000 shares of our common stock which were already issued in his name and an additional 1,000,000 shares which were to be issued) and $40,000 in cash compensation payable to him under the employment agreement. The Company paid the plaintiffs the sum of $247,500, in exchange for the return of the stock and the waiver of claims against any further stock or cash, all litigation was dismissed by the parties and the parties exchanged mutual releases.

In entering into the settlement agreement, the Company also took into consideration that legal fees and litigation costs incurred in proceeding further might very well exceed any judgment that would be awarded to the Company and the other defendants, and that even if a judgment were awarded, that there was significant doubt of the collectability of any such judgment from the Goldins.

 

Item 1A. Risk Factors.

 

See“Item 1A. Risk Factors”in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.

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

 

On May 11, 2017, we entered into a financing agreement with an institutional investor (the “Investor”) to provideJanuary 22, 2019 the Company with up to $5.8 million inreceived $70,000 from the issuance of convertible note funding through July 31, 2018 (the “May 2017 Financing Agreement”). The May 2011 Financing Agreement was amended as of July 31, 2017, to increase the amount of funding availabledebt to the Company thereunderCayman Venture Capital Fund pursuant to $6.3 million and to extend the time period for such funding to May 31, 2019 and was additionally amended as of November 15, 2017 to further increase the amount of funding available to the Company thereunder to $7.0 million and to extend the time period for such funding to November 30, 2019.

Funding under the May 2017 Financing Agreement, as amended, takes the form of the offer and sale of Convertible Notes (the “$7.0M Notes”)amended. Interest is stated at 8%. The $7.0 Notes are substantially similarNote and Interest is convertible into common shares at $0.03 per share. The Note is Due in form and substance to the $2.1M Notes that were partJanuary of the $2.1 million Financing Agreement entered into between the Company and the Investor in December 2016 and completed in March of 2017 (as well as the approximately $1.2 million in financing previously received from the Investor in 2014 and 2015), except that the $7.0M Notes are due and payable on January 1, 2020.2021.

 

As ofOn February 11, 2019 the date of this Quarterly Report, the Investor has purchased an aggregate of $1,150,000 in principal amount of $7.0M NotesCompany received $150,000 from the Company underissuance of convertible debt to the Cayman Venture Capital Fund pursuant to the May 2017 Financing Agreement, as amended to date, of which (a) $500,000 in principal amount of $7.0M Notes areamended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021. 

On March 20, 2019 the Company’s common stockCompany received $15,000 from the issuance of convertible debt to the High Net Worth Investor pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at a conversion price of $0.05 (the “$0.05Notes”); (b) $150,000 in principal amount of $7.0M Notes, which are8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of the Company’s common stock at a conversion price of $0.03 (the “$0.03Notes”); and (c) $500,000 in principal amount of $7.0M Notes, which are (i) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (ii) secured by a mortgage lien on the 26 acre property acquired by2021. 

On April 16, 2019 the Company duringreceived $75,000 from the third quarterissuance of 2017 (the $0.03 Secured Notes”).

Underconvertible debt to the Cayman Venture Capital Fund pursuant to the May 2017 Financing Agreement, as amended to date, the Investor has the right to purchase another trancheamended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of $0.03 Notes up to an aggregate of $1,050,000 in principal amount, at any time and from time to time through March 31, 2018.2021. 

 

ProvidedOn April 22, 2019 the Investor has fulfilled its obligation to purchase the additional $1,050,000 in principal amount of $0.03 NotesCompany received $35,000 from the Company on or before September 30,issuance of convertible debt to the High Net Worth Investor pursuant to the January 2018 the Investor will have the right to purchase another trancheFinancing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of $0.05 Notes up to an aggregate of $1,000,000 in principal amount, at any time and from time to time through July 31, 2018.2021.

 

ProvidedOn May 6, 2019 the Investor has fulfilled its obligation to purchase the additional $1,000,000 in principal amount of $0.05 NotesCompany received $35,000 from the Company on or before March 31,issuance of convertible debt to the High Net Worth Investor pursuant to the January 2018 the Investor will have the right to purchase up to an aggregate of $1,600,000 in principal amount of $7.0M Notes, which areFinancing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.03 per share. The Note is Due in January of 2021.

All of the Company’s common stock at a conversion price of $0.08 per share, at any time and from time to time through January 31, 2019 (the “$0.08 Notes”).

Provided the Investor has fulfilled its obligation to purchase all $1,600,000 in principal amount of $0.08 Notes from the Company on or before January 31, 2019, the Investor will have the right to purchase up to an additional $2,200,000 in principal amount of $7.0N Notes from the Company at any time and from time to time through November 30, 2019, which Notes will be convertible into shares of common stock at a conversion price of $0.11.

Theseforegoing securities were issued without registration under the Securities Act of 1933, as amended pursuant to the exemption from the registration afforded by Section 4 (a) (2) thereofof the Securities act of 1933, as amended and Regulation Dthe rules and regulations thereunder.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

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Item 5. Other Information.

 

None

 

Item 6. Exhibits

 

 

 

Exhibit No. Description of Exhibit

10.1 

 

November 15, 2017 Amendment to May 2017 Financing Agreement

31.1

31.1

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 130-14 of the Securities Exchange Act of 1934, as amended, pursuant to Section 302 of the SarbanesOxley Act of 2002Certification

 

 
32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002Certification

 

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SIGNATURES

 

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

 

 

Dated: November 20, 2017May 21, 2019

 

KAYA HOLDINGS, INC.

 

 

By:/s/ Craig Frank

Craig Frank, Chairman, President, Chief Executive Officer and Acting Chief Financial Officer

(Principal (Principal Executive, Financial and Accounting Officer)

 

 

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