$AGTK Form 10-K

The independent auditors’ report on our financial statements for the years ended December 31, 2014 and 2013 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 10 to the consolidated financial statements filed herein.

While our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our auditors have raised a substantial doubt about our ability to continue as a going concern.

Results of Operations

Year ended December 31, 2014 compared to December 31, 2013

Revenues



Revenues for the years ended December 31, 2014 and 2013 were $47,261 and
$143,792, respectively, and were comprised of the following:



                          Year ended December 31,
                            2014            2013
Wellness products      $    32,045       $      -
Chillo products             15,216          71,114
Cloud-based products            -           22,860
ACS                             -           49,818
Total                  $    47,261       $ 143,792

Operating Expenses



Operating expenses were $1,315,676 for the year ended December 31, 2014 compared
to $3,898,317 for the year ended December 31, 2013. The expenses were comprised
of:



                                            Year Ended December 31,
 Description                                 2014            2013
Administration and management fees       $   314,660     $   280,830
Stock compensation expense, management            -        3,129,405
Stock compensation expense, other            379,000         126,542
Professional and consulting fees             107,532          85,762
Bad debt expense                              16,654          26,754
Commissions and license fees                   8,722          58,871
Advertising and promotional expenses          72,091          15,077
Rent and occupancy costs                      76,235          37,195
Leased property for sub-lease                108,163              -
Property and maintenance cost                 67,925              -
Travel and entertainment                      71,029              -
General and other administrative              93,665         137,881
Total                                    $ 1,315,676     $ 3,898,317

Stock compensation expense, other (included in professional and consulting fees) was $379,000 for the year ended December 31, 2014 compared to $126,542 for the year ended December 31, 2013. The 2014 period is comprised of $133,000 to advisories to the board of directors and $246,000 for the issuance of 2,035,895 shares of common stock for services provided.

Stock compensation expense, other (included in professional and consulting fees) for 2013 includes $111,041 for the amortization of deferred stock compensation, and $15,500 for the issuance of 25,000 shares for services provided to the Company.

Professional and consulting fees (excluding stock compensation expense, other) increased to $107,532 for the year ended December 31, 2014 compared to $85,762 for the year ended December 31, 2013 and is comprised of the following:

                              Year ended December 31,
                                2014             2013
Legal fees                 $     28,882       $  9,735
Property management fees         51,000             -
Consulting fees                      -          21,700
Accounting fees                  14,050         12,775
Investor relation costs          13,600         41,552
                           $    107,532       $ 85,762

Commission and licensing fees of $8,722 were incurred for year ended December 31, 2014 compared to commissions of $27,671 for the year ended December 31, 2013. Also included in 2013 were fees of $31,200 pursuant to the ACS Agreement. The decrease in the 2014 period is primarily due to the Company and ACS terminating their agreement in April 2013.

Advertising and promotional expenses increased to $72,091 for the year ended December 31, 2014 compared to $15,077 for the year ended December 31, 2013. The increase of $57,014 was primarily due to the design, launch and marketing of the Company’s Mont Blunt brand.

Rent and occupancy costs were $76,235 for the year ended December 31, 2014 compared to $37,195 for the year ended December 31, 2013. The increase was due primarily to the Company entering into sublease agreement for the use of up to 7,500 square feet of office space that will be utilized to market, sell and distribute products to Colorado dispensaries.

Leased property available for sub-lease and property maintenance costs were $108,163 and $67.925, respectively, for the year ended December 31, 2014. These costs were comprised of $85,246 for leased real estate that the Company plans to lease or sub-lease to licensed marijuana operators, $22,917 for water rights, $15,500 for land surveys and $2,425 on land maintenance. Additionally, the Company expensed $50,000 it had advanced to MYLO Construction for the management and construction of a proposed building in the Apex Industrial Park Complex, otherwise known as Nevada’s “Green Zone”.

General and other administrative costs for the year ended December 31, 2014, were $93,665 compared to $137,881 for the year ended December 31, 2013. Expenses for the year ended December 31, 2014, include a settlement expense of $15,000 related to licensing fees, public company filing and transfer agent fees of $12,236, telephone, internet and web based service costs of $17,225, office and employee moving costs of $9,518, payroll taxes and fees of $6,304, office supply purchases of $11,736 and $21,646 of other general and administrative costs. Expenses for the 2013 period include public company filing and transfer agent fees of $30,770, travel and entertainment costs of $43,071, internet and web based service costs of $26,585, office supplies of $8,661 and $28,794 of other general and administrative costs.

Other Income (Expense), Net

Other expense for the year ended December 31, 2014 was $675,083 compared to $578,321 for the year ended December 31, 2013. Included in other expenses for the 2014 period was income from the decrease on the fair value of derivatives of $30,347 and interest income of $80,206, offset by interest expense of $785,636 related to the 2013 and 2014 Company Notes.

The 2013 expenses were comprised of $299,856 of interest expense and expense from the decrease on the fair value of derivatives of $353,761. Also included in other expenses was a gain on distribution of equity method investee of $67,186 and $8,110 of interest income related to interest collected on notes receivables.

Interest expense was $785,636 for the year ended December 31, 2014 compared to $299,856 for the year ended December 31, 2013. The increase was due to the issuance of various debt instruments from May 2013 through January 2014. A summary of interest expense for each of the periods is as follows:

                                             Year ended December 31,
                                               2014            2013
Excess value of common stock issued       $    244,135      $      -
Interest on face value                         133,769         45,875
Additional true-up interest                    123,572             -
Amortization of note discount                   81,537        185,612
Amortization of OID                            167,245         38,808
Beneficial conversion feature                       -          29,561
Amortization of deferred financing fees         35,378             -
Total                                     $    785,636      $ 299,856

For the year ended December 31, 2014, net cash used in operating activities was $749,764 compared to $453,355 for the year ended December 31, 2013. The net loss for the year ended December 31, 2014 of $2,012,102 was impacted by stock compensation expense of $379,000 comprised of $133,000 to advisories to the board of directors and $246,000 for the issuance of 2,035,895 shares of common stock for services provided. Non cash interest expense included $363,991 for excess value of common stock issued for convertible notes payable, the amortization of discounts on convertible notes of $248,782 and the amortization of deferred financing fees of $35,379 related to the convertible promissory notes. Additional non-cash expenses for the year ended December 31, 2014 was a write-off to licensing costs of $15,000 and bad debt expense of $16,654, offset by the change in fair value of the derivative liability of $30,347. Changes in operating assets and liabilities included an increase in accounts payable and accrued expenses of $62,063, an increase in deferred compensation of $149,224 and the receipt of tenant deposits of $90,000. These amounts were offset by increases in prepaid expenses of $73,540 and a decrease in inventory of $6,423.

Negative cash flows from operations for 2013 was due to the net loss of $4,421,662 and was impacted by stock and warrant compensation expense of $3,255,947 comprised of $2,821,275 of preferred stock compensation, the amortization of deferred stock compensation of $192,472 from the previous issuance of Series B preferred stock, $124,200 warrant based compensation for issuance of warrants to purchase 300,000 shares of common stock to our advisor to the board of directors, $80,000 for the one time issuance of 200,000 shares of common stock to the same advisor, 75,000 shares of common stock (with an additional 25,000 shares to be issued each quarter the advisor continues his relationship with the Company) valued at $22,500 and $15,500 for the issuance of 25,000 shares for the services provided to the Company. Additional non-cash expenses for the year ended December 31, 2013 were the amortization of the initial discounts of $185,612 on the convertible notes, the initial derivative liability expense and the change in fair market value of the derivatives of $353,761, amortization of deferred financing fees of $38,808 also related to the convertible promissory notes, loss related to the conversion of the contingent liability to common stock of $29,561 and a gain on discontinuance of equity method of $67,186.

During the year ended December 31, 2014, net cash used in investing activities was $532,573 compared to $19,060 for the year ended December 31, 2013. The 2014 period was the result of land acquisition costs of $268,531, investments of $50,000 in non-marketable securities, advances to a related party of $169,573, security deposits paid of $14,700 and the purchase of office furniture of $9,769 and the cash payment portion of $20,000 for the acquisition of Dry Vapes, Holdings, Inc. The net cash used in investing activity for the year ended December 31, 2013 was the result of the acquisition of licensing rights and the purchase of office furniture.

Net cash provided by financing activities was $1,292,000 and $579,500 for the years ended December 31, 2014 and 2013, respectively. The 2014 activity was comprised of proceeds received related to the Typenex notes receivable of $200,000, the issuance of convertible promissory notes of $1,100,000 and the payment of deferred financing fees of $8,000. The 2013 amount was comprised of issuance of convertible promissory notes of $227,500, proceeds of $400,000 related to the Typenex convertible note (see Note 6 to the consolidated financial statements contained herein) and the payment of deferred financing fees of $48,000.

For the year ended December 31, 2014, cash and cash equivalents increased by $9,663 compared to $106,874 for the year ended December 31, 2013. Ending cash and cash equivalents at December 31, 2014 was $118,429 compared to $108,766 at December 31, 2013.

We have cash and cash equivalents on hand to meet our obligations. We presently maintain our daily operations and capital needs through the sale of our products and financings available to us from our lender.

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.

Critical Accounting Policies

Accounting Policies and Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

As such, in accordance with the use of accounting principles generally accepted in the United States of America, our actual realized results may differ from management’s initial estimates as reported. A summary of significant accounting policies are detailed in notes to the financial statements which are an integral component of this annual report on Form 10-K.

Revenue Recognition

The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” (“SAB No. 104”). SAB 104 clarifies application of generally accepted accounting principles related to revenue transactions. The Company also follows the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF Issue No. 00-21”), in arrangements with multiple deliverables.

The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.

The Company recognizes revenue during the month in which products are shipped or commissions were earned.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.

Accounts Receivable

The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectibility is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience. While management uses the best information available to make its evaluations, this estimate is susceptible to significant change in the near term.

Inventory

Inventory is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving inventory is made based on management analysis or inventory levels and future sales forecasts.

Investment of Non-Marketable Securities

The Company’s investment in non-marketable securities consist of cash investments in a less than 10% interest in privately held companies that provide merchant processing services.

Impartment of Long-Lived Assets and Long-Lived Assets to be Disposed

We evaluate long-lived assets and identifiable intangible assets with finite useful lives in accordance with ASC 350-30 and ASC 360 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), and accordingly, management reviews our long-lived assets and identifiable intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize an impairment loss when the sum of the future undiscounted net cash flows expected to be realized from the asset is less than its carrying amount. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Considerable judgment is necessary to estimate the fair value of the assets and accordingly, actual results could vary significantly from such estimates. Our most significant estimates and judgments relating to the long-lived asset impairments include the timing and amount of projected future cash flows.

Fair Value of Financial Instruments

Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).

Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.

The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The three hierarchy levels are defined as follows:

Level 1 – Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.

The Company’s financial instruments consist primarily of cash, accounts payable and accrued expenses, and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.

Earnings (Loss) Per Share

Earnings (loss) per share are computed in accordance with ASC 260, “Earnings per Share”. Basic earnings (loss) per share is computed by dividing net income
(loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. As of December 31, 2014 there were warrants to purchase 300,000 shares of common stock, the Company’s outstanding convertible debt is convertible into 20,860,466 shares of common stock. These amounts are not included in the computation of dilutive loss per share because their impact is antidilutive.

Accounting for Stock-Based Compensation

The Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. Stock awards granted to non-employees are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in which services are provided.