Kaya Holdings
Overview
Kaya Holdings (KAYS) was incorporated in Delaware in 1993 under the name Gourmet Market, Inc. and has engaged in a number of businesses. Its name was changed on May 11, 2007 to Netspace International Holdings, Inc. (“Netspace”). Netspace acquired 100% of the capital stock of Alternative Fuels Americas, Inc., a Florida corporation in January 2010 in a stock for stock transaction and issued 100,000 shares of Series C convertible preferred stock to existing shareholders of the Florida corporation. The Company’s name was changed in October 2010 from Netspace International Holdings, Inc. to Alternative Fuels Americas, Inc.1
From 2010 through 2014 the Company was engaged in seeking to develop a biofuels business. In January 2015, the Company determined that it was in the best interests of its stockholders to discontinue its biofuel development activities, and to instead leverage its agricultural and business development experience and focus all its resources on the development of legal medical and recreational marijuana opportunities in the United States and in select international markets.
Legal Medical and Recreational Marijuana Operation in Oregon
In January 2014 KAYS incorporated a subsidiary, Marijuana Holdings Americas, Inc. a Florida corporation (“MJAI”). Through entities controlled by MJAI, KAYS has focused on the development of opportunities within the legal recreational and medical marijuana sectors in the United States. In March 2014, MJAI, subsidiary, applied for and was awarded its first license to operate a Medical Marijuana Dispensary (an “MMD”). The Company developed the Kaya Shack™ brand for its retail operations and on July 3, 2014 opened its first Kaya Shack™ Medical Marijuana Dispensary in Portland, Oregon, thereby becoming the first publicly traded U.S. company to own and operate an MMD. Initial customer acceptance and media coverage was very positive, including many references to KAYS as the “Starbucks of Medical Marijuana” by television news stations, news print publications and online news sources. In March 2015, the Company changed its name to Kaya Holdings, Inc. to better reflect its new plan of operations.
In April 2015, KAYS commenced its own medical marijuana grow operations for the cultivation and harvesting of legal marijuana thereby becoming the first publicly traded U.S. company to own a majority interest in a vertically integrated legal marijuana enterprise in the United States. In October 2015, concurrent with Oregon commencing legal sales of recreational marijuana through MMDs, KAYS opened its second retail operation in Salem, Oregon, the Kaya Shack™ Marijuana Superstore. Oregon. During 2015, the Company also consolidated its grow operations and manufacturing operations into a single facility in Portland, Oregon.
Recent Developments
Licensing
In 2016, Oregon began the process to transition legal marijuana sales from Oregon Health Authority (“OHA”) licensed MMDs and grow operations to Oregon Liquor Control Commission (“OLCC”) licensed recreational marijuana retailers and producer and processing facilities. Effective January 1, 2017, all retailers of recreational marijuana were required to have a recreational marijuana sales license issued by the OLLC for each retail outlet operated.
Accordingly, in 2016 the Company applied for OLLC licenses for its two initial Kaya Shack™ retail outlets (Portland, Oregon and South Salem, Oregon), and also submitted license applications for its two new locations under construction and development at that time.
In late December 2016, the company received its 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, the company received its North Salem Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #2) a 2,600 square foot Kaya Shack™ Marijuana Superstore in North Salem, Oregon, whereupon the location opened for business with both recreational and medical sales.
On May 2, 2017 the company received its OLCC recreational license for its Portland Kaya Shack™ outlet (Kaya Shack™ OLCC Marijuana Retailer License #3) and after a delay of approximately four months. During that period the company 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.
The company's OLCC License for the Central Salem Kaya Shack™ Marijuana Superstore (Kaya Shack™ OLCC Marijuana Retailer License #4) has been filed and is pending completion, inspection and final licensing. The company expect to complete construction and licensing during the third or fourth quarter of 2017 days and commence recreational and medical sales at this location as soon as possible thereafter.
Additional Kaya Shack™ Marijuana Superstores
During 2016, the Company focused a significant portion of its efforts on developing two additional Kaya Shack ™ Marijuana Superstores, including identifying and leasing suitable locations, completing necessary build out and applying for the requisite OLCC recreational marijuana retailer licenses. In addition to the four Kaya Shack™ retail marijuana stores described above, the Company plans to identify and lease locations for, license and seek to open up to four additional Kaya Shack™ Marijuana Superstores in other Oregon markets over the next 18 to 24 months, as well as explore opportunities in other states to increase its retail footprint. Additionally, the Company is exploring opportunities to further its operation in Oregon and elsewhere through the acquisition of currently licensed and operating retail operations, which can be converted to the Kaya Shack™ model.
Expansion of Grow and Manufacturing Operations
On March 21, 2017, KAYS announced that it was in the process of expanding its grow and manufacturing operations and had retained a realtor to assist in identifying a suitable 30-60 acre tract of land in Oregon which would permit KAYS to expand its grow operations to the maximum space currently allowed by law utilizing a mix of indoor and greenhouse cultivation. KAYS believes that the acquisition of a property will position the Company for future development, including increased Marijuana Canopy production, development of marijuana processing facilities and other cannabis related endeavors (subject to local zoning restrictions or liberalization of restrictions). As part of this expansion, KAYS ceased operations of its Portland grow facility at the end of March 2017, arranged to maintain its genetics library of over 30 strains of cannabis at an OHA-licensed medical grow site and contracted with farmers to meet demand until the new facility is secured, built and fully operational.
KAYS is continuing to diligently search for a suitable location that is properly zoned to permit indoor and outdoor cultivation and has segregated acquisition and development funds for this purpose.
$2.1 Million Financing
In March 2017, the Company completed a $2.1 million financing with an institutional investor (the “Investor”) who had previously furnished KAYS with $1.2 million in financing, pursuant to a financing agreement (the “$2.1M Financing Agreement”) entered into between the Company and the Investor in December 2016. Pursuant to the $2.1M Financing Agreement, the Investor purchased $2.1 million in principal amount of convertible notes (the “$2.1M Notes”) from the Company as follows:
$400,000 in principal amount of $2.1M Notes which are convertible into shares of the Company’s common stock at a conversion price of $0.04;
$700,000 in principal amount of $2.1M Notes which are convertible into shares of the Company’s common stock at a conversion price of $0.07; and
$1,000,000 in principal amount of $2.1M Notes which are convertible into shares of the Company’s common stock at a conversion price of $0.10.
The purchase price for the $2.1M Notes is equal to the principal amount thereof. The $2.1M Notes have a term of two years from issuance and bear interest at the rate of eight percent (8%) annum, which accrues and is payable to together with interest at maturity. The Investor may convert the principal amount of the $2.1M Notes (as well as other notes it currently holds as referenced above), together with accrued but unpaid interest thereon, into shares at the applicable conversion price, at any time or from time to time prior to maturity. The conversion price is subject to adjustment for stock splits, stock dividends, recapitalizations and similar transactions. The $2.1M Notes also provide that at no time may they be convertible if the number of shares being issued upon conversion to and then held by the Investor would result in the Investor beneficially owning in excess of 4.99% of the Company’s then outstanding shares of common stock, after giving effect to the proposed conversion.
$6.3 Million Financing
On May 11, 2017, the company entered into a financing agreement with the Investor, which was amended effective July 31, 2017 (as amended, the “$6.3M Financing Agreement”), pursuant to which the Investor has purchased and has agreed to purchase up to $6.3 million in convertible notes (the “$6.3M Notes”) from the Company as follows:
The Investor purchased $500,000 in principal amount of $6.3M Notes from the Company contemporaneously with the execution of the $6.3M Financing Agreement, which $6.3M Notes are convertible into shares of the Company’s common stock at a conversion price of $0.05 (the “$0.05Notes”).
The Investor purchased $150,000 in principal amount of $6.3M Notes from the Company prior to July 31, 2017 and has agreed to purchase an additional $350,000 in $6.3M Notes from the Company prior to October 31, 2017, which Notes are (a) convertible into shares of the Company’s common stock at a conversion price of $0.03; and (b) secured by a mortgage lien on any real property acquired by the Company on or before October 31, 2017 until such time as the Company repays at least $1.5 million in indebtedness owed to the Investor or such amount of indebtedness in converted into shares of the Company’s common stock in accordance with its terms (the “Secured Notes”).
Provided Investor has fulfilled its obligation to purchase all $500,000 in principal amount of Secured Notes, the Investor will have the right to purchase an additional tranche of $0.05 Notes up to an aggregate of $500,000 in principal amount, at any time and from time to time through February 28, 2018.
Provided the Investor has fulfilled its obligation to purchase the additional tranche of $1,000,000 in principal amount of $0.05 Notes from the Company on or before July 31, 2018, the Investor will have the right to purchase up to an additional $1,600,000 in principal amount of $6.3M Notes from the Company at any time and from time to time through December 31, 2018, which $6.3M Notes will be convertible into shares of common stock at a conversion price of $0.08 (the “$0.08 Notes”).
Provided the Investor has fulfilled its obligation to purchase all $1,600,000 in principal amount of $0.08 Notes from the Company on or before December 31, 2018, the Investor will have the right to purchase up to an additional $2,200,000 in principal amount of $6.3M Notes from the Company at any time and from time to time through May 31, 2019, which $6.3M Notes will be convertible into shares of common stock at a conversion price of $0.11.
The $6.3M Notes are substantially similar in form and substance to the $2.1M Notes, except that the $6.3M Notes are due and payable on January 1, 2020. The proceeds from the offer and sale of the $2.1M and $6.3M Notes are and will be used to fund the Company’s growth plan, including expansion of its chain of Kaya Shack™ Marijuana Superstores in Oregon, expansion of its marijuana grow facility and manufacturing operation, introducing new Kaya Shack™ branded cannabis products and for general working capital purposes.
Market Overview
Twenty-nine states and the District of Columbia have legalized marijuana in some capacity. Additionally, eight states (Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington State) and Washington, DC have approved the implementation of legal recreational marijuana use, with active legal cannabis economies flourishing in Colorado, Oregon and Washington. As Melia Robinson of Business Insider stated, “After a historic election cycle, which saw four states pass ballot initiatives legalizing nonmedical marijuana, one in five Americans now live in a state where it’s legal to smoke weed without a doctor’s letter.”
According to cannabis research firm Arcview, sales of legal marijuana in North America rose by 34% to $6.9 billion in 2016, and based on estimates from investment firm Cowen & Co., U.S. legal sales could reach $50 billion by 2026. For added context, ArcView estimates that North American black market sales totaled $46.4 billion last year.
Arcview projects sales will grow at a compound annual growth rate of 25% through 2021, when the North American market is expected to top $20.2 billion in sales. “The only consumer industry categories I’ve seen reach $5 billion in annual spending and then post anything like 25% compound annual growth in the next five years are cable television (19%) in the 1990s and the broadband internet (29%) in the 2000s,” Tom Adams, editor in chief of Arcview Market Research, said in a statement.
Estimates from various sources for the size of the long term market range from up to an excess of $100 billion if Federal Prohibition is repealed and marijuana sales become legal in all 50 states and Washington D.C. (for perspective beer is approximately a $100 billion market, with wine just under $30 billion and coffee approximately $12 billion).
The Kaya Shack™ Brand
Kaya Holdings operates the Kaya Shack™ brand of medical marijuana dispensaries and recreational marijuana stores.
Kaya Holdings operates three recreational marijuana retail outlets and medical marijuana dispensaries in Oregon under the Kaya Shack™ and anticipates opening a fourth location during the second quarter of 2017. In addition to these four Kaya Shack™ retail marijuana stores, the Company plans to identify and lease locations for, license and seek to open up to four additional Kaya Shack™ Marijuana Superstores in other Oregon markets over the next eighteen to twenty-four months, as well as explore opportunities in other states to increase its retail footprint. Additionally, the Company is exploring opportunities to further its operation in Oregon and elsewhere through the acquisition of currently licensed and operating retail operations, which can be converted to the Kaya Shack™ model.
Dubbed by the mainstream press as the “Starbucks of Marijuana” after its first outlet opened in July, 2014, its 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 its Happiest Days Haven’t Even Happened Yet,” and its signature “Be Kind.”
Kaya Shack™ retail outlets are open 7 days a week from 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 its stores are quality tested by independent labs to assure adherence to strict quality and OLCC regulations.
Kaya Shack™ Retail Outlets
I. Kaya Shack™ , 1719 SE Hawthorne Blvd., Portland, Oregon
The company's flagship Hawthorne Boulevard Store opened July 3, 2014. The location is prime Portland real estate, located in an area that many term as “the Greenwich Village of Portland”.
The Portland facility rotates through approximately 100 different strains throughout the year and in any given month features over 35 popular strains of marijuana with some proprietary strains testing in excess of 28%. The company's stores also feature various concentrates, including butane hash oil (B.H.O.) and CO2 oil extract (wax, shatter) which range in potency from approximately 40% to over 80% THC, as well as high grade Oils and Tinctures, high CBD – low THC strains and “Kaya Candies,” “Kaya Caramels” and an assortment of cookies and cakes for patients who do not smoke.
The company's Portland outlet initially operated as an MMD. In connection with the transition of recreational marijuana retailer licenses from the OHA to the OLCC, the company applied for an OLCC license for the facility in 2016. However, issuance of the OLCC license for the Portland, Oregon outlet was delayed because of the need to resolve various local issues with the City of Portland. Accordingly, from January 1, 2017 until May 2, 2017, when the company received Kaya Shack ™ OLCC Marijuana Retailer License #3 for this location, sales at the Portland, Oregon location were limited to medical marijuana and as such its revenues from this location were impacted.
II. Kaya Shack™ Marijuana Superstore, South Salem, Oregon
The company's second location (the first Kaya Shack ™ Marijuana Superstore) opened for business on October 17, 2015 in South Salem, Oregon in time to take advantage of early recreational sales. The company's South Salem Kaya Shack ™ Marijuana superstore received Kaya Shack ™ OLCC Marijuana Retailer License prior to the January 1, 2017 deadline to do so and both recreational and medical marijuana sales have continued at this location seamlessly.
The store is located in first class strip mall space adjacent to “Little Caesars Pizza” and “Aaron Rents”, with a footprint roughly three times the size of its first Kaya Shack ™ in Portland. The location and floorplan was carefully chosen with an eye towards concept expansion to enhance revenues and broaden branding opportunities.
In addition to the recreational and medical marijuana products as offered at its Hawthorne location, the space allows for additional products and concept innovations to be introduced. These include the Kaya Café Juice Bar ™ (featuring THC and CBD enhanced juices and beverages), the Kaya Clone Room ™ (supplying marijuana plants and home cultivation accessories) and additional unique onsite concepts.
III. Kaya Shack™ Marijuana Superstore, North Salem, Oregon
The company's third Kaya Shack™ (located in North Salem, Oregon) received Kaya Shack ™ OLCC Marijuana Recreational Retailer License #3 on March 21, 2017.
As with the South Salem Store, the location is first class space, adjacent to Starbucks Coffee. This is its largest location to date and is intended to be the model for future Kaya Shack™ Marijuana Superstores. The company selected this location with an eye towards completing market penetration of the Salem Metropolitan Area, which hosts a population of approximately 400,000 people. The company also intend to expand its product offerings here as well as utilize the additional space to host community events the company hope will help make the Kaya Shack™ a destination for cannabis consumers.
IV. Kaya Shack ™ Marijuana Superstore, Central Salem, Oregon
Kaya Holdings is completing construction of and the OLCC licensing process for its fourth outlet, a third Kaya Shack™ Marijuana Superstore, which will be located in Central Salem, Oregon and which the company anticipate will open during the third or fourth quarter of 2017. As with the other Salem, Oregon outlet, the store is located in first class space, adjacent to fast food restaurants stores and near popular national retail chain stores. It also has a footprint of approximately 2,600 square feet and utilizes the Kaya Shack™ Marijuana Superstore model reflected in its third outlet and substantially completes its geographic penetration of the Salem, Oregon market.
As discussed below, the Company intends to initiate its Kaya Car™ Home Delivery Service during the second half of 2017, contemporaneously with a grand opening celebration for all four then OLCC Licensed Kaya Shack™ retail marijuana stores and to commence the to move to the next stage of branding and retail development.
Kaya Shack™ Home Delivery
In February 2017, the Company began the process of filing applications to add Home Delivery Service for three of its Kaya Shack™ retail marijuana stores at the advice of one of their OLCC examiners. As of the date of this Annual Report, the Company has received approvals from the OLCC to add Home Delivery to their three currently OLCC licensed locations, and is also applying for and expects to receive approval for Home Delivery licensing at its fourth retail outlet, which is currently under construction.
In addition to providing added value and convenience for its customers, extending visibility and building brand recognition for the Kaya Shack™ brand, the company believe that Home Delivery provides greater market penetration, by allowing sales throughout the geographic area that its stores are licensed in. There is no limit to the number of delivery vehicles that can service an individual area using just one store as a home base, so in effect the company intend to use this service to construct additional “virtual” Kaya Shacks™ without the added costs of additional brick and mortar locations.
On April 11, 2017, the Company took delivery of its first four Fiat 500 cars, and Kaya Holdings is in the process of ordering four additional Fiat 500 cars to begin building their Kaya Car™ Home Delivery Service fleet. The cars are presently being customized with distinctive Kaya Shack™ vehicle wrapping featuring the Company’s branding logos and colors, and the Company is developing the Kaya Shack™ Delivery App for use by its customers to order “Fast, Free Delivery” of the complete line of both medical and recreational grade Kaya Shack™ cannabis products.
The Company intends to initiate its Kaya Car™ Home Delivery Service during the third or fourth quarter of 2017, contemporaneously with a grand opening celebration for all four then OLCC Licensed Kaya Shack™ retail marijuana stores and to commence the to move to the next stage of branding and retail development.
Kaya Farms™ Cannabis and Cannabis Products
General
Since April 2015, Kaya Holdings has developed, operated and expanded its Kaya Farms™ West Coast Base of Operations, housing marijuana grow operations and a manufacturing facility. These operations enabled it to develop over 30 strains of cannabis and to provide its Kaya Shack™ retail outlets with top grade connoisseur quality marijuana products including flower, concentrates and extracts.
On March 21, 2017, KAYS announced that it was in the process of expanding its grow and manufacturing operations and had retained a realtor to assist in identifying a suitable 30-60 acre tract of land in Oregon which would permit KAYS to expand its grow operations to the maximum space currently allowed by law utilizing a mix of indoor and greenhouse cultivation. KAYS believes that the acquisition of a property will position the Company for future development, including increased Marijuana Canopy production, development of marijuana processing facilities and other cannabis related endeavors (subject to local zoning restrictions or liberalization of restrictions). As part of this expansion, KAYS ceased operations of its Portland grow facility at the end of March 2017, arranged to maintain its genetics library of over 30 strains of cannabis at an OHA licensed medical grow site and contracted with farmers to meet demand until the new facility is secured, built and fully operational.
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 ™. The brand, marketed under the tagline “Buds with Benefits,” features over 25 different strains of connoisseur-grade, high quality cannabis and proprietary specialty blends. The Kaya Buddies™ cannabis cigarettes, made from 100% cannabis bud only, was launched in mid-March 2017 in the Kaya Shack™ stores in Oregon and are targeted to service the exploding legal recreational marijuana market.
Kaya Buddies™ cannabis cigarettes have consistently been very well received by both older medical patients and recreational users new to cannabis. Although they are first being marketed through its internal retail network they are also being targeted for potential distribution lines to other dispensaries.
Other Potential Markets
The company believe that revenues and profitability will be enhanced through its planned opening of additional retail outlets utilizing the Kaya Shack™ brand and model in its chain, as well as economies of scale achieved by being a multilocation retail chain and being vertically integrated with grow and manufacturing operations. Ultimately, the company believe that the company can successfully enter other markets as they open up by applying its “brand” retail chain and vertically integrated grow and manufacture model to other states that legalize recreational marijuana use. Where applicable, the company will seek to leverage its public company status to finance organic growth and enable acquisitions of existing locations for the Kaya Shack brand, as well as look to acquire and grow additional brands.
On November 8, 2016, California, Maine, Massachusetts and Nevada voted to legalize recreational marijuana, while Arkansas, Florida and North Dakota approved medical cannabis initiatives. Montana, which legalized medical marijuana in 2004, also passed a measure to set up commercial cultivation operations and dispensaries.
The California recreational cannabis market is by far the largest potential market in the country, and its operations in Oregon allow for a natural progression and expansion down the I-5 corridor into California. Florida could be a potentially large market for it as well, because the company believe that KAYS would have a distinct advantage in the state, as it is one of the few Florida-based entities whose management has significant experience in owning and operating MMDs and grow and manufacturing operations. These markets are substantial, and their development could lead to $7-$8 billion in additional annual retail cannabis sales, according to Marijuana Business Daily’s preliminary estimates.
Growth Strategy
The Company has established a well-defined strategy for entering and maintaining a strong presence in the legal marijuana sector. The cornerstones of this strategy include:
All operations are to be conducted in accordance with state and local laws and regulations and guidance outlined in the U.S. Department of Justice “Cole Memo” dated August 29, 2013.
The Company will seek to operate in a vertically integrated manner (grow, process and sell) wherever permitted by law. In states where vertical integration is not permitted, the Company plans to determine which of the permitted activities offers the most potential for growth and value creation.
The Company will seek to engage, sponsor or lead local advocacy and lobbying groups that have a significant impact on the evolution and character of laws and the regulations under which legal marijuana operations are implemented in select markets.
The Company shall work with law enforcement and government officials to insure compliance with all regulations.
Marketing and Sales
The Company will only market its legal marijuana as in compliance with applicable state law.
The Company employs a marketing campaign consisting of four cornerstones:
Promoting and establishing the Kaya Shack™ brand.
A positive and active online presence.
Daily specials and promotions.
Quirky and fun holiday specials.
The company's core strategic marketing objectives include:
Establish the Kaya Shack™ Brand – positioning the Company’s brand to have positive and value related associations with all prospective and existing customers.
Operate Cooperatively cooperation, as a strategy, helps develop a network of suppliers and marketing channels able to promote Kaya Shack™.
Deliver Value customer value is achieved when the perceived value of what the company sell along with the value of the experience the company deliver exceeds the price the company charge.
Drive Customer Traffic the only two ways to increase store income is to sell more to its existing customers and attract new customers. Programs are in place to accomplish both tasks.
