915 Middle River Drive, Suite 316
Ft. Lauderdale, Florida 33304
(Address of principal executive offices)
(954)-892-6911
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| None |
Securities registered under Section 12(g) of the Exchange Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
[ ] Large accelerated filer [ ] Accelerated filer
[X] Non-accelerated filer [X] Smaller reporting company
[X] emerging growth company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $3,260,293 as of June 30, 2021, based on the closing price on such date of $0.283 of the Company’s common stock on the OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were shares of common stock outstanding as of April 14, 2022.
DOCUMENTS INCORPORATED BY REFERENCE: No documents are incorporated by reference into this Annual Report on Form 10-K except those Exhibits so incorporated as set forth in the list of Exhibits set forth in Item 15 of this Annual Report on Form 10-K.
KAYA HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 2021
TABLE OF CONTENTS
| Page | ||
| Part I | ||
| Item 1. | Business. | 1 |
| Item 1A. | Risk Factors. | 26 |
| Item 1B. | Unresolved Staff Comments. | 31 |
| Item 2. | Properties. | 31 |
| Item 3. | Legal Proceedings. | 32 |
| Part II | ||
| Item 5. | Market for Registrant’s Common Equity and Related Stockholder Matters. | 34 |
| Item 6. | [Reserved] | 35 |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation. | 35 |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. | 38 |
| Item 8. | Financial Statements and Supplementary Data. | 38 |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. | 38 |
| Item 9A. | Controls and Procedures. | 39 |
| Item 9B. | Other Information. | 39 |
| Part III | ||
| Item 10. | Directors, Executive Officers and Corporate Governance. | 40 |
| Item 11. | Executive Compensation. | 41 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | 42 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. | 43 |
| Item 14. | Principal Accountant Fees and Services. | 44 |
| Part IV | ||
| Item 15. | Exhibits and Financial Statement Schedules. | 46 |
| Item 16. | Form 10-K Summary | 47 |
| Signatures | 47 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information contained in this Annual Report 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 contained principally in the sections titled “Item 1. Business,” “Item 1A. Risk Factors,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and 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.
As used in this Annual Report on Form 10-K (the “ Annual Report ”), the terms “ KAYS ,” “ the Company ,” “ we ,” “ us ” and “ our ” refer to Kaya Holdings, Inc. and its owned and controlled subsidiaries, unless the context indicates otherwise.
All share and per share information in this Annual Report give proforma retroactive effect to a one for 15 reverse stock split implemented by the Company December 15, 2020.
PART I
Item 1. Business.
| Overview |
Kaya Holdings is a vertically integrated legal marijuana enterprise that produces, distributes, and/or sells a full range of premium cannabis products including flower, oils, vape cartridges and cannabis infused confections, baked goods and beverages through a fully integrated group of subsidiaries and companies supporting highly distinctive brands.
KAYS is a veteran of the global legal cannabis industry, with more than six years of operational experience. KAYS is the first U.S. publicly traded company to operate a legal marijuana dispensary, as well as the first to vertically integrate by adding cultivation and manufacturing.
The Company’s business strategy seeks to achieve four fundamental objectives:
| · | maintaining direct access to customers (to own the relationship with end-users); |
| · | effecting vertical integration to control the supply chain (to control cost, selection and quality); |
| · | introducing strong brands in tradition and innovative categories (to control asset development); and |
| · | creating the capacity to expand nationally and internationally as regulations and opportunities permit. |
Kaya Holdings currently operates three majority-owned subsidiaries, each responding to various demands and opportunities in the cannabis industry, to aid in the execution of these objectives:
Marijuana Holdings Americas, Inc.
Marijuana Holdings Americas, Inc. (“MJAI”), incorporated in 2014, operates the Company’s U.S. based cannabis operations including its Kaya Shack™ retail brand and the Kaya Farms™ cultivation brand.
After an evaluation of several factors including reputation for cannabis excellence, costs of entry, learning opportunity, and ease of regulatory structure, the Company selected Oregon as its point-of-entry into the legal cannabis sector where it commenced operations in Oregon in July 2014. Oregon is universally recognized for its excellence in cannabis cultivation and is part of the famed “Green Triangle” of expert cannabis cultivation that also includes Northern California. Having Oregon as the Company’s learning ground has allowed the Company to combine “traditional” methods of cannabis cultivation with modern agriculture techniques.
The Company’s US operations are currently focused in Oregon, where all of the Company’s operations are licensed by the Oregon Liquor Control Commission (the “OLCC’), which has jurisdiction over legal medical and recreational cannabis grow, production and retail operations. The Company has two active OLCC Marijuana Retailer Licenses, each of which allow for one brick-and-mortar physical dispensary location as well as unlimited delivery operations tied to the geographic location of the fixed based licensed operations. KAYS currently operates two Kaya Shack™ retail outlets (one in South Salem and one in Portland).
The Company has developed its own proprietary Kaya Farms™ strains of cannabis, which it has grown and produced at the various medical and recreational grows that the Company has operated and maintained over the past seven years in Oregon.
The Company owns a 26-acre farm in Lebanon, Linn County, Oregon, on which it is in process of constructing an 85,000-square foot Kaya Farms™ Greenhouse Grow and Production Facility. The Company has received county zoning approvals for the complex, and has been notified by the OLCC that they are ready to proceed with KAYS Production (Grow) Licensing for the Linn County Facility pending completion of initial construction.
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Kaya Brands USA
Kaya Brands USA, Inc. (“KBUS”) is being incorporated to manage and leverage the intellectual property associated with the Kaya family of brands and seek out US based projects and ventures to enhance stockholder value associated with their development.
KBUS presently manages 18 proprietary brands formulated and developed by the Company which includes the Kaya Shack™ retail brand, the Kaya Farms™ cultivation brand, and the Kaya Gear™ apparel brand, as well as a host of carefully developed cannabis and CBD products that include cannabis extracts and concentrates, vape cartridges, chocolates, gummies and chews, topicals and creams, beverages, foods, and cannaceuticals.
Kaya Brands International and International Plans for Expansion
Kaya has implemented a strategic shift away from the U.S. cannabis market, its initial intended focus, placing current expansion emphasis on international opportunities and brand extensions. While the US Cannabis markets initially received a strong tail wind from the 2021 change in administration and the fact that US Cannabis Banking and Taxation Laws and Regulations are forecast to become more industry friendly, KAYS believes that it will still be some years until such time that the Federal Laws allow for Interstate Cannabis Commerce and true economies of scale to develop within the emerging U.S. Cannabis Markets. Thus, KAYS has developed an exciting international growth program with the potential for strategic position and growth, all the while remaining prepared for the eventuality of a more inviting U.S. market.
Kaya Brands International, Inc. (“KBI”) was incorporated in late 2019 to serve as the Company’s vehicle for expansion into worldwide cannabis markets. KBI is seeking to leverage the other product brands for development of the Kaya Shack™ retail and Kaya Farms™ brands in Europe and elsewhere as opportunities permit. Projects currently under development include licensing of the Kaya Farms™ brand to develop cultivation projects in Greece, Israel and other potential locations.
This segregation of US and foreign based activities would allow for KAYS to eventually have KBI listed on a recognized securities exchange such as the OTCQX, NASDAQ or NYSE in the US, the Canadian Securities Exchange or “CSE” in Canada (a Canadian Exchange that has proven to be an excellent source of new institutional and retail investment capital and liquidity for both Canadian and U.S.-based OTC cannabis stocks) or other such international exchange that would allow KBI to access additional capital not currently available through US over-the counter (“OTC”) markets.
KAYS intends to maintain a majority ownership of KBI, but is also working on plans to issue a dividend of common stock in KBI to stockholders of record at a date to be determined by the Board of Directors of KAYS.
Additionally, KAYS intends to structure KBI’s participation in projects that would lead to these projects eventually seeking their own public company status and corresponding issuance of securities which could potentially significantly enhance the value of KAYS/KBI’s investment and possibly lead to dividends for KAYS/KBI’s stockholders. There can be no assurance given as to whether or when KAYS will be able to do so, or it would ultimately be successful in increasing stockholder value.
Recent Developments
Kaya Farms Greece
On January 11, 2021, KAYS/KBI, through a majority owned subsidiary of KBI (Kaya Farms Greece or “KFG") and Greekkannabis (“GKC", an Athens based Cannabis Company that is licensed to build ) executed an agreement for
On January 11, 2021, KAYS/KBI, through a majority owned subsidiary of KBI (Kaya Farms Greece or “KFG") and Greekkannabis (“GKC", an Athens based Cannabis Company that is licensed to build ) executed an agreement for KBI to acquire 50% of GKC. The first 25% was acquired in January, 2021 and the remaining 25% was acquired in July, 2021.
GKC’s projects include two medical cannabis cultivation and processing projects in Greece- one in Epidaurus, Greece and the other in Thebes, Greece.
The Epidaurus Project consists of 2 connected industrial buildings (already constructed, approximately 50,000 square feet in total under-air space) situated on 2.8 acres of land, with its own independent industrial electrical power center and ample water supply to service the needs of the facility. The Epidaurus Project will include 25,000 square feet of indoor cannabis cultivation, a 15,000 square foot EU-GMP extraction and processing facility, and a 10,000 square foot EU-GMP packing area. There is ample room for expansion with room to construct an additional 15,000 square feet on site. The joint venture is awaiting project financing and final license approval from Greek government authorities.
The Epidaurus Project is smaller in scale than the Company's 15-acre project in Thebes, Greece, allowing KAYS to fast-track cultivation and processing of its proprietary branded cannabis products for distribution in legal EU markets while awaiting greater legal cannabis demand to emerge prior to developing a large-scale capacity in Thebes.
The Thebes Project has a development license from the Greek authorities and a purchase option on 15 acres in Thebes, Greece. The farm has large-scale cultivation capacities and the company expects to develop the site once legal cannabis demand warrants an increase in capacity.
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Kaya Farms Israel
On March 30, 2021 the Company confirmed that its Israeli subsidiary, Kaya Shalvah has been awarded its initial permit from the "YAKAR", the Department for Medical Cannabis in the Israeli Ministry of Health, to develop an Israeli cannabis cultivation and processing facility. This initial permit grants Kaya Shalvah permission to proceed with its plans to develop commercial scale cannabis cultivation and processing in Israel.
We have chosen to become active in the Israeli cannabis market because of this position as global center of cannabis science, where technologies are specifically developed to enhance cannabis cultivation processes and yields, and innovative consumer products are emerging that have potential interest for both the medical and recreational markets throughout the world.
Kaya Shalvah is currently focused on two separate paths of development to launch its Israel Operations- the first being through participation in the government sponsored Greenegev Cannabis Ecosystem in Yerucham, Israel and the second path being through potentially acquiring an interest in currently licensed medical cannabis production and processing facilities that are already operating in Israel.
In July 2021, KAYS concluded a settlement with Sunstone Capital Partners, LLC, Sunstone Marketing Partners LLC and Bruce Burwick, the principal of Sunstone and a director of Kays, regarding the failure to deliver to KAYS the Oregon Cannabis Production and Processing Licenses that were part of a warehouse purchase transaction in August 2018.
Pursuant to the terms of the settlement, Bruce Burwick surrendered to KAYS 1,006,671 shares of our common stock issued to him in connection with the transaction (800,003 shares which were issued for the facility purchase, 166,667 shares which were issued for $250,000 in cash and 40,001 shares which were issued as annual compensation for Burwick serving as a director of KAYS). The shares have been cancelled. In addition, the Company received clear title to the warehouse facility. As part of the settlement, Burwick received $160,000 from the net proceeds of the sale of the facility’s grow license to an unrelated third party, resigned from the Company’s board of directors and agreed to work as a non-exclusive consultant to the Company for the next four years for a yearly fee of $35,000.00
In October 2021, KAYS sold the Eugene, Oregon cannabis facility for gross proceeds of $1,325,000. The funds received from the sale have been and are being used to repay certain debt and strengthen its balance sheet, as well as providing the initial stage capital for some of the Company’s U.S. and global expansion activities, including its cultivation sites in Greece and Israel.
Corporate Information
We are incorporated in the State of Delaware. Our corporate office is located at 915 Middle River Drive, Suite 316, Fort Lauderdale, Florida, 33304. Our telephone number is 954-892-6911 and our corporate website is www.kayaholdings.com. Information contained on our corporate website does not constitute part of this Annual Report.
The Global Cannabis Industry
The global cannabis market is being driven by the increasing number of countries passing legislation to decriminalize the use of cannabis and legalize cannabis for medicinal use. This change in legislation is the result of an increase in public awareness to the medicinal benefits of cannabis and greater social acceptance of cannabis use.
According to New Frontier Data, more than 260 million adults globally consumed cannabis at least once annually in 2018 – placing global spending on cannabis (legal & illicit) at $344 billion USD annually.
The Insight Partners, another research group, in their 2019 Global Cannabis Market report projects the global cannabis market to reach $153,689,900,000 in 2027, which represents a CAGR of 34% from 2019-2027.
Prohibition Partners, expects the North American market to remain the world’s largest until 2023, when they expect North American ($17.7 billion) to outpace Europe ($16.8 billion). By 2024, with a forecasted global market of $103.9 billion, Europe is expected to outperform North America $39.1 billion to $37.9 billion.
Of the $103.9 billion global cannabis market forecasted by Prohibition Partners, $62.7 billion is expected to be medical cannabis driven. Of this $62.7 billion, Europe is expected to be the largest market, with $22.3 billion, followed by North America with $20.2 billion.
North America
North America, according to New Frontier Data, represents a total cannabis demand (legal & illicit) valued at $86 billion USD.
The United States and Canada have been leading the global legal cannabis movement, which in turn impacts the way governments worldwide are structuring the regulation of legal cannabis in their own countries.
Canada
Canada legalized medical cannabis in 2001 and in October 2017 the Federal Cannabis Act came into effect, making Canada the first G7 nation to legalize recreational cannabis. The legal structure has given rise to large Canadian cannabis companies that have achieved high valuations, which they have leveraged to purchase supply chain companies and invest in overseas infrastructure projects to produce cannabis at costs lower than those in Canada. Increasing competition from U.S. and European countries and investor frustration has seen some decline of valuation and some Canadian companies have been forced to shrink operations and lessen their developing global footprint.
Canadian cannabis companies currently export to more than twenty countries. Up until 2020, most exports of cannabis from Canada had been sent to European Countries. Exports of oil and flowers from Canada to Europe increased from 2019-2020 by 28% in terms of weight, but have declined, with most flowers being exported to Israel and the majority of oil being exported to Australia.
The United States
The United States has been the global leader in cannabis innovation; including new genetics, cultivation techniques, derivative products, and delivery methods.
Cannabis remains federally illegal in the United States, with the interstate transport and sale of cannabis prohibited. Nonetheless, support for legal recreational cannabis remains above 60% in most reputable polls, and 48 U.S. states have some form of legal medical or recreational cannabis (including hemp/CBD). Only Idaho and Nebraska prohibit all forms of cannabinoids.
States with some type of legal medical cannabis includes Alabama, Arkansas, Delaware, Florida, Georgia, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, New Hampshire, Louisiana, Maryland, Minnesota, Mississippi, Missouri, Montana, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, West Virginia, Wisconsin, and Wyoming.
States permitted the sales of recreational, or “adult-use” cannabis are Alaska, Arizona, California, Colorado, Connecticut, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New York, New Mexico, Oregon, South Dakota, Vermont, Virginia and Washington. The District of Colombia (Washington D.C.) also permits adult-use cannabis.
Despite the number of individual states permitting the cultivation and distribution of cannabis (including hemp), in 2021 the U.S. Senate failed to pass a bill that would reclassify cannabis from a Schedule I drug under the Controlled Substances Act, which would have allowed cannabis companies access to banking and relief from punitive IRS rules.
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Europe
Some key points about the European medical cannabis market are:
| § | New Frontier Data estimates the European cannabis market (legal & illicit) generates $69 billion USD annually. |
| § | Prohibition Partners Europe forecasts Europe to be the largest legal cannabis market worldwide by 2024, with a total value of $39.1 billion. |
| § | The Insight Partners estimates the European cannabis market will be worth $474 million by the end of 2021. They estimate the market to grow with a CAGR of 67.4% from 2021 to reach $3.75 billion by 2025. |
| § | Europe is projected to surpass North America (currently the largest medical cannabis market) in 2024, with a market value of $39.1 billion to North America’s $37.9 billion. |
| § | In Europe Germany continues to be largest and fastest growing medical cannabis market. Sales of insurance covered cannabis grew to 67% in 2019. |
| § | Total European market sales, including isolated cannabinoids, finished pharmaceutical products, cannabis flower and full spectrum cannabis products exceeded $295 million in 2019. |
| § | Germany has by far the largest number of medical cannabis patients as of 2021. By 2025, it is expected that countries like France and the United Kingdom will have developed their patient access considerably, growing to represent a significant share of the European market. |
Israel and Greece
In June 2017, the Greek government announced it would be legalizing medical cannabis, and less than a year later Greek leaders approved Law 4523 and Joint Ministerial Decision No. 51483, which permitted farming and production of medical cannabis. In 2020 the Greek Parliament passed legislation that further relaxed cannabis export regulations, now permitting the bulk export of cannabis flower.
Israel is currently the largest importer of medical cannabis in the world. By June 2020 Israel had imported more than six tonnes of cannabis. The strong medical cannabis program stems from traditionally progressive cannabis policies and strong cultural acceptance of cannabis medicinal uses.
The Israeli cannabis sector has been slowed by regulations, which have hindered Israeli cannabis exports and complicated domestic distribution. There is currently no mutual recognition agreement between local Medical Cannabis GMP and EU-GMP, denying many Israeli firms the qualifications necessary to export to Europe.
In February 2021, Israeli cannabis company Panaxia was chosen to supply medical cannabis to Cyprus and France as part of new government programs. IM Cannabis exports cannabis to Germany by purchasing EU-GMP flower and selling the product to German wholesalers.
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The Kaya™ Family of Brands
KAYS produces, distributes, and/or sells a full range of premium cannabis products including flower, oils, vape cartridges and cannabis infused confections, baked goods and beverages through a fully integrated group of subsidiaries and companies supporting highly distinctive brands.
Currently Operational Brands (2014-2021)
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Next Stage Traditional (2022-2023)
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Next Stage Innovative (2022-2023)
Note: The “Next Stage Traditional” and “Next Stage Innovative” brands are all targeted for release in 2022. The Company is currently awaiting the culmination of both the buildout of the Kaya Farms Ag Facility in Lebanon, Oregon and developments with the Company’s projects in Israel and Greece to finalize the release dates for these brands. In the event that the licensing approval and construction timeline of these facilities is delayed or experiences difficulties, the Company has sourced other alternatives to expedite the release of the brands and will update stockholders accordingly.
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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 two recreational marijuana retail outlets and medical marijuana dispensaries in Oregon under the Kaya Shack™ brand.
Dubbed by the mainstream press as the “Starbucks of Marijuana” after our first outlet opened in July 2014, our operating concept is simple: to deliver a consistent customer experience (quality products, fair prices and superior customer service) to a broad and diverse base of customers. Kaya Shack™ meets the quality needs of the “marijuana enthusiast”, the comfort and atmosphere of all including “soccer moms” and the price sensitivities of casual smokers.
The Kaya Shack™ brand communicates positive thinking and joy, with signs adorning the walls that read “It’s a Good Day to have a Good Day,” “Some of our Happiest Days Haven’t Even Happened Yet,” and our signature “Be Kind.”
Kaya Shack™ retail outlets are open 7 days a week- Monday through Saturday from 8:00 am to 10:00 pm, and Sunday 8:00 AM to 9:00 PM. Operations follow an operational manual that details procedures for 18 areas of operation including safety, compliance, store opening, store closing, merchandising, handling of cash, inventory control, product intake, store appearance and employee conduct.
In compliance with regulations, all marijuana and marijuana infused products sold through our stores are quality tested by independent labs to assure adherence to strict quality and OLCC regulations.
The Company is exploring opportunities to expand its operations beyond Oregon by replicating its Kaya Shack™ brand retail outlets through franchising in other states where medial and or recreational cannabis use is legal or expected to become legal in the near term, as well as in Canada, Greece and Israel, as part of KAYS International Expansion Plans. KAYS also is targeting opening corporate owned marijuana production and processing facilities to support the envisioned franchised outlets, and to both maintain quality control and offer customers a consistent customer experience while reducing costs of goods to franchisees.
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Kaya Shack™ Retail Outlets
All stores feature a check-out stand wrapped to feature the Company’s proprietary brand of pre-rolls, Kaya Buddies. The Buddies program is an exciting and popular pre-roll offering, featuring a wide selection (20-30 strains of pre-rolls) and featuring our special Kaya Saying in each Buddies tube. A glass display case showcases at least 25 strains of marijuana flower, which the stores serve to customers “deli style”, weighing straight from the jar to the customer’s take-out tube. An additional display case with a varied selection of oils, concentrates and topicals rounds out the cannabis product display.
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The stores also feature standing display cases with cannabis intended glassware under the Company’s brand Really Happy Glass, as well as a rack of proprietary t-shirt designs marketed under the Company brand Kaya Gear. The store also has a hospitality area that offers free water, coffee, tea and hot cocoa. As required by law, all products containing marijuana are either behind locked glass or behind the counter and out of customer reach.
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I. Kaya Shack™ , 1719 SE Hawthorne Blvd., Portland, Oregon.
Our first Kaya Shack™ OLCC licensed marijuana store (located in the heart of the trendy Hawthorne district in southeast Portland, the “Greenwich Village” of the West Coast) opened for business July 03, 2014. The store is located next door to a cell phone repair shop, and near to Devil’s Dill restaurant and No Fun pub. There are also a McMenamins restaurant, tattoo parlor, convenience store, hair/nail salon and a soccer sports bar. The area around the shop is mixed use (commercial and residential) and has a footprint of approximately 700 square feet and is the model for the Company’s small urban shops.
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II. Kaya Shack ™ Marijuana Superstore, South Salem, Oregon.
Our second Kaya Shack™ OLCC licensed marijuana store (located in South Salem, Oregon) opened for business on October 17, 2015. The store is located in a strip mall alongside a Caesar’s Pizza, Aaron’s furniture, a convenience store, a tanning salon, and a nail salon. The plaza also has a Subway, a sports bar and a laundromat. The area around the shop is primarily commercial with residential complexes under construction and has a footprint of approximately 2,100 square feet and serves as the model for the Company’s superstores featuring larger display areas and a soon-to-be-opened Pakalolo Juice Company infused fresh fruit smoothies stand.
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Kaya Shack™ Car Fleet and Home Delivery
The Company is licensed by the OLCC for home delivery for both of its retail licenses and has 2 Kaya Cars featuring the Company’s branding logos outfitted with safes and security equipment. We have begun to offer deliver within the geographic areas of Portland and Salem. The Company has developed the website www.kayadelivers.com to advance the growth of its delivery service and to offer pre-ordering for curbside pickup in light of the coronavirus pandemic to better serve our customers.
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Kaya Farms™
The Company has developed its own proprietary Kaya Farms™ strains of cannabis, which it has grown and produced at the various medical and recreational grows that the Company has operated and maintained over the past seven years in Oregon. Additionally, KAYS has produced a full line of cannabis concentrates and extracts which it has initially produced through third party manufacturers and marketed at the Kaya Shack Stores, along with the very popular Kaya Buddies line of strain specific cannabis cigarettes.
Please see the following pages for an overview of our current operations in Oregon.
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Kaya Farms™
Lebanon, Linn County, Oregon Marijuana Grow and Manufacturing Complex
In early 2015, KAYS commenced its own medical marijuana grow operations for the cultivation and harvesting of legal marijuana thereby becoming the first publicly traded U.S. company to own a majority interest in a vertically integrated legal marijuana enterprise in the United States. Since that time KAYS has operated various grow facilities to feed the Kaya Shack Supply Chain, and in August 2017, KAYS acquired its first property for a large scale facility- a 26-acre parcel in Lebanon, Linn County, Oregon, where we intend to develop an 85,000-square foot Kaya Farms™ facility.
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We filed for zoning and land use approval in early 2018, and after numerous regulatory challenges and delays, we finally received zoning and land use approval in early 2019 to build on the property. We have been notified by the OLCC that they are ready to proceed with KAYS Production (Grow) Licensing for the Linn County Facility pending completion of final construction.
Management believes that the development of the property will position the Company for future growth and expansion, including increased Marijuana Canopy production to the maximum extent allowed by law through use of both greenhouse and outdoor grows.
Under present laws the property can easily deliver 6-8,000 pounds of cannabis each year; if future regulations permit this capacity could easily be increased to over 100,000 pounds of cannabis per year.
When Federal Prohibition of marijuana ends and national and international cannabis trade can begin, we believe that Oregon is uniquely positioned to become America’s “pot basket” due to its superior climate and state history involving generations of Oregonian Cannabis Growers; ideal weather + extensive generational knowledge = superior, lower cost cannabis products for export.
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Kaya Buddie™ Strain Specific Cannabis Cigarettes
In 2016 the Company introduced a signature line of strain-specific connoisseur-grade, pre-rolled cannabis cigarettes branded as “Kaya Buddies™”. Kaya Buddies™ cannabis cigarettes have been very well received by medical patients and recreational users, with the Company selling over 100,000 Kaya Buddies™ since launching the brand in January 2016. The brand, marketed under the tagline “Buds with Benefits”, features over 50 different strains of connoisseur-grade, high quality cannabis and proprietary specialty blends. Many cannabis retailers produce prerolls, but none that we know of offer strain specific prerolls made from the buds of the flower.
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Kaya Brands International
After over five years of conducting “touch the plant” U.S. cannabis operations inside the strict regulatory confines of a public company, KAYS has formed Kaya Brands International, Inc. (“Kaya International” or “KBI”), to leverage its experience and expand into worldwide cannabis markets. KBI’s current operations and initiatives include Canada Greece, and Israel, with additional areas under consideration for Mexico, Uruguay and Zimbabwe.
Canada
Canadian Franchising: KAYS has endeavored to launch its franchise program and growth strategy in Canada. To this end, the Company has retained 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.
Garfinkle Biderman has since completed the necessary legal work and the Company is currently in negotiations with different potential development partners to launch franchised operations in Canada and hopes to establish up to 100 franchised locations there over the next five years.
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Greece
Kaya Kannabis is a joint venture project cultivation-for-export cannabis-farming and processing project of Athens based Greekkannabis PC (“GKC”) and KBI. GKC is an Athens, Greece based cannabis company with deep ties in the Greek business community and a strong presence in the academic and agricultural communities. The alliance is designed to combine the business acumen and extensive European network of GKC with the broad cannabis industry and cannabis cultivation experience of Kaya Holdings.
We have selected Greece as the center of our European market activity because of its amenable cannabis regulations, favorable climate, affordable, capable workforce, and the country’s position as a major pharmaceutical center in Europe. As an EU nation Greece opens up the entire European market (where legal) to KAYS flower and oils, and as permitted, the KAYS portfolio of brands.
On January 11, 2021, KAYS/KBI, through a majority owned subsidiary of KBI (Kaya Farms Greece or “KFG”) and Greekkannabis (“GKC”, an Athens based Cannabis Company) executed an agreement for KBI to acquire 50% of GKC. The first 25% was acquired in January, 2021 and the remaining 25% was acquired in July, 2021. GKC’s projects include two medical cannabis cultivation and processing projects in Greece- one in Epidaurus, Greece and the other in Thebes, Greece.
Kaya Kannabis- Epidaurus, Greece Project
Site of Epidaurus Land
GKC plans to cultivate and manufacture KAYS proprietary cannabis brands (CBD/THC) from the Epidaurus Project for distribution in the Greek, German and other EU markets as permitted by local regulations.
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Interior View- KAYS’ newest project with 50K square feet of already constructed buildings is designed to
fast-track sales of KAYS proprietary branded cannabis products to the EU.
The Epidaurus Project consists of 2 connected industrial buildings (already constructed, approximately 50,000 square feet in total under-air space) situated on 2.8 acres of land, with its own independent industrial electrical power center and ample water supply to service the needs of the facility. The Epidaurus Project will include 25,000 square feet of indoor cannabis cultivation, a 15,000 square foot EU-GMP extraction and processing facility, and a 10,000 square foot EU-GMP packing area. There is ample room for expansion with room to construct an additional 15,000 square feet on site. The joint venture is awaiting project financing and final license approval from Greek government authorities.
The Epidaurus project is smaller in scale than the Company’s 15-acre project in Thebes, Greece, allowing KAYS to fast-track cultivation and processing of its proprietary branded cannabis products for distribution in legal EU markets while awaiting greater legal cannabis demand to emerge prior to developing a large-scale capacity in Thebes.
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Kaya Kannabis- Thebes, Greece Project
Kaya Kannabis Medical Cannabis Production Facility in Thebes, Greece (Project Design Rendering)
The Thebes Project, as currently envisaged by management consists of up to 20,000 sq. meters of light deprivation greenhouses and 60,000 square feet of structure to be used for storage, laboratory, processing, manufacturing, logistics, and support/administrative space. The Thebes Project has already obtained the initial cannabis construction license approvals from Greek government authorities and is awaiting project financing.
Situated on 15 acres of land which GKC has contracted to purchase, the Thebes Project is much larger than the Epidaurus Project and allows the Company “Room to Grow” should the legal circumstances in a country or region suddenly permit (i.e., German legalization of recreational cannabis and the subsequent rapid rise in demand). Thebes, with large scale production and processing capabilities provides KAYS the operational flexibility needed to secure and maintain market position in a rapidly evolving market arena once legal cannabis demand warrants an increase in capacity.
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Israel
Kaya Shalvah Cannabis Production Facility (Project Design Rendering).
Israel has been a pioneer in cannabis R&D for several decades, and is often referred to as the “Silicon Valley” of the Global Medical Cannabis Industry. Israel currently has the world’s largest medical marijuana program and is the largest importer of cannabis.
There is legislation under Knesset review to permit adult-use cannabis, making the domestic Israeli market an attractive opportunity. Upon legalization of adult use cannabis in Israel, KAYS expects to sell flower and oils, and as permitted, the KAYS portfolio of brands in Israel, leveraging its adult use market experience and Kaya Shack™ retail shops (through a local franchisee) to serve the domestic Israeli market, and has begun to target distribution agreements with the Israeli Pharmaceutical Industry.
We have chosen to become active in the Israeli cannabis market because of this position as global center of cannabis science, where technologies are specifically developed to enhance cannabis cultivation processes and yields, and innovative consumer products are emerging that have potential interest for both the medical and recreational markets throughout the world.
On March 30, 2021 the Company confirmed that its Israeli subsidiary, Kaya Shalvah has been awarded its initial permit from the “YAKAR”, the Department for Medical Cannabis in the Israeli Ministry of Health, to develop an Israeli cannabis cultivation and processing facility. This initial permit grants Kaya Shalvah permission to proceed with its plans to develop commercial scale cannabis cultivation and processing in Israel.
Kaya Shalvah is currently focused on two separate paths of development to launch its Israel Operations- the first being through participation in the government sponsored Greenegev Cannabis Ecosystem in Yerucham, Israel and the second path being through potentially acquiring an interest in currently licensed medical cannabis production and processing facilities that are already operating in Israel.
Greenegev Cannabis Ecosystem, Yerucham, Israel
Under the leadership of its Mayor, Tal Ohana, Yerucham has embarked on a program to transform the small desert town into “Greenegev”, the first cannabinoid ecosystem in Israel. The plans call for cultivation, processing and research companies to concentrate their respective activities in Yerucham, attracting services that provide each resident company with core advantages by virtue of the cooperation and support the ecosystem community is uniquely positioned to provide. Yerucham has a Development Zone A designation from the Israeli government, making economic growth in the area a national priority and attaching a wide range of financial incentives to companies therein establishing operations.
Kaya Shalvah meets all the prescribed criteria and the licensing process is progressing, with the full support and valuable assistance of the Yerucham mayor’s office and the municipal staff. Kaya Shalvah is also benefitting from the support and guidance of Major General (Res.) Amram Mitzna, a former Yerucham mayor and the current chairman of the Yerucham Fund.
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Kaya Shalvah is currently awaiting for the Israeli Government to proceed with the land tender program (which has been delayed due to COVID 19 issues). Upon commencement with the bidding program, Kaya Shalvah will submit its land acquisition bid for 100 Dunams (approximately 25 acres) of land to the Israel Land Authority, which is tasked with processing the applications for the land bids that are part of the highly sought after Greenegez Canabis Center in Yerucham, Israel.
Pending receipt of a successful bid through this program, once Kaya Shalvah develops the site in accordance with all Israeli regulations, and meets all requisite standards, the final cultivation and processing licenses will be issued.
The Companyhas established a Board of Directors for Kaya Shalvah that includes:
Offer Lapidot (Brig. Gen. Res.)
A career fighter pilot in the Israel Air Force (1969-1996), Offer served two tours as a fighter squadron commander, and served as commander of the Flight Training School, commander of the Ramon Air Force base, and Head of Planning & Organization (at Air Force HQ). Offer holds the rank of Brigadier General. After his military service Offer spent a number of years in senior management positions at Israel’s leading retailer, as well as CEO of a high-tech start-up, only to miss flying and return to the skies as a pilot for El Al airlines. After his mandatory retirement from commercial flying, he joined the El Al executive team as the Director of Safety and Quality for El Al Airlines. Offer studied for his B.A. degree in Economics at Bar Ilan University, and holds an M.S. in Management from the Naval Post Graduate School in Monterey, California.
Ilan Horesh (Col. Res.)
Ilan was a career Israel Defense Forces officer, retiring in 1993 after 23 years at the rank of Colonel. During his career Ilan held numerous command positions with combat ground forces. His final assignment in the IDF was Commander of the School of Electronics and Computerization. After his military service Ilan embarked on a career as an executive and leader in the Israeli high tech sector, working with such companies as Pelephone, Bezek, Paz Oil and others. Ilan has served on the Boards of a number of Israeli companies, including Taldor Computer Systems, Ltd., Rakah Pharmaceutical Industry, Ltd., Ampa Investments, Ltd., and Retalix, Ltd.
Joseph Gayer, Adv.
Joseph “Yossi” Gayer is one of the founders of the international law firm ZAG-S&W. Yossi is a prominent expert in a number of legal fields, including commercial litigation and contracts law, representing clients both on domestic and international matters.
Yossi also represents Israel’s leading professional athletes in all fields of sports, including advising sports clubs, organizations, and sponsors in Israel and abroad. His litigation practice has yielded many legal precedents that have influenced the status of professional athletes, both in Israel and abroad, with respect to their rights vis-a-vis employers, sports authorities, and various statutory institutes. Yossi’s expertise includes insurance and property law.
Yossi lectures at the Radzyner School of Law at the Interdisciplinary Center (IDC) Herzliya.
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Gadi Katz
Gadi is the founder of Total Immersion Swimming Israel “TISI”, the Israel franchise of a multinational corporation in the sports and leisure market. Gadi has built TISI to a current 70 branches operating across Israel, serving thousands of clients annually. Since founding TISI in 2006, Gadi has become expert in online marketing and has development in-house a state of the art marketing and sales Business Intelligence system. Gadi is also an expert in business development, specializing in small and mid-sized companies. Prior to TISI, Gadi was the co-founder and CFO of the American-Israeli Crisis and Issue Management (AICIM) consulting firm. AICIM specialized in high-level advisory services to politicians (including candidates for Head of State) and business leaders globally. Early in his career Gadi practiced law at what is today Israel’s largest Law Office Meitar & Co., where he engaged in various business focused matters such as Venture Capital, IPOs, M&As, Joint Ventures, Spin Offs and Corporate Restructurings. Gadi holds a B.A. in Business Administration, Magna Cum Laude, LL.B and an MBA.
Kaya Shalvah’s supportive Board of Advisors includes:
Uzi Teshuva
Uzi is a second-generation Israeli farmer, active in agriculture since his teenage years. Since 1991 Uzi has served as the CEO of a farm distributes its agricultural products, grown using groundbreaking and innovative agricultural methods. Uzi became the active Chairman of TAP, an agricultural engineering and technology company specializing in the design, construction and management of agricultural farms in numerous countries worldwide.
Elon Kaplan, Ph.D.
Elon, a Ph.D. in Organizational Psychology is the Founder and CEO of Cytegic, a cutting-edge cyber-risk quantification solution predicated on the idea that enterprise risk is a combination of three key elements: technology, people, and business. Cytegic was recently sold to MasterCard. Elon brings to Kaya Shalvah the guidance of a serial entrepreneur, a scientist and a cyber-security expert. As a business leader, he excels at building exceptional teams and driving innovative breakthroughs. As an applied behavioral scientist, he is trained in specific modeling and statistical methodologies. Prior to Cytegic, Elon was Founder and CEO of Gilon Yaad, Ltd., an organizational business strategy consultancy, where he worked with many large companies, including PayPal, El-Al, Johnson & Johnson, Bank Leumi, Bank HaPoalim, Discount Bank, Maccabi Healthcare, and Comverse.
Rafi Cohen
Rafi is the Israeli Chief of Operations for Day Three Labs. Rafi has managed and overseen small and large-scale cannabis research & development projects since 2015, specializing in medicinal, cosmetic , wellness and animal health product development. For the past five years, Rafi has been dedicated exclusively to working within the emerging Israeli and global cannabis industry, recognizing the commercial and medicinal potential of cannabis. Rafi has distinctive experience in cannabis research projects, product development, clinical studies, investments, and joint ventures. Rafi began his career as a corporate attorney with Fischer Behar Chen Well Orion & Co., where he focused on M&A and strategic corporate development. Later he was a founding partner at Cohen, Light, Ziv and Associates. Rafi has a B.ed. from Herzog College of Education, an MA from Yeshiva University in New York City and an LL.B. from the Hebrew University in Jerusalem.
Josh Rubin
Josh is the founder and CEO of Day Three Labs (DTL). Headquartered in Denver, Colorado and with research operations in Israel, DTL seeks to disrupt the cannabis industry by introducing Israeli cannabis related innovations to the North American and global markets. Josh began his career in the cannabis industry in 2017 as a consultant analyzing trends in the cannabis market. Recognizing the opportunity to bridge the North American and Israeli cannabis sectors, he launched DTL. Josh was well suited to establish DTL, for in addition to his extensive network in Israel, he speaks Hebrew and has experience living and working in Israel. During a five year period in Israel Josh studied at the Hebrew University and the Interdisciplinary College in Herzliya (IDC), worked in the Knesset, and worked for the International Institute for Counter-Terrorism as a researcher. Josh even found time to volunteer as a medic for Magan David Adom. Josh has a Masters of Business Administration from Johns Hopkins University (Marketing), a Masters Degree from IDC in Government and a Bachelor of Arts Degree from Queens College (Psychology & Philosophy).
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.
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Our foreign operations will also be subject to comparable government regulation in Greece, Israel and any other various foreign jurisdictions in which KAYS intends to operate.
Competition
The legal marijuana sector is rapidly growing and the Company faces significant competition in the operation of retail outlets, MMDs and grow facilities. Many of these competitors will have far greater experience, more extensive industry contacts and greater financial resources than the Company. There can be no assurance that we can adequately compete to succeed in our business plan.
Employees
As of the date as of this Report, our Oregon operations have a total of 12-15 part-time store employees including budtenders, trimmers, growers, and 4 full-time employees, consisting of the Senior Vice President of Cannabis Operations, the Vice President of Marketing and Brand development, and 2 store managers. Additionally, we engage several consultants to assist with daily duties and business plan implementation and execution. Additional employees will be hired and other consultants engaged in the future as our business expands.
Potential Effects of the COVID-19 Pandemic on our Business
The adverse public health developments and economic effects of the COVID-19 pandemic in the United States and overseas could adversely affect the Company’s customers and suppliers as a result of quarantines, facility closures and logistics restrictions in connection with the outbreak. More broadly, the COVID-19 pandemic could potentially lead to an extended economic downturn, which would likely decrease spending, adversely affect demand for our products and services, slow our international expansion plans, harm our business, results of operations and financial condition. The Company cannot accurately predict the effect the COVID-19 pandemic will have on the Company.
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Item 1A. Risk Factors.
We have a limited operating history with our current business.
The Company was incorporated in 1993 and has engaged in a number of businesses as both a private and as a publicly held company, including the online sale of specialty foods, online marketing and website development.
KAYS’s legal marijuana business, which it has focused on since 2014, only commenced generating more than a limited level of revenues subsequent to the commencement of legal recreational marijuana sales in Oregon on October 1, 2015. Accordingly, our operations continue to be subject to all the problems, expenses, difficulties, complications and delays encountered in an early stage business. There can be no assurance that the Company will generate significant revenues or operate at a profit.
The Company will require additional financing to become commercially viable.
The Company’s current legal marijuana operations can be capital intensive.
During the years ended December 31, 2021 and 2020, we raised approximately $501,000 and $277,500 respectively, through a series of private debt and equity offerings to finance operations.
The Company had net income of $9,724,262 and a net loss of $12,098,821 for the years ended December 31, 2021 and 2020, respectively.
All of the net income for the years ended December 31, 2021 and December 31, 2020 were not actual operating gains but were a result of the derivative liabilities from the conversion of debt from the stabilization of our stock prices the reduces the volatility factors used in the derivative calculations.
At December 31, 2021, we had a total stockholders' deficit of $14,407,905 and a working capital deficiency of $7,458,348. There can be no assurance that the Company will become commercially viable without additional financing, the availability and terms of which are uncertain. If the Company cannot secure necessary capital when needed on commercially reasonable terms, its business, condition (financial and otherwise) and commercial viability may be harmed. Although management believes that it will be able to successfully execute its business plan, which includes third party financing and the raising of capital to meet the Company’s future liquidity needs, there can be no assurances in this regard. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
We currently rely on certain key individuals, and the loss of one of these key individuals could have an adverse effect on the Company.
Our success depends to a certain degree upon certain key members of our management and certain key consultants to the company. These individuals are a significant factor in our growth and success. The loss of the services of such members of management could have a material adverse effect on our Company.
The Company’s success will be dependent in part upon its ability to attract qualified personnel and consultants.
The Company’s success will be dependent in part upon its ability to attract qualified creative marketing, sales and development professionals. The inability to do so on favorable terms may harm the Company’s proposed business.
KAYS must effectively meet the challenges of managing expanding operations.
The Company’s business plan anticipates that operations will undergo expansion in 2020 and beyond. This expansion will require the Company manage a larger and more complex organization, which could place a significant strain on our managerial, operational and financial resources. Management may not succeed with these efforts. Failure to expand in an efficient manner could cause expenses to be greater than anticipated, revenues to grow more slowly than expected and could otherwise have an adverse effect on the business, financial condition and results of operations.
Marijuana remains illegal in the United States under federal law.
Notwithstanding its legalization for recreational and/or medical use by a growing number of states, the growing, transport, possession or selling of marijuana continues to be illegal under federal law. Although the Obama administration had made a policy decision to allow implementation of state laws legalizing recreational and/or medical marijuana use and not to federally prosecute anyone operating under state law, the continuance of that policy is not assured under the Trump administration and could change at any time, which might render our marijuana operations illegal and adversely affecting KAYS’s business, financial condition and results of operations.
The marketing and market acceptance of marijuana may not be as rapid as KAYS expects.
The market for legal marijuana is quickly evolving, and activity in the sector is expanding rapidly. Demand and market acceptance for legal marijuana are subject to uncertainty and risk, as changes in the price and possible adverse political efforts could influence and denigrate demand. KAYS cannot predict whether, or how fast, this market will grow or how long it can be sustained. If the market for legal marijuana develops more slowly than expected or becomes saturated with competitors, KAYS’s operating results could be adversely impacted.
KAYS’s marijuana activities are part of an emerging industry.
The Company intends to implement an aggressive plan of growth to enter the legal recreational and medical marijuana industry. The legal marijuana industry is new and emerging, and has yet to fully define competitive, operational, financial and other parameters for successful operations. By pursuing a growth strategy to enter a new and emerging industry, the Company’s operations may be adversely impacted as the industry’s competitive, operational, financial and other parameters take shape. Given the fluidity of the industry, the Company may make errors in implementing its business plan, thereby limiting some or all of its ability to perform in accordance with its expectations.
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Our business could be affected by changes in governmental regulation.
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 KAYS’s 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. Our foreign operations will also be subject to comparable government regulation in Greece, Israel and any other various foreign jurisdictions in which KAYS intends to operate. There can be no assurance that KAYS 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.
Our business will be subject to other operating risks which may adversely affect the Company’s financial condition.
Our planned operations will be subject to risks normally incidental to manufacturing operations which may result in work stoppages and/or damage to property. This may be caused by:
| · | breakdown of the equipment; | |
| · | labor disputes; |
| · | imposition of new government regulations; | |
| · | sabotage by operational personnel; | |
| · | cost overruns; and | |
| · | fire, flood, or other acts of God. |
We will likely face significant competition.
The legal marijuana industry is in its early stages and is attracting significant attention from both small and large entrants into the industry. KAYS expects to encounter significant competition as it implements its business strategy. The ability of KAYS to effectively compete could be hindered by a lack of funds, poor positioning, management error, and other factors. The inability to effectively compete could adversely affect our business, financial condition and results of operations.
Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act `Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial office and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company | |
| · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and/or directors of the Company; and | |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
We do not have a sufficient number of employees to segregate responsibilities and may be unable to afford increasing our staff or engaging outside consultants or professionals to overcome our lack of employees. During the course of our testing, we may identity other deficiencies that we may not be able to timely remediate. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes Oxley”). Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock, if a market ever develops, could drop significantly
The Jumpstart our Business Startups Act of 2012 (the “Jobs Act”) has reduced the information that the Company is required to disclose.
Under the Jobs Act, the information that the Company will be required to disclose has been reduced in a number of ways.
As a company that had gross revenues of less than $1 billion during the Company’s last fiscal year, the Company is an “emerging growth company,” as defined in the Jobs Act (an “ EGC ”). The Company will retain that status until the earliest of (a) the last day of the fiscal year which the Company has total annual gross revenues of $1,000,000,000 (as indexed for inflation in the manner set forth in the Jobs Act) or more; (b) the last day of the fiscal year of following the fifth anniversary of the date of the first sale of the common stock pursuant to an effective registration statement under the Securities Act; (c) the date on which the Company has, during the previous three year period, issued more than $1,000,000,000 in nonconvertible debt; or (d) the date on which the Company is deemed to be a “ large accelerated filer ,” as defined in Rule 12b-2 under the Exchange Act or any successor thereto. As an EGC, the Company is relieved from the following:
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· |
The Company is excluded from Section 404(b) of Sarbanes-Oxley, which otherwise would have required the Company’s auditors to attest to and report on the Company’s internal control over financial reporting. The Jobs Act also amended Section 103(a)(3) of Sarbanes-Oxley to provide that (i) any new rules that may be adopted by the PCAOB requiring mandatory audit firm rotation or changes to the auditor’s report to include auditor discussion and analysis (each of which is currently under consideration by the PCAOB) shall not apply to an audit of an EGC; and (ii) any other future rules adopted by the PCAOB will not apply to the Company’s audits unless the SEC determines otherwise. |
| · | The Jobs Act amended Section 7(a) of the Securities Act to provide that the Company need not present more than two years of audited financial statements in an initial public offering registration statement and in any other registration statement, need not present selected financial data pursuant to Item 301 of Regulation S-K for any period prior to the earliest audited period presented in connection with such initial public offering. In addition, the Company is not required to comply with any new or revised financial accounting standard until such date as a private company (i.e., a company that is not an “issuer” as defined by Section 2(a) of Sarbanes-Oxley) is required to comply with such new or revised accounting standard. Corresponding changes have been made to the Exchange Act, which relates to periodic reporting requirements, which would be applicable if the Company were required to comply with them. |
| · | As long as the Company is an EGC, the Company may comply with Item 402 of Regulation S-K, which requires extensive quantitative and qualitative disclosure regarding executive compensation, by disclosing the more limited information required of a “smaller reporting company .” | |||
| · | In the event that the Company registers the common stock under the Exchange Act, the Jobs Act will also exempt the Company from the following additional compensationrelated disclosure provisions that were imposed on U.S. public companies pursuant to the Dodd-Frank Act: | |||
| (i) | the advisory vote on executive compensation required by Section 14A(a) of the Exchange Act; | |||
| (ii) | the requirements of Section 14A(b) of the Exchange Act relating to stockholder advisory notes on “golden parachute” compensation; | |||
| (iii) | the requirements of Section 14(i) of the Exchange Act as to disclosure relating to the relationship between executive compensation and our financial performance; and | |||
| (iv) | the requirement of Section 953(b)(1) of the Dodd-Frank Act, which requires disclosureas to the relationship between the compensation of the Company’s chief executive officer and median employee pay. |
The costs of being a public company could result in us being unable to continue as a going concern.
As a public company, we are required to comply with numerous financial reporting and legal requirements, including those pertaining to audits and internal control. The costs of this compliance could be significant. If our revenues do not increase and/or we cannot satisfy many of these costs through the issuance of our shares, we may be unable to satisfy these costs in the normal course of business that would result in our being unable to continue as a going concern.
Management and the Board of Directors may be indemnified.
The Certificate of Incorporation and Bylaws of KAYS provide for indemnification of directors and officers at the expense of the respective corporation and limit their liability. This may result in a major cost to the corporation and hurt the interests of stockholders because corporate resources may be expended for the benefit of directors and officers. The Company has been advised that, in the opinion of the Securities and Exchange Commission, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
The market for the KAYS Shares is extremely limited and sporadic
KAYS’s common stock is quoted on the OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc. The market KAYS’s for common stock is limited and sporadic. Trading in stock quoted on the OTCQB is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of KAYS’s common stock for reasons unrelated to operating performance. Moreover, the trading of securities in the OTCQB is often more sporadic than the trading of securities listed on a quotation system like NASDAQ, or a stock exchange like the New York Stock Exchange.
KAYS’s common stock is a penny stock. Trading of KAYS’s common stock may be restricted by the penny stock regulations adopted by the Securities and Exchange Commission (the “SEC”) and FINRA’s sales practice requirements, which may limit a stockholder’s ability to buy and sell our common stock.
KAYS’s common stock is a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. KAYS’s common stock is covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in, and limit the marketability of, KAYS’s common stock.
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In addition to the penny stock rules promulgated by the SEC, FINRA (the Financial Industry Regulatory Authority) has adopted rules that require when recommending an investment to a customer, a broker- dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low -priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA’s requirements make it more difficult for broker-dealers to recommend that their customers buy KAYS’s common stock, which may limit investor ability to buy and sell KAYS’s common stock.
The market for penny stocks has experienced numerous frauds and abuses that could adversely impact KAYS’s common stock.
Company management believes that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
| · | control of the market for the security by one or a few broker-dealers that are often related to a promoter or issuer; |
| · | manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; | |
| · | boiler room practices involving high pressure sales tactics and unrealistic price projections by sales persons; | |
| · | excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and | |
| · | wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. |
The board of directors of KAYS has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stockholders and with the ability to adversely affect common stockholder voting power and rights upon liquidation.
KAYS’s Certificate of Incorporation allows us to issue shares of preferred stock without any vote or further action by our stockholders. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders of preferred stock the rights to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
The ability of our principal stockholders, including our CEO, to control our business may limit or eliminate minority stockholders’ ability to influence corporate affairs.
The principal stockholder of KAYS holds 1,533,131 shares of common stock and an unrelated third-party stockholder holds 20 shares of Series D Convertible Preferred Stock. Additionally, our CEO owns 752,011 shares of common stock and 20 shares of Series D Convertible Preferred Stock. Each Series D Preferred Share votes as 1% of the issued and outstanding common shares on an as converted, fully-diluted basis. There are presently 14,722,835 shares of common stock outstanding, so factoring in the conversion of these Series D Preferred Shares means that these three parties have approximately 49.31 % of votes on matters presented to stockholders
Accordingly, these three individuals are in a position to significantly influence membership of our board of directors as well as all other matters requiring stockholder approval. The interests of our principal stockholders may differ from the interests of other stockholders with respect to the issuance of shares, business transactions with or sales to other companies, selection of other officers and directors and other business decisions. The minority stockholders have no way of overriding decisions made by our principal stockholders. This level of control may also have an adverse impact on the market value of our shares because our principal stockholders may institute or undertake transactions, policies or programs that result in losses and/or may not take any steps to increase our visibility in the financial community and/or may sell sufficient numbers of shares to significantly decrease our price per share.
We do not expect to pay cash dividends in the foreseeable future.
KAYS has not paid cash dividends on its shares of common stock and does not intend to do so at any time in the foreseeable future. The future payment of dividends depends upon future earnings, capital requirements, financial requirements and other factors that the companies’ boards of directors will consider. Since they do not anticipate paying cash dividends on the common stock, return on investment, if any, will depend solely on an increase, if any, in the market value of the common stock.
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The conversion of the 40 shares of KAYS’ outstanding Series D Preferred stock by the CEO and an unrelated third-party shareholder would result in the issuance of 29,176,768 shares of KAYS’ common stock (assuming the effect of conversion of all outstanding debt described in this Annual Report into 72,941,919 shares of KAYS common stock at December 31, 2021). Accordingly, such market overhang could adversely impact the market price of the common stock.
KAYS has 20 shares of Series D Convertible Preferred Stock outstanding, all of which are held by our CEO and an unrelated third-party shareholder. These preferred shares can be converted into a total of 29,176,768 shares of KAYS common stock (assuming the effect of conversion of all outstanding debt described in this Annual Report into 72,941,919 shares of KAYS common stock at December 31, 2021.. This would result in further dilution if converted. Such market overhang could adversely impact the market price of KAYS’s common stock as a result of the dilution which would result if such securities were converted into shares of KAYS common stock.
Future sales of shares of KAYS common stock pursuant to Rule 144 under the Securities Act could adversely affect the market price of KAYS’s common stock.
KAYS has a substantial number of shares of common stock which were issued in transactions exempt from the registration requirements of the Securities Act and are now available for public sale pursuant to the Rule 144 under the Securities Act. Such sales could adversely affect the market price of KAYS’s common stock.
Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested director transactions, conflicts of interest and similar matters.
Sarbanes-Oxley as well as rule changes proposed and enacted by the SEC, the NYSE/AMEX and the NASDAQ Stock Market as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the NASDAQ Stock Market. Because we are not currently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with voluntary compliance, we have not yet adopted these measures.
We do not currently have independent audit or compensation committees. As a result, directors have the ability, among other things, to determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested- director transactions, conflicts of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations as a result thereof.
We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of Sarbanes-Oxley. The enactment of Sarbanes-Oxley has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.
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Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
Operating Leases
The Company has in Fort Lauderdale, Florida and 4 store leases in Oregon under arrangements classified as leases under ASC 842:
Effective June 1, 2019, the Company leased its current office space in Fort Lauderdale, Florida under a 2-year operating lease expiring May 31, 2021. In May 2021 the lease was extended for an additional year and now expires May 31, 2022. The rental payment is currently $1,905.07 per month. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease.
Effective May 15, 2014, the Company leased a 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 which have increased to a monthly payment of $2,950. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease.
Effective June 1, 2015, the Company leased a unit in Salem, Oregon under a 5-year operating lease expiring May 31, 2020. The lease has been extended and now expires May 31, 2025. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $3,584 which have increased to a net monthly payment of $5,061. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease.
Effective April 15, 2016, the Company leased a 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 Company is currently in process of negotiating a termination agreement with the landlord for this space as this store has been closed.
Effective April 15, 2016, the Company leased a 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 Company is currently in process of negotiating a termination agreement with the landlord for this landlord as this store has been closed
The Company has right-of-use assets of $255,770_and operating lease liabilities of $79,875_as of December 31, 2021. As noted above, the two (2) leases that the Company entered into effective April 15, 2016 are in the process of being terminated with the landlord subject to completion of negotiations. Accordingly, there is an impairment of the right-of-use-assets in the amount of $0.
Real Property
In August 2017, KAYS we acquired a 26 acre parcel in Lebanon, Linn County, Oregon, which we intend to develop as a Kaya Farms™ legal cannabis cultivation and manufacturing facility.
In 2018, we acquired the Eugene, Oregon based Sunstone Farms grow and manufacturing facility. Pursuant to the settlement with Burwick and Sunstone Marketing described below in Item 3. Legal Proceedings, On October 12, 2021, KAYS completed the sale of its Eugene, Oregon Cannabis Production and Processing Facility for gross proceeds of $1,325,000. Funds received from the sale were and are being used to repay certain debt and strengthen our balance sheet and for general working capital purposes, as well as provide the initial stage capital for some of the Company’s U.S. and global expansion activities, including its planned cultivation sites in Greece and Israel.
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Item 3. Legal Proceedings.
From time-to-time KAYS be party to various legal proceedings in the ordinary course of business. Pleases see paragraphs below for results of legal proceedings during 2020 and 2021as well as a pending licensing matter with the OLCC
A-1. Oregon Licensing Matters- Kaya Farms Greenhouse Grow and Production Facility, Lebanon, Oregon
On February 9, 2018 KAYS submitted a site plan review for the Company’s envisioned 101,000 square foot OLCC licensed Kaya Farms™ Marijuana Grow and Manufacturing Complex and an application for a conditional use permit for marijuana processing on the Company owned 26.50-acre property zoned Exclusive Farm Use (EFU) with the Linn County, Oregon Planning and Building Department.
On March 9, 2018 the Company was notified by the Linn County, Oregon Planning and Building Department (the “Department ”) that the application was deemed complete and received an official letter of completeness with respect to the application. The formal “ Letter of Completeness ,” sent March 9, 2018 by a Linn County Senior Planner, confirmed the eligibility of the Company’s 26-acre plot for the purposes of growing legal cannabis, as well as the eligibility of the property for a special purpose exemption for the Company’s proposed manufacturing operations.
On April 20, 2018 the Company was notified by the Department that the site plan review for the indoor and outdoor marijuana operation on the 26.50-acre property (which encompasses approximately 86,000 square feet of the Company’s 101,000 square feet of the Company’s submitted buildings) had been approved. However, the conditional use permit for marijuana processing (which encompasses approximately 15,000 square feet of the Company’s 101,000 square feet of the Company’s submitted buildings) had been denied, largely due to the scale and coverage of the proposed processing operation. Additionally, local residents requested a hearing to appeal the approval of the site plan based on concerns that a portion of the approved site plan that supports the 36,000 square feet of green houses for outdoor growing is not eligible for the Irrigation rights that the Company possesses for the Property.
On June 12, 2018 the Linn County Planning Commission held a hearing and adopted a motion to Deny the previously approved site plan, citing that the proposed site plan does not comply with the odor and waste management standards set forth in Section 940.400 of the Linn County Development Code.
On August 7, 2018 KAYS filed a Notice of Appeal with the State of Oregon Land Use Board of Appeals (LUBA).
On October 9, 2018, Larkins Vacura Kayser LLP (“LVKLAW”), Oregon Counsel, received a letter from Linn County’s Attorney notifying them that Linn County did not intend to file a response brief or appear at the State of Oregon Land Use Board of Appeals (“LUBA”) hearing, and shortly thereafter LUBA cancelled the LUBA Hearing.
On November 13, 2018 LUBA issued its FINAL OPINION AND ORDER (the “Order”). The Order reversed the County’s decision and ordered the County to approve the Company’s Land Use Application for the to-be-built 85,000-square foot Kaya Farms & Greenhouse Facility in Lebanon, Oregon.
On August 16th, 2019 the Land Use Board of Appeals issued an order granting attorney’s fees and costs in the amount of $25,158 be paid to KAYS and the funds were received in September, 2019. The proceeds were recorded net against costs incurred, noting no gain or loss.
On November 12, 2020 the Company received official notification from the OLCC that they were ready to move forward on the KAYS license application for their Kaya Farms Greenhouse Grow and Production facility located in Lebanon, Oregon, and on November 13, 2020 KAYS met with Linn County Zoning Officials and filed for and received a one year extension of their Zoning Permits so as to allow for scheduling of construction and OLCC licensing inspections after the facility is completed.
On September 24, 2021 the Company received final approvals from the Linn County Planning and Building Department for its Site Plan and the permits to build its structures and operate the Cannabis Production Facility (subject to obtaining final OLCC Licensing). KAYS is still working out logistics and final licensing but is targeting the facility to be functionally complete by mid-fall 2022.
The facility features approximately 85,000 square feet of buildings and greenhouses on approximately 26.5 acres in the heart of Oregon’s Agriculture Country in Linn County. Under present laws the property can easily deliver 6-8,000 pounds of cannabis each year; if future regulations permit this capacity could easily be increased to over 100,000 pounds of cannabis per year.
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A-2. Oregon Licensing Matters- MJAI Oregon 1, LLC Retail Cannabis License
On January 25, 2022 the OLCC served notice that they were seeking cancellation of one of the Company’s Marijuana Retailer Licenses in connection with two alleged violations-
a. From approximately February 4, 2019 to February 10, 2020, Licensee and/or Licensee's employees, agents, or representatives supplied adulterated (as defined in OAR 845-025-1015(2)(a)(c)(e)(f)(g)(h)) marijuana items when pre-rolled marijuana joints and useable marijuana pre-packs adulterated with broken glass were sold to consumers or transferred to other licensees for ultimate sale to consumers which is a violation of OAR 845-025-8540(3)(a); and
b. On multiple occasions from approximately February 4, 2019 to May 28, 2020, Licensee, including Managers and/or Licensee's employees, agents, or representatives, including Marijuana Holdings Americas, Inc. and a stockholder Consultant, intentionally asked or encouraged employees to conceal potential evidence of violations of OAR chapter 845 division 025, by telling them not to ever speak directly to the OLCC and/or by threatening employees with termination or lawsuits if they were to report issues of concern to the OLCC. This is a violation of OAR 845-025-8540(4)(a).
The Company had previously confirmed with the OLCC the appropriate procedures for destroying and disposing of glass contaminated product and subsequently documented the Company’s compliance with these procedures (including video and pictures of said disposal). Additionally, the Company had forwarded a Company of their Employment Agreement to the OLCC which requires Employees to confirm their understanding of how to address any Compliance Concerns that any employee may have (pursuant to guidelines written by the OLCC which stipulate that the employees are supposed to first address them with the Licensee).
Accordingly, the Company has filed an answer denying the allegations and requesting a hearing where it can address the matter and is optimistic that the matter will be withdrawn when the OLCC reviews the detailed answer that it is providing. The Company believes that the allegations are without merit and is confident that the issues will be resolved amicably upon review by Company’s Counsel along with the OLCC’s Counsel assigned to the matter.
In the interim the Company proceeded with the renewal process for their 2 OLCC Retailer Licenses. On April 5, 2022 the Company received notice that the first marijuana retailer license had been fully renewed and is awaiting confirmation of the status of the second marijuana retailer license renewal.
B. Settlement with Sunstone and Bruce Burwick regarding non-transferability of Sunstone Grow License
In the fourth quarter of 2018, KAYS concluded the purchase of the Eugene, Oregon based Sunstone Farms grow and manufacturing facility, which is licensed by the Oregon Liquor Control Commission (the “ OLCC ”) for both the production (growing) of medical and recreational marijuana flower and the processing of cannabis concentrates/extracts/edibles. 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.
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. At the OLCC’s Administrative Hearing Session held on October 15, 2020, the OLCC approved a settlement between the Oregon Liquor Control Commission (OLCC) and Sunstone Marketing Partners that required theirs license to either be sold to a third party (other than KAYS) or surrendered.
As the settlement between the OLCC and Sunstone, in July 2021, KAYS concluded a settlement with Sunstone Capital Partners, LLC, Sunstone Marketing Partners LLC and Bruce Burwick, the principal of Sunstone and a director of KAYS, regarding the failure to deliver to KAYS the Oregon Cannabis Production and Processing Licenses that were part of a warehouse purchase transaction in August 2018.
Pursuant to the terms of the settlement, Bruce Burwick surrendered to KAYS 1,006,671 shares of our common stock issued to him in connection with the transaction (800,003 shares which were issued for the facility purchase, 166,667 shares which were issued for $250,000 in cash and 40,001 shares which were issued as annual compensation for Burwick serving as a director of KAYS). The shares have been cancelled. In addition, the Company received clear title to the warehouse facility. As part of the settlement, Burwick received $160,000 from the net proceeds of the sale of the facility’s grow license to an unrelated third party, resigned from the Company’s board of directors and agreed to work as a non-exclusive consultant to the Company for the next four years for a yearly fee of $35,000.00
In October 2021, KAYS sold the Eugene, Oregon cannabis facility for gross proceeds of $1,325,000. The funds received from the sale have been and are being used to repay certain debt and strengthen its balance sheet, as well as providing the initial stage capital for some of the Company’s U.S. and global expansion activities, including its cultivation sites in Greece and Israel.
C. Service Provider and Vendor Litigation and Settlements
| · | On December 3, 2020 a suit was filed against Kaya Shack/MJAI Oregon 1 by a Groen Chocolate claiming non-payment of a Vendor Invoice in the amount of $7,196.50. A settlement was reached February 22, 2021 for the amount of $7,186.50 which has been satisfied. |
| · | On January 21, 2021 a suit was filed against Kaya Holdings, Inc. and MJAI Oregon 1, LLC dba Kaya Shack by Northwest Confection claiming non-payment of a Vendor Invoice in the amount of $28,363.52. A settlement was reached June 1, 2021 for the amount of $28,363.52 and requiring monthly installments of $2,000. The terms of the settlement are current and approximately $5,200 remains to be paid pursuant to the terms of the settlement. |
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PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
Market for Common Stock
Our common stock is currently traded on the OTCQB tier of the over-the-counter market operated by OTC Markets Group, Inc. under the symbol “KAYS.” Such market is extremely limited. We can provide no assurance that our shares will be continued to be traded on the OTCQB or another exchange, or if traded, that the current public market will be sustainable.
Holders of Our Common Stock
As of the date of this Annual Report, we had634 holders of record of our common stock. One of these holders is CEDE and Company which is the mechanism used for brokerage firms to hold securities in book entry form on behalf of their clients. As of the date of this Annual Report, CEDE held 8,360,806 shares of common stock for these stockholders. When the Company last received a report from CEDE it showed a log of 7,669 stockholders that consented to release their name to the Company for purposes of stockholder communications. Accordingly, we believe that KAYS has approximately 8,000-10,000 beneficial stockholders as of such date.
Securities Authorized for Issuance under Equity Compensation Plans
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future insurance under equity compensations plans (excluding securities reflected in column (a)) | |||
| Equity compensation plans approved by security holders | 0 shares (1) | n/a | 0 shares | |||
| Equity compensation plans not approved by security holders | 0 shares | n/a | 0 shares | |||
| (1) |
Recent Sales of Unregistered Securities (includes common stock, preferred stock and debt issuances/cancellations)
Convertible Debt Issuances
On January 22, 2021, the Company received $60,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The Note is Due in January of 2024.
On February 28, 2021, 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 $0.15 per share. The Note is Due in January of 2024.
On March 31, 2021, the Company received $50,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The Note is Due in January of 2024.
On May 4, 2021, the Company received $40,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The Note is Due in January of 2024.
On May 6, 2021, the Company received $66,000 from the issuance of convertible debt. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The Note is Due in January of 2024.
Common Stock Issuances- Private Placements
On January 22, 2021, the Company sold and issued 50,000 shares of common stock for gross proceeds of $15,000 (a price of $0.30 per share).
On March 5, 2021, total of 41,666 shares of common stock had been issued from stock payable for stock subscripted in 2020 (a price of $0.30 per share).
On March 8, 2021, the Company sold 66,666 shares of common stock for gross proceeds of $20,000 and issued on March 11,2021(a price of $0.30 per share). .
Common Stock Cancellations- Legal Settlement
As noted above in Item 3 B, Legal Proceedings, in March, 2021 the Company entered into a settlement with Bruce Burwick (a former Director of the Company) in regards to the non-transferability of the Cannabis Licenses associated the purchase of a warehouse property from Burwick in 2018 (the “Transaction”). As a result of the settlement , all 1,006,671 shares issued that had been issued to him in connection with the Transaction (the 773,336 shares for the facility purchase, the 166,667 shares issued for $250,000.00, and subsequent shares issued as annual compensation for Board Member Compensation) were returned to the Company. For more information please see Item 3-B, Legal Proceedings.
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Common Stock Issuances- Debt Conversion
On May 18, 2021 the Company received conversion notices totaling 579,390 shares, which were issued on June 7, 2021. This settled convertible debt and interest totaling $86,909 (conversion price of $0.15 per share).
On May 24, 2021 the Company received conversion notices totaling 727,375 shares, which were issued on June 7, 2021. This settled convertible debt and interest totaling $109,106 (conversion price of $0.15 per share).
There was no gain/loss on these conversions, as they were made within the terms of the note agreements.
Preferred Stock Issuances- Exchange Agreement
On December 27, 2021 the Company entered into an Exchange Agreement with Craig Frank and BMN Consultants, Inc. for the 50,000 Series C Preferred Shares of Kaya Holdings that they each held.
Pursuant to the terms and conditions of this Agreement, the Holders each agreed to (a) waive payment of approximately $338,000 of Accrued Compensation; (b) defer payment of the remaining balance of Accrued Compensation owed to each of them of approximately $250,000 until January 1, 2025 ; and (c) exchange their 50,000 Series C Shares for twenty (20) Series D Convertible Preferred Shares of Kaya Holdings Stock. Each Share of Series D Preferred Stock is convertible, at the option of the holder thereof, at any time and from time to time, into one percent (1%) of the Company’s Fully Diluted Capitalization as of the Conversion Date. The Company recorded a loss on impairment on assets of $87,151 in year ended December 31, 2020, related to discontinued lease right of use assets.
All the above securities were issued pursuant to the exemptions from registration under the Securities Act afforded by Section 4(a)(2) and Section 3(a)(9) thereof and Regulation D thereunder.
Item 6. [Reserved].
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Year ended December 31, 2021 compared to year ended December 31, 2020
| Revenues |
We had revenues of $889,899 for the year ended December 31, 2021, as compared to revenues of $1,029,543 for the year ended December 31, 2020.
Cost of Sales
We had a cost of sales of $279,333 on revenues of $889,899 for the year ended December 31, 2021 versus a cost of sales of $310,685 on revenues of $1,029,543 for the year ended December 31, 2020
Operating Expenses
General and administrative were $780,462 for the year ended December 31, 2021, as compared to $720,525 for the year ended December 31, 2020. Salaries and wages were $370,034 for the year ended December 31, 2021 as compared to $418,697 for the year ended December 31, 2020. The decrease in these expense categories from 2020 to 2021, reflects our shift of focus to overseas development of operations.
Professional fees were $ 889,912 for the year ended December 31, 2021, as compared to $1,327,607 for the year ended December 31, 2020, reflecting a decrease of $437,695. After giving effect to all of the foregoing, total operating expenses were $2,040,408 for the year ended December 31,2021, as compared to $2,553,980 for the year ended December 31, 2020. Accordingly, our operating loss was $1,429,842 for the year ended December 31, 2021, as compared to $1,835,122 for the year ended December 31, 2020. The Company recorded a loss on impairment on assets of $87,151 in year ended December 31, 2020, related to discontinued lease right of use assets.
Interest expense
Interest expense was $635,810 for the year ended December 31, 2021, as compared to $602,806 for the year ended December 31, 2020, reflecting an increase of additional debt incurred in 2021.
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Net Income (Loss)
After giving effect to an operating loss of $1,429,842 interest expense of $635,810, amortization of debt discount of $333,296, derivative liabilities expense of $566,080, gain on extinguishment of debt of $6,155, gain on disposal/impairment of fixed assets of $142,844, gain on settlement $44,294, change in derivative liabilities expense of $12,947,095 arising from the increase of our stock prices which increased the volatility factors used in the derivative calculations, we had net loss from non-controlling interest of $331,009 for the year ended December 31,2021. Additionally, the Company has accrued a tax liability of $782,107 related to potential taxes due under the IRS Code 280E.
This compares to a net loss from non-controlling interest of $198,401 for the year ended December 31, 2020, after giving effect to an operating loss of $1,835,122, interest expense of $602,806, amortization of debt discount of $241,755, derivative liabilities expense of $324,033 and loss on extinguishment of debt of $-0- offset by other income from a change in derivative liabilities income of $9,119,848 arising from the reduction of our stock prices which reduced the volatility factors used in the derivative calculations. The net income attributable to the Company for 2021 and net loss attributable to the Company for 2020 was $11,362,219 and $12,098,821, respectively.
Liquidity and Capital Resources
During 2021 our cash position increased by $522,817 to $565,979 and our negative working capital deficit was $7,458,348.
As of December 31, 2021, our working capital consisted of cash of $565,979, inventories of $51,484 and prepaid expenses of $13,967 as compared to cash of $43,162, inventories of $47,618 and prepaid expenses of $ 12,135 as of December 31, 2020.
Our current liabilities include accounts payable and accrued expenses of $918,148, accounts payable and accrued expenses-related parties of $141,990 accrued interest of $1,152,783 current portion of lease liability of $79,875, tax liability of $782,107 convertible notes payable- net of discount of $25,000, notes payable of $9,312 and derivative liabilities of $4,980,563 as compared to accrued expenses of $988,247, accounts payable and accrued expenses-related parties of $846,111 accrued interest of $616,329, current portion of lease liability of $149,896, convertible notes payable- net of discount of $363,243, notes payable of $9,312 and derivative liabilities of $17,328,904 as of December 31, 2020.
The following table sets forth the major sources and uses of cash for the years ended December 31, 2021 and 2020:
| 2021 | 2020 | |||||||
| Net cash provided by (used in) operating activities | $ | (1,043,482) | $ | (289,617 | ) | |||
| Net cash provided by (used in) investing activities | $ | 1,274,018 | $ | (31,688 | ) | |||
| Net cash provided by financing activities | $ | 296,000 | $ | 277,500 | ||||
| Net (decrease) increase in cash | $ | 526,536 | $ | (43,805 | ) | |||
Cash Used in Operating Activities
During 2021, we had cash of $1,043,482 used in operating activities, as compared to cash used in operations of $289,617 in 2020.
Cash Provided by (Used in) Investing Activities
During 2021, we had cash of $1,274,018 provided by investing activities, as compared to $31,688 used in investing activities in 2020. Expenditures in 2021 and 2020 consisted of property and equipment.
Cash Provided by Financing Activities
During 2021, $466,000 of convertible debt was issued, with repayment of $205,000 and we sold $35,000 of restricted stock, as compared to $265,000 of convertible debt and $12,500 in restricted stock in 2020.
Additional Capital
As of December 31, 2021 we had cash of $565,979 and a working capital deficiency of $7,458,348 as compared to cash of $43,805 and a working capital deficiency of $20,199,127 at December 31, 2020.
Management believes that it will require additional capital, in addition to anticipated revenues from operations to fund expansion of the Company’s operations and ultimately achieve profitability. The Company intends to seek such additional capital from further private offerings of equity and/or debt securities. However, we may not be successful in raising additional capital on commercially reasonable terms, if and when needed, in which case our business, financial condition, cash flows and results of operations may be materially and adversely affected.
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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:
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.
To confirm, all of our OLCC licensed cannabis retail sales operations are conducted and operated on a “cash and carry” basis- product(s) from our inventory accounts are sold to the customer(s) and the customer settles the account at time of receipt of product via cash payment at our retail store; the transaction is recorded at the time of sale in our point of sale software system. Revenue is only reported after product has been delivered to the customer and the customer has paid for the product with cash.
To date the only other revenue we have received is for ATM transactions and revenue from this activity is only reported after we receive payment via check from the ATM service provider company.
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.
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.
We are subject to certain tax risks and treatments that could negatively impact our results of operations
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly and the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E favorable to cannabis businesses.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $782,107 during the year ended December 31, 2021 compared to $0 during the year ended December 31, 2020. Although we have net operating losses that we believe are available to us to offset this entire tax liability, which arises under Section 280E of the Code because we are a cannabis company, as a conservative measure, we have accrued this liability.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the effect of recently issued standards that are not yet effective will not have a material effect on its consolidated financial position or results of operations upon adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). Under ASU No. 2016-2, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, the Company adopted this standard on January 1, 2019 using the modified retrospective method. The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients’, which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs; and all of the new standard’s available transition practical expedients. On adoption, the Company recognized a right of use asset of $638,593, operating lease liabilities of $638,593, based on the present value of the remaining minimum rental payments under current leasing standards for its existing operating lease. The new standard also provides practical expedients for a company’s ongoing accounting. The Company elected the short-term lease recognition exemption for its leases. For those leases with a lease term of 12 months or less, the Company will not recognize ROU assets or lease liabilities.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” to simply the accounting for certain instruments with down round features. The amendments require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Further, companies that provide earnings per share (“EPS”) data will adjust the basic EPS calculation for the effect of the feature when triggered and will also recognize the effect of the trigger within equity. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company adopted this new standard on January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.
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In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820).” This standard modifies disclosure requirements related to fair value measurement and is effective for all entities for fiscal years, and interim periods within those There are no other recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on its financial position, results of operations, or cash flows. fiscal years, beginning after December 15, 2019. Early adoption is permitted. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. The standard also allows for early adoption of any removed or modified disclosures upon issuance while delaying adoption of the additional disclosures until their effective date. The Company is currently assessing the impact of adopting this standard on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”. This standard simplifies the accounting for income taxes. This standard is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted for all entities, The Company is currently assessing the impact of adopting this standard on its consolidated 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 that is material to investors.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
See the Index of Consolidated Financial Statements on page F-1 below.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Disclosure controls and procedures
Under the direction of our Chairman and President, who is our principal, executive, financial and accounting officer, we evaluated our disclosure controls and procedures as of December 31, 2021. Our Chairman and President, who is our principal, executive, financial and accounting officer, concluded that our disclosure controls and procedures were not effective as of December 31, 2021.
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 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 Chairman and President, who is 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 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman and President, who is 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. Based on the foregoing, our Chairman and President 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.
Management’s Report on Internal Control Over Financial Reporting
Our management of is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our Chairman and President, who is our principal, executive, financial and accounting officer and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
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| ▪ | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; | |
| ▪ | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and | |
| ▪ | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s Chairman and President, who is our principal, executive, financial and accounting officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). The COSO framework is based upon five integrated components of control: control environment, risk assessment, control activities, information and communications and ongoing monitoring.
Based on the assessment performed, the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, has concluded that the Company’s internal control over financial reporting, as of December 31, 2021, is not effective to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of its financial statements in accordance with generally accepted accounting principles. Further, the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, has identified material weaknesses in internal control over financial reporting as of December 31, 2021.
Based on an evaluation, the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, has concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of December 31, 2021 (the “Evaluation Date”), to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms; and (ii) accumulated and communicated to the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure. Each of the following is deemed a material weakness in our internal control over financial reporting:
| ▪ | We do not have an audit committee. While we are not currently obligated to have an audit committee, including a member who is an “audit committee financial expert,” as defined in Item 407 of Regulation S-K, under applicable regulations or listing standards; however, it is management’s view that such a committee is an important internal control over financial reporting, the lack of which may result in ineffective oversight in the establishment and monitoring of internal controls and procedures. | |
| ▪ | We did not maintain proper segregation of duties for the preparation of our financial statements. We currently have only one officer overseeing all transactions. This has resulted in several deficiencies, including the lack of control over preparation of financial statements and proper application of accounting policies | |
| ▪ | Lack of controls over related party transactions: As of December 31, 2021, the Company did not establish a formal written policy for the approval, identification and authorization of related party transactions. |
The Company’s Chairman and President, who is our principal, executive, financial and accounting officer, believes that the material weaknesses set forth in the two items above did not have an effect on our financial results. However, the Company’s Chairman and President, who is our principal, executive, financial and accounting officer, believes that the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and financial procedures, which could result in a material misstatement in our consolidated financial statements in future periods.
Changes in Internal Control over Financial Reporting
There was no change in our internal controls or in other factors that could affect these controls during the fourth quarter of the year ended December 31, 2021 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B. Other Information
| None |
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
Our directors and executive officers and their respective ages and titles are as follows:
| Name | Age | Position(s) and Office(s) Held |
| Craig Frank | 60 | Chairman of the Board, President, Chief Executive Officer, Acting Chief Financial Officer, Director |
| Carrie Schwarz | 61 | Director |
| Mitchell Chupak | 67 | Director |
Set forth below is a brief description of the background and business experience of our directors and executive officers.
Craig Frank became Chairman of the Board, President, Chief Executive Officer and a Director of the Company in January 2010. He assumed the appointed position of acting Chief Financial Officer in 2012. For the past 15 years, Mr. Frank has served as Chairman and CEO of Tudog International Consulting, a Florida-based company with business advisory, business development, market research, training, and merchant banking divisions. During his tenure at Tudog, Mr. Frank has worked with more than 200 companies from 19 countries. In addition, in such capacity, he developed the business plan for a biofuels company based in Central America, and is the co-founder of the Company’s predecessor, which we acquired in January 2010. He remains Tudog’s Chairman. Mr. Frank is a widely published author with articles on business matters featured in magazines and newsletters internationally, including publications of the Guatemala America Chamber of Commerce, the Israel Export Institute, the Romania Chamber of Commerce, and the World Association of Small and Medium Sized Enterprises. He is also an in-demand speaker at international conferences, including the Florida Sterling Council, the International Project Management Association, The Central American Center for Entrepreneurship, the Israel Center for Entrepreneurial Studies, and the Pino Center for Entrepreneurship at Florida International University. The Company believes that Mr. Frank’s consulting and entrepreneurial experience brings significant value to our management team.
Carrie Schwarz, who became a director in January 2010, has served as the Managing Partner of Athena Assets Management, a New York based hedge fund specializing in investments of special situation publicly traded securities since 2002. Ms. Schwarz has also been a Portfolio Manager at Metropolitan Capital, a New York based hedge fund. From 1999 to 2001 Ms. Schwarz was an executive at Bank of America Securities, where she built and managed a proprietary Risk Arbitrage Department. From 1991 to 1999 she founded and managed Athena Investment Partners, L.P., a hedge fund that focused on special situations. Prior thereto, she was with American Porters, L.P., a hedge fund that focused on risk arbitrage, which she joined as a junior analyst in 1995 and ultimately rose to become Head of Research and a partner. Ms. Schwarz serves on the board of directors of the American Friends of the Weizmann Institute of Science. We believe that her financial industry experience makes her a valuable member of the board of directors.
Mitchell Chupak became a director in December, 2020 to fill a vacancy created by the resignation of Jordi Arimany. Mitchell Chupak has resided in Israel since 1972, where since 1997, he has been the Director of Development for the Jaffa Institute, the largest not for profit social service agency serving southern portions of Tel-Aviv-Jaffa, Israel and its suburbs. During his over 25 years at the Jaffa Institute, Mr. Chupak has grown the organization extensively and is responsible for development of major social services, educational and community projects for which he secured millions of dollars in funding. He developed funding sources worldwide and enlisted the aid of major donors in the United States, Canada, Europe, Australia, and South America.
In 2005, Mr. Chupak created the Israel Fundraisers Forum to assist other non-profit organizations better understand methods of fundraising. The forum, with which he has been associated since its founding, promotes professionalism in fundraising and development and assists both organizations and individual fundraisers to improve methods of the profession.
We believe that Mr. Chupak’s spectrum of experience in both management and funding, will add value our board of directors.
Terms of Office
Our directors are appointed for a one-year term to hold office until the next annual meeting of our stockholders and until a successor is appointed and qualified, or until their removal, resignation, or death. Executive officers serve at the pleasure of the board of directors.
Board Committees
Two of our three directors are “independent” within the scope of the rules adopted by the NASDAQ Stock Market and the SEC: Ms. Schwarz and Mr. Chupak. However, our board of directors does not currently have an audit committee, a compensation committee, or a corporate governance committee. We plan to establish such committees in the near future.
Board of Directors Role in Risk Oversight
Members of the board of directors have periodic meetings with management and the Company’s independent auditors to perform risk oversight with respect to the Company’s internal control processes. Our board is currently comprised of a majority of independent directors. The Company believes that the board’s role in risk oversight does not materially affect the leadership structure of the Company.
Code of Ethics
We adopted a Code of Business Conduct and Ethics (the “Ethics Code”) on February 28, 2013 that includes provisions ranging from conflicts of interest to compliance with all applicable laws and regulations. All officers, directors and employees are bound by the Ethics Code, violations of which may be reported to any independent member of the board of directors.
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Item 11. Executive Compensation
Summary Compensation Table
The table below summarizes all compensation awarded to, earned by, or paid to our Chief Executive Officer and acting Chief Financial Officer, who is our sole executive officer, for 2021 and 2020.
SUMMARY COMPENSATION TABLE
| Name and principal position | Year | Salary ($) | Bonus ($) |
Stock Awards (#) |
Option Awards (#) |
Non-Equity Incentive Plan Compensation($) |
Nonqualified Deferred Compensation Earnings ($) |
All Other Compensation ($) |
Total ($) | ||||||||||||||||||
Craig Frank CEO/Acting CFO
|
2021 | $300,000 | -0-
|
$300,000 (1) |
|||||||||||||||||||||||
| 2020 | $300,000 | 3,000,000 (3) |
$300,000 (2) |
| (1) | Mr. Frank’s compensation for 2021 was a total of $186,000 paid in cash and $114,000 in accruals. |
| (2) | Mr. Frank’s compensation for 2020 was a total of $93,000 paid in cash and $207,000 in accruals. |
| (3) | Represents “ restricted ” shares of our common stock valued at $0.10 per share. |
Mr. Frank's compensation was paid to Tudog International Consulting, Inc., of which Mr. Frank is the Chairman and a principal.
Employment and Consulting Agreements
The Company is currently not a party to any employment agreement with its executive officers. The Company has consulting agreements with Tudog International Consulting, of which firm Mr. Frank is Chairman and a Principal, for the services of Mr. Frank as CEO and acting CFO.
Outstanding Equity Awards at Fiscal Year-End
| None. |
Compensation of Directors
No Compensation was paid to directors in 2021 but the Company intends to resume director stock stock compensation in 2022.
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Narrative Disclosure to the Director Compensation Table
Our non-employee directors are compensated with common stock. All such directors normally receive 100,000 “restricted” shares of common stock annually for their service, but no shares were issued in 2021.
2011 Incentive Stock Plan
Our 2011 Incentive Stock Plan, as amended (the “Plan”) provides for equity incentives to be granted to our employees, executive officers or directors or to key advisers or consultants. Equity incentives may be in the form of stock options with an exercise price not less than the fair market value of the underlying shares as determined pursuant to the Plan, restricted stock awards, other stock- based awards, or any combination of the foregoing. The Plan is administered by the board of directors.
As of December 31, 2020 awards covering 2,606,333 shares have been issued under the Plan and 60,333 shares of common stock were available for issuance under the Plan (Note- these figures are expressed in 15:1 post stock split numbers).
The Plan has now expired in accordance with its terms and the Company intends to adopt a new incentive stock plan in 2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth the beneficial ownership of our common stock by each director and executive officer, by all directors and executive officers as a group and by each other person known by us to beneficially own 5% or more of our common stock as of the date of this Annual Report. The address of each such person is c/o the Company 915 Middle River Drive, Suite 316, Fort Lauderdale, FL, 33304.
| Name and Address of Beneficial Owner and Directors and Executive officers: | Number of Shares of Common Stock | Number of Shares of Preferred Stock | Percentage of shares (4) | |||||||||
| Craig Frank (1)(2) | 753,345 | 20 | 23.06 | |||||||||
| Carrie Schwarz | 60,002 | 0 | * | |||||||||
| Mitchel Chupak | 50,601 | 0 | * | |||||||||
| All directors and | ||||||||||||
| executive officers, | ||||||||||||
| as a group (three | ||||||||||||
| persons) (1)(2) | 3,345,519 | 20 | 23.52 | % | ||||||||
| Other 5% or greater | ||||||||||||
| stockholders: | ||||||||||||
| Ilan Sarid | 1,533,131 | 6.24 | % | |||||||||
| RLH Financial Partners, Inc (3) | 20 | 20 | % | |||||||||
* Less than 1%
| 1. | includes shares beneficially owned by Tudog International Consulting and Drora Frank. |
| 2. | Includes 4,907,611 shares of common stock issuable upon conversion of 20 shares of our Series D Convertible Preferred Stock held by Mr. Frank, which shares vote on an “as converted” basis. |
| 3. | Includes 4,907,611 shares of our common stock issuable upon conversion of 20 shares of our Series D Convertible Preferred Stock held by RLH Financial Partners, Inc. which shares vote on an “as converted” basis. |
| 4. |
All values for “Percentage of Shares” owned were calculated by adding 9,815,223 (the number of shares of common stock currently issuable on the conversion of the outstanding 20 Series D Convertible shares) to 14,722,835 (the number of currently issued and outstanding shares of common stock). The persons named above have full voting and investment power with respect to the shares indicated. Under the rules of the SEC, a person (or group of persons) is deemed to be a “beneficial owner” of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security, which that person has the right to acquire within 60 days, such as options or warrants to purchase our common stock. |
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Securities Authorized for Issuance under Equity Compensation Plans
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future insurance under equity compensations plans (excluding securities reflected in column (a)) | |||
| Equity compensation plans approved by security holders | 0 shares (1) | n/a | (1) | |||
| Equity compensation plans not approved by security holders | 0 shares | n/a | 0 shares | |||
(1) Our 2011 Incentive Stock Plan has now expired in accordance with its terms and the Company intends to adopt a new incentive stock plan in 2022..
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Related Party Transactions
stockholderstockholder
Settlement with Sunstone, Burwick regarding non-transferability of Sunstone Grow License
In the fourth quarter of 2018, KAYS concluded the purchase of the Eugene, Oregon based Sunstone Farms grow and manufacturing facility, which is licensed by the Oregon Liquor Control Commission (the “ OLCC ”) for both the production (growing) of medical and recreational marijuana flower and the processing of cannabis concentrates/extracts/edibles. 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.
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. At the OLCC’s Administrative Hearing Session held on October 15, 2020, the OLCC approved a settlement between the Oregon Liquor Control Commission (OLCC) and Sunstone Marketing Partners that required theirs license to either be sold to a third party (other than KAYS) or surrendered.
As the settlement between the OLCC and Sunstone, in July 2021, KAYS concluded a settlement with Sunstone Capital Partners, LLC, Sunstone Marketing Partners LLC and Bruce Burwick, the principal of Sunstone and a director of KaAYS, regarding the failure to deliver to KAYS the Oregon Cannabis Production and Processing Licenses that were part of a warehouse purchase transaction in August 2018.
Pursuant to the terms of the settlement, Bruce Burwick surrendered to KAYS 1,006,671 shares of our common stock issued to him in connection with the transaction (800,003 shares which were issued for the facility purchase, 166,667 shares which were issued for $250,000 in cash and 40,001 shares which were issued as annual compensation for Burwick serving as a director of KAYS). The shares have been cancelled. In addition, the Company received clear title to the warehouse facility. As part of the settlement, Burwick received $160,000 from the net proceeds of the sale of the facility’s grow license to an unrelated third party, resigned from the Company’s board of directors and agreed to work as a non-exclusive consultant to the Company for the next four years for a yearly fee of $35,000.00
In October 2021, KAYS sold the Eugene, Oregon cannabis facility for gross proceeds of $1,325,000. The funds received from the sale have been and are being used to repay certain debt and strengthen its balance sheet, as well as providing the initial stage capital for some of the Company’s U.S. and global expansion activities, including its cultivation sites in Greece and Israel.
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Exchange Agreement for Cancellation of Series C Preferred Shares and Issuance of Series D Preferred Shares
On December 27, 2021 the Company entered into an Exchange Agreement with Craig Frank and BMN Consultants, Inc. for the 50,000 Series C Preferred Shares of Kaya Holdings that they each held (BMN’s shares were acquired from Mr. Frank and Ilan Sarid pursuant to stock options that they each extended to BMN in 2010).
Pursuant to the terms and conditions of this Agreement, the Holders each agreed to (a) waive payment of approximately $338,000 of Accrued Compensation; (b) defer payment of the remaining balance of Accrued Compensation owed to each of them of approximately $250,000 until January 1, 2025 ; and (c) exchange their 50,000 Series C Shares for twenty (20) Series D Convertible Preferred Shares of Kaya Holdings Stock. Each Share of Series D Preferred Stock is convertible, at the option of the holder thereof, at any time and from time to time, into one percent (1%) of the Company’s Fully Diluted Capitalization as of the Conversion Date.
Pursuant to the terms of the Exchange Agreement, payment of approximately $338,000 of Accrued Compensation was waived by each of Craig Frank and BMN Consultants ; (b) payment of the remaining balance of Accrued Compensation owed to each of them of approximately $250,000 was deferred until January 1, 2025 ; and (c) Craig Frank and BMN Consultants each exchanged their 50,000 Series C Shares for twenty (20) Series D Convertible Preferred Shares of Kaya Holdings Stock. Each Share of Series D Preferred Stock.
Mr. Frank’s Series D shares were issued to Mr. Frank and BMN’s Series D shares were issued to RLH Financial Services pursuant to a private sale between BMN and RLH whereby RLH acquired the shares in exchange for a promissory note in the amount of $1,000,000.
Review, Approval and Ratification of Related Party Transactions
Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of transactions with our executive officers, directors and significant stockholders. However, all such matters are approved by our independent directors as well as the board of directors as a whole prior to implementation.
Item 14. Principal Accountant Fees and Services.
Audit Fees
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The following is a summary of the fees billed to us for professional services (a) for the years ended December 31, 2021 and 2020 by M&K CPAS, PLLC our independent public registered accounting firm .
| 2021 | 2020 | |||||||
| Audit fees | $ | 35,500 | $ | 35,500 | ||||
| Audit-related fees | -0- | -0- | ||||||
| Tax fees | -0- | -0- | ||||||
| All other fees | -0- | -0- | ||||||
| 35,500 | $ | 35,500 | ||||||
Audit fees consist of billings for the audit of the Company’s consolidated financial statements included in our Annual Reports on Form 10-K and reviews of the consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q.
The Company does not have an Audit Committee. It is the Company’s policy to have its Chief Executive Officer preapprove all audit and permissible non-audit services provided by the independent public accountants, subject to approval by the oard of directors.
These services may include audit, audit-related, tax and other services. Pre-approval is generally for up to one year, is detailed as to the particular service or category of services and is generally subject to a specific budget. Unless there are significant variations from the pre-approved services and fees, the independent public accountants and management generally are not required to formally report to the Board of Directors regarding actual services and related fees.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
| a) | The following documents are filed as part of this Annual Report: | |
| (1) | Financial Statements – The following Consolidated Financial Statements of the Company are contained in Item 8 of this Annual Report: | |
| • | Reports of Independent Registered Public Accounting Firms | |
| • | Consolidated Balance Sheets at December 31, 2021 and 2020 | |
| • | Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 | |
| • | Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 20201and 2020 | |
| • | Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 | |
| • | Notes to the Consolidated Financial Statements. | |
| (2) | Financial Statement Schedules were omitted, as they are not required or are not applicable, or the required information is included in the Consolidated Financial Statements. | |
| (3) | Exhibits – The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b32 under the Exchange Act: |
| Exhibit No. | Description of Exhibit | ||
| 3.1 | Certificate of Incorporation, as amended (1)(2) | ||
| 3.2 | Bylaws, as amended(1) | ||
| 10.1 | |||
| 10.2 | 2011 Incentive Stock Plan, as amended (1) + | ||
| 10.6 | Form of 8% Convertible Promissory Note (1) | ||
| 10.5 | Consulting Agreement between Registrant and Tudog International Consulting, Inc . (1) + | ||
| 10.6 | Office Lease for premises located at 305 South Andrews Avenue, Suite 209, Fort Lauderdale, FL 33301 (3) | ||
| 10.9 | Letter Agreement effective December 1, 2011 between Registrant and Ilan Sarid(1) | ||
| 10.10 | Amendment to Consulting Agreement between Registrant and Tudog International Consulting, Inc. (1) + | ||
| 10.11 | Amendment to Consulting Agreement between Registration and The Tudog Group (3) + | ||
| 21.1 | Subsidiaries of Registrant (4) | ||
| 23.1 | Consent of M&K CPAS LLC(5) | ||
| 31.1 | Section 302 Certification(5) | ||
| 32.1 | Section 906 Certification(5) |
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| (1) | Filed as an Exhibit to the Company’s Registration Statement on Form S-1, as amended (File No. 333-177532) and incorporated herein by reference. |
| (2) | Amendments to the Certificate of Incorporation are filed as Exhibits to the Company’s Current Reports on Form 8-K dated April 23, 2015 and March 22, 2017 and are incorporated herein by reference. |
| (3) | Filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by reference. |
| (4) | Filed as an Exhibit to the Company’s annual Report on Form 10-K for the year ended December 31, 2017 and Incorporated herein by reference. |
| (5) | Filed herewith. |
+ Management compensation arrangement.
Item 16. Form 10-K Summary.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 18, 2022
| KAYA HOLDINGS, INC. | ||
| By: | /s/ Craig Frank | |
| Craig Frank | ||
| Chairman of the Board, President, Chief Executive Officer, Acting Chief Financial Officer (Principal Executive, Financial and Accounting Officer | ||
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, this Annual Report on Form 10K has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
| Signature | Title | Date |
| / s/ Craig Frank | Chairman of the Board, President, Chief Executive Officer, | |
| Craig Frank | Acting Chief Financial Officer and Director (Principal Executive, Financial and Accounting Officer) | April 18, 2022 |
| /s/ Carrie Schwarz | Director | April 18, 2022 |
| Carrie Schwarz | ||
| /s/ Mitchel Chupak | Director | April 18, 2022 |
| Mitchel Chupak |
| 47 |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |
| Reports of Independent Registered Public Accounting Firm | F-1 |
| Consolidated Balance Sheets at December 31, 2021 and 2020 | F-2 |
| Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 | F-3 |
| Consolidated Statements of Stockholders' Deficit Years Ended December 31, 2021 and 2020 | F-4 |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 | F-5 |
| Notes to Consolidated Financial Statements | F-6 |
| 48 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of Kaya Holdings, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Kaya Holdings, Inc. (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered net losses from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Derivative Liabilities
As discussed in Note 9, the Company borrows funds through the use of convertible notes payable that contain a conversion price that may be fixed or fluctuates with the stock price.
Auditing management’s estimates of the fair value of the derivative liability involves significant judgements and estimates given the embedded conversion features of the notes.
To evaluate the appropriateness of the fluctuation of the conversion price, the embedded conversion feature requires bifurcation from the host contract and is recorded as a liability subject to market adjustments as of each reporting period. Significant judgment is exercised by the Company in determining derivative liability values for these convertible note agreements, including the use of a specialist engaged by management.
We evaluated management’s conclusions regarding their derivative liability and reviewed support for the significant inputs used in the valuation model, as well as assessing the model for reasonableness.
M&K CPAS, PLLC
We have served as the Company’s auditor since 2018.
Houston, TX
April 18, 2022
| F-1 |
Kaya Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Decmeber 31, 2021 and December 31, 2020
| ASSETS | ||||||||
| (Audited) | (Audited) | |||||||
| December 31, 2021 | December 31, 2020 | |||||||
| CURRENT ASSETS: | ||||||||
| Cash and equivalents | $ | 565,979 | $ | 43,162 | ||||
| Inventory | 51,484 | 47,618 | ||||||
| Prepaid expenses | 13,967 | 12,135 | ||||||
| Total current assets | 631,430 | 102,915 | ||||||
| NON-CURRENT ASSETS: | ||||||||
| Right-of-use asset - operating lease | 255,770 | 322,760 | ||||||
| Property and equipment, net of accumulated depreciation of $364,331 and $547,469 as of December 31, 2021 and December 31, 2020, respectively | 574,733 | 1,824,946 | ||||||
| Investment in subsidaries | 25,021 | 31,688 | ||||||
| Other Assets | 82,159 | 16,507 | ||||||
| Total non-current assets | 937,683 | 2,195,901 | ||||||
| Total assets | $ | 1,569,113 | $ | 2,298,816 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expense | $ | 918,148 | $ | 988,247 | ||||
| Accounts payable and accrued expense-related parties | 141,990 | 846,111 | ||||||
| Accrued interest | 1,152,783 | 616,329 | ||||||
| Right-of-use liability - operating lease | 79,875 | 149,896 | ||||||
| Taxable Payable | 782,107 | |||||||
| Convertible notes payable, net of discount of $0 and $79 | 25,000 | 363,243 | ||||||
| Notes payable | 9,312 | 9,312 | ||||||
| Derivative liabilities | 4,980,563 | 17,328,904 | ||||||
| Total current liabilities | 8,089,778 | 20,302,042 | ||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Notes payable-related party | 250,000 | 250,000 | ||||||
| Convertible notes payable, net of discount of $477,634 and $494,851 | 6,934,518 | 6,399,574 | ||||||
| Accounts payable and accrued expensed related parties | 500,000 | |||||||
| Right-of-use liabiliy - operating lease | 202,722 | 273,289 | ||||||
| Total non-current liabilities | 7,887,240 | 6,922,863 | ||||||
| Total liabilities | 15,977,018 | 27,224,905 | ||||||
| STOCKHOLDERS' DEFICIT: | ||||||||
| Convertible preferred stock, Series C, par value $; shares authorized; and issued and outstanding at December 31, 2021 and December 31, 2020, respectively | 100 | |||||||
| Common convertible preferred stock, Series D, par value $; shares authorized; and issued and outstanding at December 31, 2021 and December 31, 2020, respectively | ||||||||
| Common stock , par value $; shares authorized; shares issued as of December 31, 2021 and shares outstanding as of December 31, 2020, respectively | 14,723 | 14,265 | ||||||
| Subscriptions payable | 163,630 | 163,880 | ||||||
| Additional paid in capital | 21,735,185 | 20,639,456 | ||||||
| Accumulated deficit | (34,495,346 | ) | (44,219,608 | ) | ||||
| Accumulated other comprehensive income | (3,719 | ) | ||||||
| Total stockholders' deficit attributable to parent company | (12,585,527 | ) | (23,401,907 | ) | ||||
| Non-controlling interest | (1,822,378 | ) | (1,524,182 | ) | ||||
| Total stockholders' deficit | (14,407,905 | ) | (24,926,089 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 1,569,113 | $ | 2,298,816 | ||||
The accompanying notes are an integral part of these audited consolidated financial statements.
| F-2 |
Kaya Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
| (Audited) | (Audited) | |||||||
| For The Twelve | For The Twelve | |||||||
| Months Ended | Months Ended | |||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Net sales | $ | 889,899 | $ | 1,029,543 | ||||
| Cost of sales | 279,333 | 310,685 | ||||||
| Gross profit | 610,566 | 718,858 | ||||||
| Operating expenses: | ||||||||
| Professional fees | 889,912 | 1,327,607 | ||||||
| Salaries and wages | 370,034 | 418,697 | ||||||
| (Gain) Loss on impairment of assets | 87,151 | |||||||
| General and administrative | 780,462 | 720,525 | ||||||
| Total operating expenses | 2,040,408 | 2,553,980 | ||||||
| Operating loss | (1,429,842 | ) | (1,835,122 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | (635,810 | ) | (602,806 | ) | ||||
| Amortization of debt discount | (333,296 | ) | (241,755 | ) | ||||
| Derivative liabilities expense | (566,080 | ) | (324,033 | ) | ||||
| Gain (loss) on extinguishment of debt | 6,155 | |||||||
| Gain (loss) on Settlement | 44,294 | |||||||
| Gain (loss) on disposal | 142,844 | (173,658 | ) | |||||
| Change in derivative liabilities expense | 12,947,095 | (9,119,848 | ) | |||||
| Other income (expense) | ||||||||
| Total other income (expense) | 11,605,202 | (10,462,100 | ) | |||||
| Net income (loss) before income taxes | 10,175,360 | (12,297,222 | ) | |||||
| Provision for Income Taxes | (782,107 | ) | ||||||
| Net income (loss) | 9,393,253 | (12,297,222 | ) | |||||
| Net Income (loss) attributed to non-controlling interest | (331,009 | ) | (198,401 | ) | ||||
| Net income (loss) attributed to Kaya Holdings, Inc. | 9,724,262 | (12,098,821 | ) | |||||
| Basic net income (loss) per common share | $ | 0.66 | $ | (0.92 | ) | |||
| Weighted average number of common shares outstanding - Basic | 14,760,118 | 13,161,972 | ||||||
| Diluted net income (loss) per common shassre | $ | 0.13 | $ | (0.92 | ) | |||
| Weighted average number of common shares outstanding - Diluted | 72,181,499 | 13,161,972 | ||||||
The accompanying notes are an integral part of these audited consolidated financial statements.
| F-3 |
Kaya Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
For the year ended December 31, 2021 (Audited) and the year ended December 31, 2020 (Audited)
| Preferred Stock-Series C | Preferred Stock- Series D | Post-Split Common Stock | Subscription Payable | Additional Paid-in | Accumulated | Accumulated Comprehensive | Noncontrolling | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Amount | Capital | Deficit | Loss | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 100,000 | $ | 100 | $ | 12,500,254 | 12,501 | $ | 163,630 | $ | 19,778,857 | $ | (32,120,787 | ) | $ | $ | (1,325,781 | ) | $ | (13,491,480 | ) | |||||||||||||||||||||||||
| Imputed interest | — | — | — | 22,500 | 22,500 | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for Cash | — | — | — | 250 | 7,715 | 7,965 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | — | — | 546,667 | 547 | 263,445 | 263,992 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued for services - related parties | — | — | 533,333 | 533 | 263,467 | 264,000 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion and interest | — | — | 683,753 | 684 | 101,879 | 102,563 | |||||||||||||||||||||||||||||||||||||||
| Warrants granted for Cash | — | — | — | 4,535 | 4,535 | ||||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liabilities to additional paid in capital | — | — | — | 197,058 | 197,058 | ||||||||||||||||||||||||||||||||||||||||
| Rounding Shares | — | — | 402 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (12,098,821 | ) | (198,401 | ) | (12,297,222 | ) | ||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 (Audited) | 100,000 | $ | 100 | $ | 14,264,409 | $ | 14,265 | $ | 163,880 | $ | 20,639,456 | $ | (44,219,608 | ) | $ | $ | (1,524,182 | ) | $ | (24,926,089 | ) | ||||||||||||||||||||||||
| Balance, December 31, 2020 | 100,000 | $ | 100 | $ | 14,264,409 | $ | 14,265 | $ | 163,880 | $ | 20,639,456 | $ | (44,219,608 | ) | $ | $ | (1,524,182 | ) | $ | (24,926,089 | ) | ||||||||||||||||||||||||
| Imputed interest | — | — | — | 22,438 | 22,438 | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for Cash | — | 158,332 | 158 | (250 | ) | 35,092 | 35,000 | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for notes conversion and interest | — | — | 1,306,765 | 1,307 | 194,708 | 196,015 | |||||||||||||||||||||||||||||||||||||||
| Share Cancellation | — | — | (1,006,671 | ) | (1,007 | ) | 1,007 | ||||||||||||||||||||||||||||||||||||||
| Exchange of pre of preferred shares - series C to series D | (100,000) | (100) | 40 | — | 100 | ||||||||||||||||||||||||||||||||||||||||
| Settlement of related party accrued compensation | — | — | — | 559,058 | 559,058 | ||||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liabilities to additional paid in capital | — | — | — | 283,326 | 283,326 | ||||||||||||||||||||||||||||||||||||||||
| Business combination of foreign entities | — | — | — | 35,805 | 35,805 | ||||||||||||||||||||||||||||||||||||||||
| Translation Adjustment | — | — | — | (3,719 | ) | (2,992 | ) | (6,711 | ) | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 9,724,262 | (331,009 | ) | 9,393,253 | ||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 (Audited) | $ | 40 | $ | 14,722,835 | $ | 14,723 | $ | 163,630 | $ | 21,735,185 | $ | (34,495,346 | ) | $ | (3,719 | ) | $ | (1,822,378 | ) | $ | (14,407,905 | ) | |||||||||||||||||||||||
The accompanying notes are an integral part of these audited consolidated financial statements.
| F-4 |
Kaya Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Cashflows
The accompanying notes are an integral part of these audited consolidated financial statements.
| F-5 |
NOTE 1 – ORGANIZATION AND NATURE OF THE BUSINESS
Organization
Kaya Holdings, Inc. FKA (Alternative Fuels Americas, Inc.) is a holding company. The Company was incorporated in 1993 and has engaged in a number of businesses. Its name was changed on May 11, 2007 to NetSpace International Holdings, Inc. (a Delaware corporation) (“NetSpace”). NetSpace acquired 100% of Alternative Fuels Americas, Inc. (a Florida corporation) in January 2010 in a stock-for-member interest transaction and issued 6,567,247 shares of common stock and 100,000 shares of Series C convertible preferred stock to existing shareholders. Certificate of Amendment to the Certificate of Incorporation was filed in October 2010 changing the Company’s name from NetSpace International Holdings, Inc. to Alternative Fuels Americas, Inc. (a Delaware corporation). Certificate of Amendment to the Certificate of Incorporation was filed in March 2015 changing the Company’s name from Alternative Fuels Americas, Inc. (a Delaware corporation) to Kaya Holdings, Inc.
The Company has four subsidiaries: Alternative Fuels Americas, Inc, a Florida corporation, which is wholly-owned, Marijuana Holdings Americas, Inc., a Florida corporation (“MJAI”), which is majority-owned, 34225 Kowitz Road, LLC, a wholly-owned Oregon limited liability company which holds ownership of the Company’s 26 acre property in Lebanon, Oregon on which it plans to develop a legal cannabis cultivation and manufacturing facility, and Kaya Brand International, Inc. (KBI) a Florida Corporation which the Company owns 85% of which was formed on October 14, 2019 to expand the business overseas
MJAI develops and operates the Company’s legal cannabis retail operations in Oregon through controlling ownership interests in five Oregon limited liability companies: MJAI Oregon 1 LLC, MJAI Oregon 2 LLC (inactive), MJAI Oregon 3 LLC (inactive) , MJAI Oregon 4 LLC (inactive) and MJAI Oregon 5 LLC.
MJAI Oregon 1 LLC is the entity that holds the licenses for the Company’s retail store operations and pending OLCC Production and Processing license transfer applications for the 260 Grimes Street property in Eugene, Oregon. MJAI Oregon 5 LLC maintains the Company’s pending OLCC Producer Application for the Company’s 26 acre farm property in Lebanon Oregon.
KBI is the entity that holds controlling ownership interests in Kaya Farms Greece, S.A. (a Greek corporation) and Kaya Shalvah (“Kaya Farms Israel”, an Israeli corporation). These two entities were formed to facilitate expansion of the Company’s business in Greece and Israel respectively.
Nature of the Business
In January 2014, KAYS incorporated MJAI, a wholly-owned subsidiary, to focus on opportunities in the legal recreational and medical marijuana in the United States. MJAI has concentrated its efforts in Oregon, where through controlled Oregon limited liability companies, it initially secured licenses to operate a medical marijuana dispensary (an “MMD”) and following legalization of recreational cannabis use in Oregon, has secured licenses to operate four retail outlets and purchased 26 acres for development as a legal cannabis cultivation and manufacturing facility. The Company has developed the Kaya Shack™ brand for its retail operations and the Kaya Farms ™ brand for its cannabis gowing and processing operations.
On July 3, 2014 opened its first Kaya Shack™ MMD in Portland, Oregon. In April 2015, KAYS commenced its own medical marijuana grow operations for the cultivation and harvesting of legal marijuana thereby becoming the first publicly traded U.S. company to own a majority interest in a vertically integrated legal marijuana enterprise in the United States. In October 2015, concurrent with Oregon commencing legal sales of recreational marijuana through MMDs, KAYS opened its second retail outlet in Salem, Oregon, the Kaya Shack™ Marijuana Superstore. During 2015, the Company also consolidated its grow operations and manufacturing operations into a single facility in Portland, Oregon.
In 2016, Oregon began the process to transition legal marijuana sales from Oregon Health Authority (“OHA”) licensed MMDs and grow operations to Oregon Liquor Control Commission (“OLCC”) licensed recreational marijuana retailers and producer and processing facilities. Effective January 1, 2017, all retailers of recreational marijuana were required to have a recreational marijuana sales license issued by the OLLC for each retail outlet operated.
In 2016 the Company applied for OLLC licenses for its two initial Kaya Shack™ retail outlets (Portland, Oregon and South Salem, Oregon), and also submitted license applications for its two new locations under construction and development at that time.
In late December 2016, we received our OLCC recreational license for the South Salem Kaya Shack™ Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #1) and recreational and medical sales continued without interruption from 2016 through the present at that location.
On March 21, 2017, we received our North Salem Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #2) a 2,600-square foot Kaya Shack™ Marijuana Superstore in North Salem, Oregon, whereupon the location opened for business with both recreational and medical sales.
| F-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.
During August of 2017, the Company purchased a 26 acre parcel in Lebanon, Linn County, Oregon, on which we intend to construct an 85,000 square foot Kaya Farms™ Greenhouse Grow and Production Facility at the property.
On February 15, 2018, we received our OLCC recreational, medical and home delivery license for the Central Salem Kaya ShackTM outlet (Kaya ShackTM OLCC Marijuana Retailer License #4) a 3,100-square foot Kaya ShackTM Marijuana Superstore in Central Salem, Oregon. After various construction and permitting delays, On April 12, 2018, the location opened for business with both recreational and medical sales.
On August 18, 2018, the Company had concluded the purchase of the Eugene, Oregon based Sunstone Farms manufacturing facility, which was licensed by the OLCC for both the production of medical and recreational marijuana flower and the processing of cannabis concentrates/extracts/edibles. The purchase included a 12,000 square foot building housing and indoor grow facility, as well as equipment for growing and extraction activity. The purchase price of $1.3 was paid for by the issuance of 12 million shares of KAYS restricted stock to the seller at closing. Additionally, the seller purchased 2.5 million restricted shares for $250,000 in cash in a private transaction with the Company, and became a Board Member of Kaya Holdings. While the shares carried a lock-up-restriction allowing for their staged eligibility for resale over a 61-month period from the date of the purchase of the facility by KAYS, none of the shares have been submitted for resale.
In mid-April, 2019 the Company was notified by Sunstone that the OLCC had filed an administrative proceeding and was proposing that Sunstone’s licenses for the facility purchased by KAYS be cancelled, claiming that Sunstone had not filed paperwork correctly with respect to the transaction and the historical ownership of Bruce Burwick, the seller of the facility to the Company. Neither the Issuer nor any of its agents, consultants, employees or related entities was named as a respondent to the action and accordingly could not respond to the proceedings.
On September 26, 2019, the Company formed the majority owned subsidiary Kaya Brands International, Inc. (“KBI”) to serve as the Company’s vehicle for expansion into worldwide cannabis markets.
On November 4, 2019 the Company filed an 8-K announcing that its majority owned subsidiary, Kaya Brands International, Inc. (“KBI”), had executed a memorandum of understanding (“MOU”) setting forth the terms for KBI’s acquisition of a 50% ownership interest in Greekkannabis, PC (“GKC”), an Athens, Greece based cannabis company which at the time was awaiting issuance of a medical cannabis cultivation, processing, and export license from the Greek government.
In February, 2020 the Company renewed the OLCC Marijuana Retailer Licenses #1, 2 and 4 listed above and did not renew OLCC Marijuana Retailer License #3 and ceased operations at that location. The Company is currently seeking to transfer OLCC License #4 to another location.
On April 22, 2020 KAYS/KBI received confirmation from its Greek Counsel that the Greek Government had approved and issued the Crucial Installation License for the GKC facility which is the subject of the previously announced MoU executed by and between KBI and GKC. The license allows for construction of a medical cannabis cultivation and process facility which includes twelve (12) 35,000 square foot of light deprivation greenhouses and an additional 50,000 square foot building for workspace, storage and administrative offices situated on fifteen acres of land in Thibes, Greece.
On June 7, 2020 Kaya Shalvah (“Kaya Farms Israel”) was incorporated by the Company’s Israel Counsel, Sullivan & Worcester. KBI owns a majority of Kaya Farms Israel.
On October 15, 2020 the OLCC approved a settlement between the OLCC and Sunstone Marketing Partners that required that the licenses for the Eugene Oregon based Sunstone Farms facility be sold to a third party (other than KAYS) or surrendered. For more information, please see Note 15, Subsequent Events and Part II-Other Information, Item 1, Legal Proceedings elsewhere in this filing.
On November 27, 2020 Kaya Farms Greece, S.A. (“KFG)” was incorporated by the Company’s Greek Counsel Dalakos, Fassolis and Theofanopoulos of Piraeus, Greece. KBI owns a majority of KFG.
| F-7 |
On December 31, 2020, the Company entered into a joint venture agreement with Greekkbannabis., and and On January 11, 2021, KAYS/KBI, through a majority owned subsidiary of KBI (Kaya Farms Greece or “KFG") and Greekkannabis (“GKC") executed an agreement for KBI to acquire 50% of GKC. The terms are as follows:
1. Prior to the execution of the transaction, the GKC shareholders owned a total of 320 shares (100%) of GKC.
2. Pursuant to first section of the contract, KBI has initially acquired 80 shares of GKC (from the current shareholders) for payment of 30,000 Euros- 20,000 Euros have been paid from the $31,688 (25,000 Euros) sent to Greece on December 31, 2020 and the remaining 10,000 Euros is due to be paid by June 30, 2022. This leaves current shareholders on GKC side with 240 shares.
3. GKC is in process of issuing an additional 160 shares of GKC to KFG in exchange for additional paid in capital by KFG of 16,000 Euros. At the conclusion of the process (minutes of meetings have to be published in Greek Government publications, etc which will take a few months), KFG will own 50% of GKC (240 shares) and the current shareholders of GKC will own 50% (240 shares).
5. An operating agreement is currently being drafted that allows for 5 board members (2 from KFG and 3 from GKC). Ilias will become the President and Panos will become the vice president and Managing Director. Final terms will include the provision that a super majority (80%) is required to enter into a transaction in excess of 100K Euros and also to issue new shares, encumber/sell existing shares, enter into decisions regarding infrastructure, development and construction decisions, etc.
On March 31, 2021 the Company entered into a settlement with Sunstone Capital Partners, LLC, Sunstone Marketing Partners LLC and Bruce Burwick, the principal of Sunstone and a director of Kays, regarding the failure to deliver to KAYS the Oregon Cannabis Production and Processing Licenses that were part of a warehouse purchase transaction in August 2018.
On July 28, 2021 the Company announced that all terms had been satisfied. Pursuant to the terms of the settlement, Bruce Burwick surrendered to KAYS 1,006,671 shares of our common stock issued to him in connection with the transaction (800,003 shares which were issued for the facility purchase, 166,667 shares which were issued for $250,000 in cash and 40,001 shares which were issued as annual compensation for Burwick serving as a director of KAYS). The shares have been submitted to KAYS' transfer agent for cancellation. In addition, the Company received clear title to the warehouse facility, which enables the Company to sell it without restriction. As part of the settlement, Burwick received $160,000 from the net proceeds of the sale of the facility's grow license to an unrelated third party, resigned from the Company's board of directors and agreed to work as a non-exclusive consultant to the Company for the next four years for a yearly fee of $35,000.00.
On October 12, 2021, KAYS completed the sale of its Eugene, Oregon Cannabis Production and Processing Facility for gross proceeds of $1,325,000, generating a cash influx of approximately $0.09 per share for the Company (the “Eugene Warehouse Sale”). The sale was part of our recently announced settlement with Sunstone Farms, and it also resulted in the cancellation of 1,006,671 shares of KAYS stock, decreasing the Company’s issued and outstanding shares by approximately 6.5% to 14.7 million shares. Funds received from the sale were and are being used to repay certain debt and strengthen our balance sheet and for general working capital purposes, as well as provide the initial stage capital for some of the Company’s U.S. and global expansion activities, including its planned cultivation sites in Greece and Israel.
NOTE 2 – LIQUIDITY AND GOING CONCERN
The Company’s consolidated financial statements as of December 31, 2021 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 had net income of $9,724,262 for the twelve months ended December 31, 2021 and a net loss of $12,098,821 for the twelve months ended December 31, 2020. The increase in net income during 2021 is primarily due to the gain on changes in derivative liabilities, and gain on disposal, offset by the increase in amortization of debt discount and derivative liabilities expense, as well as the company continues to have operating losses. At December 31, 2021 the Company has a working capital deficiency of $7,458,348 and is totally dependent on its ability to raise capital. The Company has a plan of operations and acknowledges that its plan of operations may not result in generating positive working capital in the near future. Even though management believes that it will be able to successfully execute its business plan, which includes third-party financing and capital issuance, and meet the Company’s future liquidity needs, there can be no assurances in that regard. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this material uncertainty. Management recognizes that the Company must generate additional funds to successfully develop its operations and activities. Management plans include:
| • | 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. |
| F-8 |
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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future non-conforming events. Accordingly, actual results could differ significantly from estimates.
Risks and Uncertainties
The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure.
The Company has experienced, and in the future expects to continue to experience, variability in its sales and earnings. The factors expected to contribute to this variability include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the product, (ii) competition inherent at other locations where product is expected to be sold (iii) general economic conditions and (iv) the related volatility of prices pertaining to the cost of sales.
Fiscal Year
The Company’s fiscal year-end is December 31.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Kaya Holdings, Inc. and all wholly and majority-owned subsidiaries. All significant intercompany balances have been eliminated.
Wholly-owned subsidiaries:
| · | Alternative Fuels Americas, Inc. (a Florida corporation) |
| · | 34225 Kowitz Road, LLC (an Oregon LLC) | |
Majority-owned subsidiaries:
Kaya Brands International, Inc. (a Florida Corporation)
Kaya Shalvah (“Kaya Farms Israel”, an Israeli corporation) majority owned subsidiary of KBI)
Kaya Farms Greece, S.A. (a Greek Corporation) majority owned subsidiary of KBI)
| · | Marijuana Holdings Americas, Inc. (a Florida corporation) |
| o | MJAI Oregon 1 LLC |
| o | MJAI Oregon 2 LLC (inactive) |
| o | MJAI Oregon 3 LLC (inactive) |
| o | MJAI Oregon 4 LLC (inactive) |
| o | MJAI Oregon 5 LLC |
| F-9 |
Non-Controlling Interest
The company owned 55% of Marijuana Holdings Americas until September 30, 2019. Starting October 1, 2019, Kaya Holding, Inc. owns 65% of Marijuana Holdings Americas, Inc. As of December 31, 2021 Kaya owns 65% of Marijuana Holdings Americas, Inc.
The company owned 85% of Kaya Brands International, Inc. until July 31, 2020. Starting August 1, 2020, Kaya Holding, Inc. owns 65% of Kaya Brands International, Inc.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less. The Company had no cash equivalents.
Inventory
Inventory consists of finished goods purchased, which are valued at the lower of cost or market value, with cost being determined on the first-in, first-out method. The Company periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. Total Value of Finished goods inventory as of December 31, 2021 is $51,484 and $47,618 as of December 31, 2020. No allowance as necessary as of December 31, 2021 and December 31, 2020.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 5-30 years of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred.
Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations.
Long-lived assets
The Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its intangible assets, management performs an analysis of the anticipated undiscounted future net cash flow of the individual assets over the remaining amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows.
Accounting for the Impairment of Long-Lived Assets
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to forecasted undiscounted net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on discounted cash flows, appraised values or management's estimates, depending upon the nature of the assets.
Operating Leases
We lease our retail stores under non-cancellable operating leases. Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions. We recognize rent expense on a straight-line basis over the lease term, excluding contingent rent, and record the difference between the amount charged to expense and the rent paid as a deferred rent liability.
Deferred Rent and Tenant Allowances
Deferred rent is recognized when a lease contains fixed rent escalations. We recognize the related rent expense on a straight-line basis starting from the date of possession and record the difference between the recognized rental expense and cash rent payable as deferred rent. Deferred rent also includes tenant allowances received from landlords in accordance with negotiated lease terms. The tenant allowances are amortized as a reduction to rent expense on a straight-line basis over the term of the lease starting at the date of possession.
| F-10 |
In accordance with ASC 260, Earnings per Share, the Company calculates basic earnings per share by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed if the Company has net income; otherwise it would be anti-dilutive, and would result from the conversion of a convertible note.
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.
We are subject to certain tax risks and treatments that could negatively impact our results of operations
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly and the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E favorable to cannabis businesses.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $782,107 during the year ended December 31, 2021 compared to $0 during the year ended December 31, 2020. Although we have net operating losses that we believe are available to us to offset this entire tax liability, which arises under Section 280E of the Code because we are a cannabis company, as a conservative measure, we have accrued this liability.
Fair Value of Financial Instruments
The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure fair value:
| • | Level 1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities. |
| • | Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| • | Level 3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. |
| F-11 |
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses, certain notes payable and notes payable – related party, approximate their fair values because of the short maturity of these instruments.
The Company accounts for its derivative liabilities, at fair value, on a recurring basis under level 3. See Note 7.
Embedded Conversion Features
The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.
For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based simple derivative financial instruments, the Company uses the Binomial option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
In July 2017, the FASB issued ASU 2017-11 Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendment also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.
Prior to this Update, an equity-linked financial instrument with a down round feature that otherwise is not required to be classified as a liability under the guidance in Topic 480 is evaluated under the guidance in Topic 815, Derivatives and Hedging, to determine whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope exception from derivative accounting. Generally, for warrants and conversion options embedded in financial instruments that are deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement such that the embedded conversion option meets the definition of a derivative), the existence of a down round feature results in an instrument not being considered indexed to an entity’s own stock. This results in a reporting entity being required to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure at fair value initially and at each subsequent reporting date.
The amendments in this Update revise the guidance for instruments with down round features in Subtopic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. An entity still is required to determine whether instruments would be classified in equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round features are no longer classified as liabilities and embedded conversion options with down round features are no longer bifurcated.
For entities that present EPS in accordance with Topic 260, and when the down round feature is included in an equity-classified freestanding financial instrument, the value of the effect of the down round feature is treated as a dividend when it is triggered and as a numerator adjustment in the basic EPS calculation. This reflects the occurrence of an economic transfer of value to the holder of the instrument, while alleviating the complexity and income statement volatility associated with fair value measurement on an ongoing basis. Convertible instruments are unaffected by the Topic 260 amendments in this Update.
The amendments in Part 1 of this Update are a cost savings relative to former accounting. This is because, assuming the required criteria for equity classification in Subtopic 815-40 are met, an entity that issued such an instrument no longer measures the instrument at fair value at each reporting period (in the case of warrants) or separately accounts for a bifurcated derivative (in the case of convertible instruments) on the basis of the existence of a down round feature. For convertible instruments with embedded conversion options that have down round features, applying specialized guidance such as the model for contingent beneficial conversion features rather than bifurcating an embedded derivative also reduces cost and complexity. Under that specialized guidance, the issuer recognizes the intrinsic value of the feature only when the feature becomes beneficial instead of bifurcating the conversion option and measuring it at fair value each reporting period.
| F-12 |
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.
Stock-Based Compensation - Employees
The Company accounts for its stock-based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.
If the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement memorandum (based on sales to third parties) (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated on the date of grant using a Binomial Option Model option-pricing valuation model. The ranges of assumptions for inputs are as follows:
| • | Expected term of share options and similar instruments: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
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| • | Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
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| • | Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
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| • | Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.
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| F-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.
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation: Improvement to Nonemployee Share-Based Payment Accounting (Topic 718). The ASU supersedes ASC 505-50, Equity-Based Payment to Non-Employment and expends the scope of the Topic 718 to include stock-based payments granted to non-employees. Under the new guidance, the measurement date and performance and vesting conditions for stock-based payments to non-employees are aligned with those of employees, most notably aligning the award measurement date with the grant date of an award. The new guidance is required to be adopted using the modified retrospective transition approach. The Company adopted the new guidance effective January 1, 2019, with an immaterial impact on its financial statements and related disclosures.
The fair value of share options and similar instruments is estimated on the date of grant using a Binomial option-pricing valuation model. The ranges of assumptions for inputs are as follows:
| • | Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
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| • | Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
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| • | Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
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| • | Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.
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Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 – Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identifying the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.
To confirm, all of our OLCC licensed cannabis retail sales operations are conducted and operated on a “cash and carry” basis- product(s) from our inventory accounts are sold to the customer(s) and the customer settles the account at time of receipt of product via cash payment at our retail store; the transaction is recorded at the time of sale in our point of sale software system. Revenue is only reported after product has been delivered to the customer and the customer has paid for the product with cash.
To date the only other revenue we have received is for ATM transactions and revenue from this activity is only reported after we receive payment via check from the ATM service provider company.
Cost of Sales
Cost of sales represents costs directly related to the purchase of goods and third party testing of the Company’s products.
| F-14 |
Related Parties
The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the related parties include a. affiliates of the Company; b. Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements.
The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Contingencies
The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, consolidated financial position, and consolidated results of operations or consolidated cash flows.
Uncertain Tax Positions
The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the reporting period ended December 31, 2021, except as noted below.
Provision for Income Taxes
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS has issued a clarification allowing the deduction of certain expenses, the bulk of operating costs and general administrative costs are generally not permitted to be deducted. The operations of certain of the Company’s subsidiaries are subject to Section 280E. This results in permanent differences between ordinary and necessary business expenses deemed non-deductible under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.
We recorded a provision for income taxes in the amount of $782,107 during the year ended December 31, 2021 compared to $0 during the year ended December 31, 2020. Although we have net operating losses that we believe are available to us to offset this entire tax liability, which arises under Section 280E of the Code because we are a cannabis company, as a conservative measure, we have accrued this liability.
Subsequent Events
The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued.
Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the effect of recently issued standards that are not yet effective will not have a material effect on its consolidated financial position or results of operations upon adoption.
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will have on its financial statements.
| F-15 |
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31, 2021 and December 31, 2020:
| December 31, 2021 | December 31, 2020 | |||||||
| (Audited) | (Audited) | |||||||
| ATM Machine | $ | 5,600 | $ | 5,600 | ||||
| Computer | 30,713 | 18,990 | ||||||
| Furniture & Fixtures | 42,965 | 43,466 | ||||||
| HVAC | 44,430 | 41,768 | ||||||
| Land | 533,778 | 697,420 | ||||||
| Leasehold Improvements | 147,636 | 142,979 | ||||||
| Machinery and Equipment | 69,312 | 312,331 | ||||||
| Sign | 12,758 | 12,758 | ||||||
| Structural | - | 1,017,359 | ||||||
| Vehicle | 51,872 | 79,744 | ||||||
| Total | 939,064 | 2,372,415 | ||||||
| Less: Accumulated Depreciation | (364,331 | ) | (547,469 | ) | ||||
| Property, Plant and Equipment - net | $ | 574,733 | $ | 1,824,946 | ||||
Depreciation expense totaled of $119,039 and $141,727 for the twelve months ended December 31, 2021 and 2020, respectively. Due to the closure of 2 stores, the Company removed net assets of $173,658 and recorded a loss of disposal of fixed asset $173,658 during the years ended December 31, 2020.
On August 30, 2021 the Company elected to dispose of two (2) of the four (4) Fiat cars that it owned that it was not using. The four cars were originally purchased in September of 2017 for prices ranging from $13,584 to $14,992.
After a review of market pricing the Company was able to sell one of the cars to Carvana for $14,460, after adjustments for cost removed and accumulated depreciation removal, the sale resulted in a gain on settlement. The Company recorded a net gain on disposal of assets of $28,983.
Additionally, the second Fiat was transferred to Mr. Frank in lieu of $15,000.00 in fees owed him. See Note 11 for additional information.
On October 12, 2021, KAYS completed the sale of its Eugene, Oregon Cannabis Production and Processing Facility for gross proceeds of $1,325,000. The Company recorded a net gain on disposal of $113,861. Due to the closure of 2 stores, the Company removed net right of use assets of $173,658 and recorded a loss on disposal of assets of $173,658, during the years ended December 31, 2020.
NOTE 5 – OTHER ASSETS
Other assets consisted of the following at December 31, 2021 and December 31, 2020:
December 31, 2021 (Audited) | December 31, 2020 (Audited) | |||||||
| Rent Deposits | $ | 11,016 | $ | 11,016 | ||||
| Security Deposits | 71,143 | 5,491 | ||||||
| Non-Current Assets | $ | 82,159 | $ | 16,507 | ||||
Due to the closure of 2 stores, the Company recorded a loss on deposits.
Due to the closure of 2 stores, the Company recorded a loss on deposits expensed against rent of $11,016, during year ended December 31, 2021
NOTE 6 – CONVERTIBLE DEBT
These debts have a price adjustment provision. Therefore, the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation 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 0.09% to 0.76%, volatility ranging from 131.33% to 145.54%, trading prices ranging from $0.09 per share to $0.65 per share and a conversion price of $0.15 per share.
| F-16 |
See Below Summary Table
| Convertible Debt Summary | ||||||||
| Debt Type | Debt Classification | Interest Rate | Due Date | Default | Ending | |||
| CT | LT | 12/31/2021 | 12/31/2020 | |||||
| A | Convertible | X | 10.0% | 1-Jan-17 | X | 25,000 | $ 25,000 | |
| B | Convertible | X | 8.0% | 1-Jan-24 | 82,391 | 82,391 | ||
| C | Convertible | X | 8.0% | 1-Jan-24 | 41,195 | 41,195 | ||
| D | Convertible | X | 8.0% | 1-Jan-24 | 262,156 | 262,156 | ||
| O | Convertible | X | 8.0% | 1-Jan-24 | 136,902 | 136,902 | ||
| P | Convertible | X | 8.0% | 1-Jan-24 | 66,173 | 66,173 | ||
| Q | Convertible | X | 8.0% | 1-Jan-24 | 65,274 | 65,274 | ||
| S | Convertible | X | 8.0% | 1-Jan-24 | 63,205 | 63,205 | ||
| T | Convertible | X | 8.0% | 1-Jan-24 | 313,634 | 313,634 | ||
| BB | Convertible | X | 10.0% | 1-Jan-24 | - | 50,000 | ||
| CC | Convertible | X | 10.0% | 1-Jan-24 | 100,000 | 100,000 | ||
| KK | Convertible | X | 8.0% | 1-Jan-24 | 188,000 | 188,000 | ||
| LL | Convertible | X | 8.0% | 1-Jan-24 | 749,697 | 749,697 | ||
| MM | Convertible | X | 8.0% | 1-Jan-24 | 124,690 | 124,690 | ||
| NN | Convertible | X | 8.0% | 1-Jan-24 | 622,588 | 622,588 | ||
| OO | Convertible | X | 8.0% | 1-Jan-24 | 620,908 | 620,908 | ||
| PP | Convertible | X | 8.0% | 1-Jan-24 | 611,428 | 611,428 | ||
| Convertible | X | 8.0% | 1-Jan-24 | 180,909 | 180,909 | |||
| RR | Convertible | X | 8.0% | 1-Jan-24 | 586,804 | 586,804 | ||
| SS | Convertible | X | 8.0% | 1-Jan-24 | 174,374 | 174,374 | ||
| TT | Convertible | X | 8.0% | 1-Jan-24 | 345,633 | 345,633 | ||
| UU | Convertible | X | 8.0% | 1-Jan-24 | 171,304 | 171,304 | ||
| VV | Convertible | X | 8.0% | 1-Jan-24 | 121,727 | 113,322 | ||
| XX | Convertible | X | 8.0% | 1-Jan-24 | 112,734 | 112,734 | ||
| YY | Convertible | X | 8.0% | 1-Jan-24 | 173,039 | 173,039 | ||
| ZZ | Convertible | X | 8.0% | 1-Jan-24 | 166,603 | 166,603 | ||
| AAA | Convertible | X | 8.0% | 1-Jan-24 | 104,641 | 104,641 | ||
| BBB | Convertible | X | 8.0% | 1-Jan-24 | 87,066 | 87,066 | ||
| CCC | Convertible | X | 8.0% | 1-Jan-24 | - | 25,000 | ||
| DDD | Convertible | X | 8.0% | 1-Jan-24 | 75,262 | 75,262 | ||
| EEE | Convertible | X | 8.0% | 1-Jan-24 | 160,619 | 160,619 | ||
| GGG | Convertible | X | 8.0% | 1-Jan-24 | 79,422 | 79,422 | ||
| HHH | Convertible | X | 8.0% | 1-Jan-24 | - | 35,000 | ||
| JJJ | Convertible | X | 8.0% | 1-Jan-24 | 52,455 | 52,455 | ||
| LLL | Convertible | X | 8.0% | 1-Jan-24 | 77,992 | 77,992 | ||
| MMM | Convertible | X | 8.0% | 1-Jan-24 | 51,348 | 51,348 | ||
| PPP | Convertible | X | 8.0% | 1-Jan-24 | 95,979 | 95,979 | ||
| RRR | Convertible | X | 8.0% | 1-Jan-24 | - | 15,000 | ||
| SSS | Convertible | X | 8.0% | 1-Jan-24 | 75,000 | 75,000 | ||
| TTT | Convertible | X | 8.0% | 1-Jan-24 | 80,000 | 80,000 | ||
| UUU | Convertible | X | 8.0% | 1-Jan-24 | - | 20,000 | ||
| VVV | Convertible | X | 8.0% | 1-Jan-24 | 75,000 | 75,000 | ||
| WWW | Convertible | X | 8.0% | 1-Jan-24 | 60,000 | - | ||
| XXX | Convertible | X | 8.0% | 1-Jan-24 | 100,000 | - | ||
| YYY | Convertible | X | 8.0% | 1-Jan-24 | 50,000 | - | ||
| ZZZ | Convertible | X | 8.0% | 1-Jan-24 | 40,000 | - | ||
| AAAA | Convertible | X | 8.0% | 1-Jan-24 | 66,000 | - | ||
| Total Convertible Debt | 7,437,152 | 7,257,747 | ||||||
| Less: Discount | (477,634) | (494,930) | ||||||
| Convertible Debt, Net of Discounts | $ 6,959,518 | $ 6,762,817 | ||||||
| Convertible Debt, Net of Discounts, Current | $ 25,000 | $ 363,243 | ||||||
| Convertible Debt, Net of Discounts, Long-term | $ 6,934,518 | $ 6,399,574 | ||||||
FOOTNOTES FOR CONVERTIBLE DEBT ACTIVITY FOR YEAR ENDED DECEMBER 31, 2021
(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 $0.15 per share. The market value of the stock at the date when the debt becomes convertible was $1.17. The debt issued is a result of a financing transaction and contain a beneficial conversion feature. The accrued interest of $5,000 was converted to 166,666 shares of common stock on September 15, 2019. The accrued interest of $5,000 was paid in cash in the year of 2020. On January 1, 2019, due date of this note was extended until January 1, 2020. On May 18, 2021, the noteholder converted the remaining principal of $50,000 and accrued interest of $10,197. No gain or loss on conversion, was recorded as conversions were made within the terms of agreement. The remaining balance of principal and interest was $0 and $0, respectively, at December 31, 2021.
| F-17 |
(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 was convertible after September 23, 2015 and was convertible into the Company’s common stock at a conversion rate of $.45 per share. The market value of the stock at the date when the debt becomes convertible was $1.17. The debt issued is a result of a financing transaction and contain a beneficial conversion feature. On May 18, 2021, the noteholder converted the accrued interest of $26,711 and received a cash payment of $10,000 for accrued interest. No gain or loss on conversion, was recorded as conversions were made within the terms of agreement. During 2021, the Noteholder and Company agreed to extend the maturity date until January 1, 2024. All other terms of the note remain the same.. The remaining balance of principal and interest was $100,000 and $0, respectively, at December 31, 2021.
(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. Interest is stated at 5%. The Note and Interest is convertible into common shares at $0.15 per share. In January 2021, the maturity date of the notes had been extended to January 1, 2024. No gain or loss on conversion, was recorded as conversions were made within the terms of agreement. On November 1, 2021, interest of $8,405 was capitalized, due to conversion. 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.
(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 $.75 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 $.75 per share to $.45 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, 2024. 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, see Note 9 for further details. On November 1, 2021, interest of $4,055 was capitalized, due to conversion. On May 24, 2021, the noteholder converted the remaining principal of $29,055 and accrued interest of $969. No gain or loss on conversion, was recorded as conversions were made within the terms of agreement. The remaining balance of principal and interest was $0 and $0, respectively, at December 31, 2021.
(HHH)
On April 22, 2019 the Company received $35,000 from the issuance of convertible debt to the High Net Worth Investor pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The maturity date of the notes had been extended to January 1, 2024. 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, see Note 9 for further details. On November 1, 2021, interest of $4,741 was capitalized, due to conversion. On May 24, 2021, the noteholder converted the remaining principal of $39,741 and accrued interest of $1,325. No gain or loss on conversion, was recorded as conversions were made within the terms of agreement. The remaining balance of principal and interest was $0 and $0, respectively, at December 31, 2021.
(RRR)
On January 8, 2020, the Company 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 8%. The Note and Interest is convertible into common shares at $0.15 per share. The maturity date of the notes had been extended to January 1, 2024. 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, see Note 9 for further details. On November 1, 2021, interest of $1,177 was capitalized, due to conversion. On May 24, 2021, the noteholder converted the remaining principal of $16,177 and accrued interest of $539. No gain or loss on conversion, was recorded as conversions were made within the terms of agreement. The remaining balance of principal and interest was $0 and $0, respectively, at December 31, 2021.
(UUU)
On August 13, 2020, the Company received $20,000 from the issuance of convertible debt to the High Net Worth Investor pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The Note is Due in January of 2024. 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, see Note 9 for further details. On November 1, 2021, interest of $614 was capitalized, due to conversion. On May 24, 2021, the noteholder converted the remaining principal of $20,614 and accrued interest of $687. No gain or loss on conversion, was recorded as conversions were made within the terms of agreement. The remaining balance of principal and interest was $0 and $0, respectively, at December 31, 2021.
(VVV)
On September 24, 2020, the Company received $75,000 from the issuance of convertible debt to the Cayman Venture Capital Fund pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The Note is Due in January of 2024. 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.
(WWW)
On January 22, 2021, the Company received $60,000 from the issuance of convertible debt to the Cayman Venture Capital Fund pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The Note is Due in January of 2024. 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, see Note 9 for further details.
| F-18 |
(XXX)
On February 28, 2021, the Company received $100,000 from the issuance of convertible debt to a High Net Worth Investor. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The Note is Due in January of 2024. 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, see Note 9 for further details.
(YYY)
On March 31, 2021, the Company received $50,000 from the issuance of convertible debt to a High Net Worth Investor. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The Note is Due in January of 2024. 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, see Note 9 for further details.
(ZZZ)
On May 4, 2021, the Company received $40,000 from the issuance of convertible debt to a High Net Worth Investor. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The Note is Due in January of 2024. 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, see Note 9 for further details.
(AAAA)
On May 6, 2021, the Company received $66,000 from the issuance of convertible debt to the Cayman Venture Capital Fund pursuant to the January 2018 Financing Agreement, as amended. Interest is stated at 8%. The Note and Interest is convertible into common shares at $0.15 per share. The Note is Due in January of 2024. 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, see Note 9 for further details
NOTE 7 – NON-CONVERTIBLE DEBT
A-Non Related Party
| December 31, 2021 | December 31, 2020 | |||||||
| Note 5 | 9,312 | 9,312 | ||||||
| Note BBBB | ||||||||
| Note CCCC | ||||||||
| Total Non-Convertible Debt | 9,312 | 9,312 | ||||||
(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, 2021 with an outstanding balance of $9,312.
(BBBB) On July 22, 2021, the Company received a total of $55,000 to be used for operating expenses, which matures on March 31, 2022. The note bears interest accruing at 9% per year. On October 12, 2021 the Company repaid principal of $55,000 and all accrued interest of $1,112. The balance of principal and interest as of December 31, 2021 was $-0-.
(CCCC) On August 1, 2021, the Company received a total of $150,000 to be used for operating expenses, which matures on March 31, 2022. The note bears interest accruing at 10% per year. On October 12, 2021 the Company repaid principal of $150,000 and agreed to settle all accrued interest for payment of $7,500. The balance of principal and interest as of December 31, 2021 was $-0-.
B-Related Party |
| Loan payable - Stockholder, 0%, Due December 31, 2021 (1) | $ | 250,000 | $ | 250,000 | ||||
| $ | 250,000 | $ | 250,000 |
| (1) | The $250,000 non-convertible note was issued as part of a Debt Modification Agreement dated January 2, 2014. On January 1, 2019, the holder of the note extended the due date until December 31, 2021. The interest rate of the non-convertible note is 0%. The Company used the stated rate of 9% as imputed interest rate, which was $44,938 and $22,500 for the year ended December 31, 2021 and 2020, respectively. As of December 31, 2021, the balance of the debt was $250,000. On December 31, 2021, the Company entered into an agreement to further extend the debt until December 31, 2025, with no additional interest for the extension period. |
| F-19 |
NOTE 8 – STOCKHOLDERS’ EQUITY
The Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001, of which 100,000 shares have been designated as Series C convertible preferred stock (“Series C” or “Series C preferred stock”). The Board has the authority to issue the shares in one or more series and to fix the designations, preferences, powers and other rights, as it deems appropriate.
Each share of Series C has 434 votes on any matters submitted to a vote of the stockholders of the Company and is entitled to dividends equal to the dividends of 434 shares of common stock. Each share of Series C preferred stock is convertible at any time at the option of the holder into 434 shares of common stock.
On December 27, 2021 the Company entered into an Exchange Agreement with Craig Frank and BMN Consultants, Inc. for the 50,000 Series C Preferred Shares of Kaya Holdings that they each held, 100,000 total shares..
Pursuant to the terms and conditions of this Agreement, the Holders each agreed to (a) waive payment of approximately $338,000 of Accrued Compensation; (b) defer payment of the remaining balance of Accrued Compensation owed to each of them of approximately $250,000 until January 1, 2025 ; and (c) exchange their 50,000 Series C Shares ( at total of 100,000) for twenty (20) Series D Convertible Preferred Shares of Kaya Holdings Stock. Each Share of 40 Series D Preferred Stock is convertible, at the option of the holder thereof, at any time and from time to time, into one percent (1%) of the Company’s Fully Diluted Capitalization as of the Conversion Date. This resulted in a related party gain of $559,058, which was applied to APIC.
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.
On February 13, 2020, the Company sold a 0.25 subscription unit for $12,500. Each unit consists of 66,667 post-reverse split shares of the Company's common stock; 66,667 one-year class A warrants at an exercise price of $0.12 per Company's post-reverse split share; 66,667 two-year class B warrants at an exercise price of $0.18 per Company's post-reverse split share; and 1,000,000 shares of common stock of Kaya Brands International, Inc, which is a majority-owned subsidiary of the Company. As of December 31, 2021, the shares had not been issued.
On July 13, 2020, a total of 533,333 post-reverse split shares of common stock of Kaya Holding Inc. were issued for services performed; 266,667 post-reverse split shares were issued to a non-management consultant and related parties and 266,666 post-reverse split shares were issued to a related party The shares were valued at $264,000. Total of 480,000 shares of common stock has been issued for service performed by employees. The shares were valued at $237,600.
On July 20, 2020, total of 683,753 post-reverse split shares of common stock of Kaya Holdings Inc. were issued in satisfaction of 5 promissory notes. The total principal and interest converted were $102,563. There was no gain or loss on conversion as the conversion was done per terms of the note agreement.
On October 7, 2020, a total of 66,667 post-reverse split shares of common stock of Kaya Holding Inc. were issued for services performed. The shares were valued at fair value of $26,392
The above issuances reflected a 15 to 1 reverse stock split, which resulted in a total of 14,264,409 outstanding as of December 31, 2020 and 402 rounding shares issued in 2020.
On January 22, 2021, the Company sold and issued 50,000 shares of common stock for gross proceeds of $15,000.
On March 8, 2021, the Company sold 66,666 shares of common stock for gross proceeds of $20,000 and issued on March 11,2021.
On March 5, 2021, total of 41,666 shares of common stock had been issued from stock payable for stock subscripted in 2020.
On May 18, 2021 the Company received conversion notices totaling 579,390 shares, which were issued on June 7, 2021. This settled convertible debt and interest totaling $86,909.
On May 24, 2021 the Company received conversion notices totaling 727,375 shares, which were issued on June 7, 2021. This settled convertible debt and interest totaling $109,106. There was no gain/loss on these conversions, as they were made within the terms of the note agreements.
On July 26, 2021, the Company reached an agreement with a shareholder and board member for the return of 1,006,671 shares of common stock. The par value of the shares were accounted for in additional paid in capital, in the amount of $1,007.
NOTE 9 DERIVATIVE LIABILITIES
Effective January 1, 2019, an equity-linked financial instrument with a down round feature that otherwise is not required to be classified as a liability under the guidance in Topic 480 is evaluated under the guidance in Topic 815, Derivatives and Hedging, to determine whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope exception from derivative accounting. Generally, for warrants and conversion options embedded in financial instruments that are deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement such that the embedded conversion option meets the definition of a derivative), the existence of a down round feature results in an instrument not being considered indexed to an entity’s own stock. This results in a reporting entity being required to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure at fair value initially and at each subsequent reporting date.
However, due to a recognition of tainting, due to variable conversion price on some of the convertible notes, all convertible notes are considered to have a derivative liability, therefore the Company accounted for these Notes under ASC Topic 815-15 “Embedded Derivative.” The derivative component of the obligation is initially valued and classified as a derivative liability with an offset to discounts on convertible debt. Discounts are amortized to interest expense over the respective term of the related note. In determining the indicated value of the convertible note issued, the Company used the Binomial Options Pricing Model with a risk-free interest rate of ranging from 0.09% to 0.76%, volatility ranging from 131.33% to 145.54%, trading prices ranging from $0.09 per share to $0.65 per share and a conversion price of $0.15 per share.
| F-20 |
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, 2020 | $ | 17,328,904 | ||
| Initial | 882,080 | |||
| Change in Derivative Values | (12,947,095 | ) | ||
| Conversion of debt-reclass to APIC | (283,326 | ) | ||
| Balance as of December 31, 2021 | $ | 4,980,563 | ||
The Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining fair value of the derivative liability, as it exceeded the gross proceeds of the note.
The Company recorded initial derivative liabilities of $882,080 and $589,033 for the new notes issued for the years ended December 31, 2021 and 2020, respectively. The Company recorded derivative liability expense of $566,080 and $324,033 for the years ended December 31, 2021 and 2020, respectively.
The Company recorded a change in the value of embedded derivative liabilities gain of $12,947,095 and lossof $9,119,848 for the years ended December 31, 2021 and 2020, respectively.
The Company reclassified derivative liabilities of $283,326 to additional paid in capital due to debt conversion for the year ended December 31, 2021 2021 and $197,058 for year ended December 31, 2020.
NOTE 10 – DEBT DISCOUNT
The Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining fair value of the derivative liability, as it exceeded the gross proceeds of the note.
Debt discount amounted to $477,634 as of December 31, 2021 and $494,930 as of December 31, 2020.
The Company recorded the amortization of debt discount of $333,296 and $241,755 for the years ended December 31, 2021 and 2020, respectively.
NOTE 11 – RELATED PARTY TRANSACTIONS
At December 31, 2014, the Company was indebted to an affiliated shareholder of the Company for $840,955, which consisted of $737,100 principal and $103,895 accrued interest, with interest accruing at 10%. On January 2, 2014, the Company entered into a Debt Modification Agreement whereby the total amount of the debt was reduced to $750,000 and no interest accrued until December 31, 2015. $500,000 of the debt is convertible into 50,000 Series C Convertible Preferred Shares of KAYS. The remaining $250,000 is not convertible.
On December 31, 2015, the Company entered into an agreement to extend the debt until December 31, 2017 with no additional interest for the extension period. On January 1, 2018 the Company entered into an agreement to further extend the debt until December 31, 2021 with no additional interest for the extension period. On December 31, 2021, the Company entered into an agreement to further extend the debt until December 31, 2025, 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 for travel and miscellaneous expenses incurred by Mr. Frank from travel and related activities in Oregon.
In each of 2018 and 2019, the Company issued stock grants to Jordi Arimany and Carrie Schwarz for 100,000 shares of KAYS stock for their service as board members. The stock was issued from Treasury as restricted stock and carries a one-year restriction before it can be registered for resale pursuant to Rule 144.
In 2018 and 2019, the Company issued stock grants to Craig Frank for 3,000,00 shares of KAYS stock each year, pursuant to his employment agreement via board resolution. Jordi Arimany and Carrie Schwarz for 100,000 shares of KAYS stock. The stock was issued from Treasury as restricted stock and carries a one-year restriction before it can be registered for resale pursuant to Rule 144.
In August, 2018 KAYS entered into an agreement with Bruce Burwick, (who subsequently joined the Board of Directors and became an affiliate of the Company) to purchase the Eugene, Oregon based Sunstone Farms grow and manufacturing facility, which is licensed by the OLCC for both the production (growing) of medical and recreational marijuana flower and the processing of cannabis concentrates/extracts/edibles. The purchase includes a 12,000 square foot building housing an indoor grow facility, as well as equipment for growing and extraction activity. KAYS paid Bruce Burwick $1,300,000.00 for the real property and schedule of equipment that was and is used to operate the facility.
| F-21 |
Bruce Burwick acquired the property for satisfaction of a promissory note due him for $1,433,000.00. The purchase price of $1.3 million for the OLCC licensed marijuana production and processing facility, consisting of the building and equipment was paid for by the issuance of 12 million shares of KAYS restricted stock to the seller at closing. The shares carry a lock-up-restriction that allows for their staged eligibility for resale over a 61-month period from the date of the purchase of the facility by KAYS. Additionally, the seller purchased 2.5 million restricted shares for $250,000 in cash in a private transaction with the Company. The proceeds from the sale of those shares were and are being used for acquisition related expenses, transitional operating costs and facility capital improvements with respect to the production and processing facility we purchased.
On October 14, 2019 the shareholder submitted a conversion notice and the $500,000 in convertible debt was converted into 50,000 Series C Preferred shares of KAYS stock. The stock was issued from Treasury as restricted stock and carries a minimum of one year restriction before it can be registered for resale pursuant to Rule 144.
In 2019, the Company issued a stock grant to Bruce Burwick for 100,000 shares of KAYS stock for his service as a board member. 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 2019, the Company entered into amended consulting agreements with Tudog International Consulting, Inc. which provides CEO services to the Company through Craig Frank, an Officer of the Company and BMN Consultants, Inc. which provides business development and financial consulting services to the Company through William David Jones, a non-officer Consultant to the Company. Pursuant to the amended consulting agreements, each entity is entitled to a monthly compensation of $25,000. Due to the liquidity of the Company, the compensations were paid partially over the periods. As of December 31, 2021, the accrued compensation was approximately $500,000, whereas, $820,405 was carried over from prior years. As of December 31,2021, the Company also had $1,990 of accounts payable (net) due to Tudog International Consulting, Inc. and BMN Consultants, Inc.
In 2021, the Company formed Kaya Farm Greece, which is a majority owned subsidiary of Kaya Brands International, Inc., with 70% ownership. The remaining 30% is owned by related parties of the Company. Subsequently, Kaya Farm Greece entered an acquisition agreement to acquire 50% GREEKKANNABIS S.A. (GK) The remaining 50% of GREEKKANNABIS S.A. is currently owned by Ilias Kammenos (President of GK) and Panagiotis Kininis (Vice president of GK). There is non-controlling capital of $1,548,641 representing the equity not currently owned by the Company. The financial statements have been consolidated with the Company.
On March 31, 2021 the Company entered into a settlement with Sunstone Capital Partners, LLC, Sunstone Marketing Partners LLC and Bruce Burwick, the principal of Sunstone and a director of Kays, regarding the failure to deliver to KAYS the Oregon Cannabis Production and Processing Licenses that were part of a warehouse purchase transaction in August 2018.
On July 28, 2021 the Company announced that all terms had been satisfied. Pursuant to the terms of the settlement, Bruce Burwick surrendered to KAYS 1,006,671 shares of our common stock issued to him in connection with the transaction (800,003 shares which were issued for the facility purchase, 166,667 shares which were issued for $250,000 in cash and 40,001 shares which were issued as annual compensation for Burwick serving as a director of KAYS). The shares have been submitted to KAYS' transfer agent for cancellation. In addition, the Company received clear title to the warehouse facility, which enables the Company to sell it without restriction. As part of the settlement, Burwick received $160,000 from the net proceeds of the sale of the facility's grow license to an unrelated third party, resigned from the Company's board of directors and agreed to work as a non-exclusive consultant to the Company for the next four years for a yearly fee of $35,000.00.
On October 12, 2021, KAYS completed the sale of its Eugene, Oregon Cannabis Production and Processing Facility for gross proceeds of $1,325,000, generating a cash influx of approximately $0.09 per share for the Company (the “Eugene Warehouse Sale”). The sale was part of our recently announced settlement with Sunstone Farms, and it also resulted in the cancellation of 1,006,671 shares of KAYS stock, decreasing the Company’s issued and outstanding shares by approximately 6.5% to 14.7 million shares. Funds received from the sale were and are being used to repay certain debt and strengthen our balance sheet and for general working capital purposes, as well as provide the initial stage capital for some of the Company’s U.S. and global expansion activities, including its planned cultivation sites in Greece and Israel.
On August 30, 2021 the Company elected to dispose of two (2) of the four (4) Fiat cars that it owned that it was not using. The four cars were originally purchased in September of 2017 for prices ranging from $13,584.00 to $14,992.00.
After a review of market pricing the Company was able to sell one of the cars to Carvana for $14,460.00 and the funds were used for general working capital. Additionally, the second Fiat was transferred to Mr. Frank in lieu of $15,000.00 in fees owed him. After adjusting for net book value, the Company recorded $12,453 to additional paid in capital.
On December 27, 2021 the Company entered into an Exchange Agreement with Craig Frank and BMN Consultants, Inc. for the 50,000 Series C Preferred Shares of Kaya Holdings that they each held, 100,000 total shares..
Pursuant to the terms and conditions of this Agreement, the Holders each agreed to (a) waive payment of approximately $338,000 of Accrued Compensation; (b) defer payment of the remaining balance of Accrued Compensation owed to each of them of approximately $250,000 until January 1, 2025 ; and (c) exchange their 50,000 Series C Shares ( at total of 100,000) for twenty (20) Series D Convertible Preferred Shares of Kaya Holdings Stock. Each Share of 40 Series D Preferred Stock is convertible, at the option of the holder thereof, at any time and from time to time, into one percent (1%) of the Company’s Fully Diluted Capitalization as of the Conversion Date. This resulted in a related party gain of $559,058, which was applied to APIC.
| F-22 |
NOTE 12 – STOCK OPTION PLAN
In 2011 the Alternative Fuels America, Inc. 2011 Incentive Stock Plan (the “Plan”), which provides for equity incentives to be granted to the Company’s employees, executive officers or directors or to key advisers or consultants. Equity incentives may be in the form of stock options with an exercise price not less than the fair market value of the underlying shares as determined pursuant to the 2011 Incentive Stock Plan, restricted stock awards, other stock-based awards, or any combination of the foregoing. The 2011 Incentive Stock Plan is administered by the board of directors.
On July 22, 2020, the Board of Directors approved the issuance of 666,667 post-reverse split shares of stock to recipients of the plan (the shares are to be issued after the 2020 June 30 Quarterly filing is completed). Upon issuance the remaining balance of the shares available in the plan will be 60,333 post-reverses split shares.
NOTE 13 – WARRANTS
On September 8, 2015 the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 210,772 paid and non-assessable post -reverse split shares of the Common Stock at the price of $0.4744455 per post-reverse split share (the “Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $100,000, 10% promissory note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017. As of December 31, 2019, the note was paid in full.
On September 9, 2015 the Company received a total of $100,000 from an accredited investor in exchange for a two year note in the aggregate amount of $100,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 210,772 paid and non-assessable post-reverse split shares of the Common Stock at the price of $0.4744455 per post-reverse split share (the “Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $100,000, 10% promissory note due September 9, 2017 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or September 9, 2017. As of December 31, 2019, the note was paid in full.
On May 9, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 158,079 paid and non-assessable post-reverse split shares of the Common Stock at the price of $0.4744455 per post-reverse split 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, 2019, the note was paid in full.
On May 17, 2016 the Company received a total of $75,000 from an accredited investor in exchange for a two year note in the aggregate amount of $75,000 with interest accruing at 10%. The note holder is entitled to subscribe for and purchase from the company 158,078 paid and non-assessable shares of the Common Stock at the price of $0.4744455 per share (the “Warrant Exercise Price”) for a period of five (5) years commencing from the earlier of such time as that certain $75,000, 10% promissory note due May 17, 2018 has been fully repaid or the start of the Acceleration Period as defined in “The Note” or May 17, 2018. As of December 31, 2019, the note was paid in full.
| Warrants issued to Non-Employees | |||||
| Weighted | Weighted | ||||
| Average | Average | ||||
| Warrants | Exercise | Contract | |||
| Issued | Price | Terms Years | |||
| Balance as of December 31, 2020 | 737,703 | 0.47 | |||
| Granted | - | ||||
| Exercised | - | - | |||
| Expired | (16,667) | - | - | ||
| Balance as of December 31, 2021 | 316,158 | 0.42 | |||
| F-23 |
NOTE 14 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has several operating leases for an office and store lease in Fort Lauderdale, Florida and several locations in Oregon under arrangements classified as leases under ASC 842.
Effective June 12, 2017, the Company leased the office space in Fort Lauderdale, Florida under a 5-year operating lease expiring June 30, 2022. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $4,017 and culminating in a monthly payment of $4,839. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The lease was terminated on July 3, 2019 and the Company agreed to issue landlord 500,000 shares of common stock as penalty for early termination.
Effective June 1, 2019, the Company leased the office space in Fort Lauderdale, Florida under a 2-year operating lease expiring May 31, 2021. The rental payment is $1,802 per month. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease.
Effective May 15, 2014, the Company leased an unit in Portland, Oregon under a 5-year operating lease expiring May 15, 2019. In May 2019, the lease had been extended to May 15, 2024. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $2,250 and culminating in a monthly payment of $2,632. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The lease is now on a month-to-month basis.
Effective June 1, 2015, the Company leased an unit in Salem, Oregon under a 5-year operating lease expiring May 31, 2020. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $3,584 and culminating in a monthly payment of $4,034. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The lease is now on a month-to-month basis.
Effective April 15, 2016, the Company leased an unit in Salem, Oregon under a 5-year operating lease expiring April 15, 2021. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $4,367 and culminating in a monthly payment of $4,915. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The lease is now on a month-to-month basis.
Effective April 15, 2016, the Company leased an unit in Salem, Oregon under a 5-year operating lease expiring April 15, 2021. The lease provides for increases in future minimum annual rental payments based on defined annual increase beginning with monthly payments of $4,617 and culminating in a monthly payment of $5,196. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The lease is now on a month-to-month basis.
The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable. The Company used an estimated incremental borrowing rate of 9.32% to estimate the present value of the right of use liability.
The Company has right-of-use assets of $255,770 and operating lease liabilities of $282,597 as of December 31, 2021. Operating lease expense for the twelve months ended December 31, 2021 and 2020 were $194,689 and $265,442, respectively.
| Maturity of Lease Liabilities at December 31, 2021 | Amount | |||||
| 2022 | 120,960 | |||||
| 2023 | 99,203 | |||||
| 2024 | 76,617 | |||||
| Later years | 27,041 | |||||
| Total lease payments | 323,823 | |||||
| Less: Imputed interest | (41,224 | ) | ||||
| Present value of lease liabilities | $ | 282,597 | ||||
Note 15- Income Taxes
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income.
The Act also created a new minimum tax on certain future foreign earnings. The impact of the Act increase the Company’s deferred tax asset related to the Company’s net operating loss by approximately $2,891,850 and increase the Company’s valuation allowance by approximately $2,891,850 resulting in no impact to the Company’s financials.
We record tax positions as liabilities in accordance with ASC 740 and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the recognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of December 31, 2021, and 2020 we have not recorded any uncertain tax positions in our financial statements.
The effective US Federal Income Corporate Tax Rates for 2021 and 2020 are 21% and 21%, respectively.
The Company has net operating loss carry forwards of approximately $13,770,716 at December 31, 2021 that do not expire. However, utilization of these losses may be limited pursuant to Section 382 of the Internal Revenue Code due to a recapitalization in 2007 and subsequent stock issuances.
| F-24 |
The Company has a deferred tax asset as shown in the following:
| Year Ending December 31, 2021 | Year Ending December 31, 2020 | |||||||
| Deferred Tax Asset | 2,891,850 | 2,378,639 | ||||||
| Valuation Allowance | (2,891,850 | ) | (2,378,639 | ) | ||||
| Net Deferred Tax Asset | $ | $ | ||||||
We are subject to certain tax risks and treatments that could negatively impact our results of operations
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly and the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E favorable to cannabis businesses.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $782,107 during the year ended December 31, 2021 compared to $0 during the year ended December 31, 2020. Although we have net operating losses that we believe are available to us to offset this entire tax liability, which arises under Section 280E of the Code because we are a cannabis company, as a conservative measure, we have accrued this liability.
Note 16- Subsequent Events
Events that occur after the balance sheet date but before the financial statements were available to be issued must be evaluated for recognition or disclosure. The effects of subsequent events that provide evidence about conditions that existed at the balance sheet date are recognized in the accompanying financial statements. Subsequent events, which provide evidence about conditions that existed after the balance sheet date, require disclosure in the accompanying notes. Management evaluated the activity of the Corporation through the date the financial statements were issued, and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements, other than those listed below.
| F-25 |