/s/ SD Mayer & Associates, LLP SD Mayer & Associates, LLP We have served as the Company’s auditor since 2016 Seattle, Washington March 8, 2019 PMB Helin Donovan, LLP
/s/ PMB Helin Donovan, LLP
April 14, 2016
Seattle, WA
GROWLIFE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS | CONSOLIDATED BALANCE SHEETS |
| | December 31, 2015 | | | December 31, 2014 | | ASSETS | | | | | | | | | | | | | | CURRENT ASSETS: | | | | | | | Cash and cash equivalents | | $ | 60,362 | | | $ | 286,238 | | Inventory, net | | | 398,439 | | | | 883,350 | | Prepaid expenses | | | - | | | | 41,791 | | Deposits | | | 16,754 | | | | 33,584 | | Total current assets | | | 475,555 | | | | 1,244,963 | | | | | | | | | | | EQUIPMENT, NET | | | 10,327 | | | | 24,042 | | | | | | | | | | | OTHER ASSETS | | | | | | | | | Intangible assets, net | | | 243,604 | | | | 353,752 | | Goodwill | | | 739,000 | | | | 739,000 | | | | | | | | | | | TOTAL ASSETS | | $ | 1,468,486 | | | $ | 2,361,757 | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' (DEFICIT) | | | | | | | | | | | | | | | | | | CURRENT LIABILITIES: | | | | | | | | | Accounts payable - trade | | $ | 1,272,572 | | | $ | 1,129,130 | | Accounts payable - related parties | | | 71,920 | | | | - | | Accrued expenses | | | 121,765 | | | | 276,225 | | Accrued expenses - related parties | | | 53,287 | | | | - | | Derivative liability | | | 1,377,175 | | | | 2,100,915 | | Current portion of convertible notes payable | | | 2,287,868 | | | | 887,272 | | Deferred revenue | | | 25,000 | | | | 108,799 | | Total current liabilities | | | 5,209,587 | | | | 4,502,341 | | | | | | | | | | | LONG TERM LIABILITIES: | | | | | | | | | Convertible notes payable | | | - | | | | 98,333 | | | | | | | | | | | COMMITMENTS AND CONTINGENCIES | | | 2,000,000 | | | | - | | | | | | | | | | | MEZZANINE EQUITY: | | | | | | | | | | | | | | | | | | Contingently redeemable common stock-15,000,000 shares issued and outstanding at 12/31/15 and 12/31/14, respectively | | | 300,000 | | | | - | | | | | | | | | | |
STOCKHOLDERS' DEFICIT | | | | | | | Preferred stock - $0.0001 par value, 10,000,000 shares authorized, no shares | | | | | | | issued and outstanding | | | - | | | | - | | Series B Convertible Preferred stock - $0.0001 par value, 150,000 shares authorized, | | | | | | | | | 150,000 shares issued and outstanding at 12/31/2015 and 12/31/2014, respectively | | | 15 | | | | - | | Series C Convertible Preferred stock - $0.0001 par value, 51 shares authorized, | | | | | | | | | 51 shares issued and outstanding at 12/31/2015 and 12/31/2014, respectively | | | - | | | | - | | Common stock - $0.0001 par value, 3,000,000,000 shares authorized, 891,116,496 | | | | | | | | | and 879,343,771 shares issued and outstanding at 12/31/2015 and 12/31/2014, respectively | | | 89,098 | | | | 87,936 | | Additional paid in capital | | | 110,585,434 | | | | 108,699,950 | | Accumulated deficit | | | (116,715,648 | ) | | | (111,026,803 | ) | Total stockholders' deficit | | | (6,041,101 | ) | | | (2,238,917 | ) | | | | | | | | | | TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 1,468,486 | | | $ | 2,361,757 | |
| | | ASSETS | | | | | | CURRENT ASSETS: | | | Cash and cash equivalents | $2,334,377 | $69,191 | Accounts receivable - trade | 42,254 | - | Inventory, net | 792,664 | 465,678 | Prepaid costs | 3,418 | - | Deposits | 51,916 | 24,308 | Total current assets | 3,224,629 | 559,177 | | | | EQUIPMENT, NET | 712,866 | 302,689 | INTANGIBLE ASSETS | 3,280,453 | - | TOTAL ASSETS | $7,217,948 | $861,866 | | | | LIABILITIES AND STOCKHOLDERS' (DEFICIT) | | | | | | CURRENT LIABILITIES: | | | Accounts payable - trade | $1,054,371 | $821,398 | Accrued expenses | 261,954 | 133,988 | Accrued expenses - related parties | 73,585 | 37,776 | Derivative liability | 1,795,473 | 2,660,167 | Current portion of convertible notes payable | 3,404,133 | 3,015,021 | Current portion of notes payable- related parties | 100,020 | - | Current portion of capital lease | 8,534 | - | Deferred revenue | 89,504 | 10,000 | Total current liabilities | 6,787,574 | 6,678,350 | | | | COMMITMENTS AND CONTINGENCIES | - | - | | | | STOCKHOLDERS' DEFICIT | | | Preferred stock - $0.0001 par value, 10,000,000 shares authorized, no shares | | | issued and outstanding | - | - | Common stock - $0.0001 par value, 6,000,000,000 shares authorized, 3,437,599,095 | | | and 2,367,634,022 shares issued and outstanding at 12/31/2018 and 12/31/2017, respectively | 343,749 | 236,752 | Additional paid in capital | 139,331,067 | 123,678,069 | Accumulated deficit | (141,176,087) | (129,731,305) | Total stockholders' deficit | (1,501,271) | (5,816,484) | | | | NON CONTROLLING INTEREST IN EZ-CLONE ENTERPRISES, INC. | 1,931,645 | - | | | | TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $7,217,948 | $861,866 |
The accompanying notes are an integral part of these consolidated financial statements. GROWLIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSGROWLIFE, INC. AND SUBSIDIARIES | | Years Ended, | | | | December 31, 2015 | | | December 31, 2014 | | | | | | | | | NET REVENUE | | $ | 3,499,642 | | | $ | 8,537,676 | | COST OF GOODS SOLD | | | 2,980,503 | | | | 7,172,376 | | GROSS PROFIT | | | 519,139 | | | | 1,365,300 | | GENERAL AND ADMINISTRATIVE EXPENSES | | | 2,684,107 | | | | 7,851,370 | | OPERATING LOSS | | | (2,164,968 | ) | | | (6,486,070 | ) | | | | | | | | | | OTHER INCOME (EXPENSE): | | | | | | | | | Change in fair value of derivative | | | 1,678,541 | | | | (16,252,823 | ) | Interest expense, net | | | (1,118,635 | ) | | | (64,073,997 | ) | Other expense, prrimarily related to TCA Global Credit Master Fund LP funding | | | (2,002,533 | ) | | | - | | Loss on class action lawsuit settlements | | | (2,081,250 | ) | | | - | | Realized gain on sale of investment | | | - | | | | 186,791 | | Total other (expense) | | | (3,523,877 | ) | | | (80,140,029 | ) | | | | | | | | | | (LOSS) BEFORE INCOME TAXES | | | (5,688,845 | ) | | | (86,626,099 | ) | | | | | | | | | | Income taxes - current benefit | | | - | | | | - | | | | | | | | | | | NET (LOSS) | | $ | (5,688,845 | ) | | $ | (86,626,099 | ) | | | | | | | | | | Basic and diluted (loss) per share | | $ | (0.01 | ) | | $ | (0.10 | ) | | | | | | | | | | Weighted average shares of common stock outstanding- basic and diluted | | | 884,348,627 | | | | 834,503,868 | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
The accompanying notes are an integral part of these consolidated financial statements. | | | | | | | | NET REVENUE | $4,573,461 | $2,452,104 | COST OF GOODS SOLD | 4,105,172 | 2,180,603 | GROSS PROFIT | 468,289 | 271,501 | GENERAL AND ADMINISTRATIVE EXPENSES | 5,016,977 | 2,320,455 | OPERATING LOSS | (4,548,689) | (2,048,954) | | | | OTHER INCOME (EXPENSE): | | | Change in fair value of derivative | 977,732 | 496,306 | Interest expense, net | (1,320,811) | (1,281,083) | Impairment of acquired assets | (61,902) | - | Other (expense) income | - | 15,577 | Loss on debt conversions | (6,519,467) | (2,502,819) | Total other (expense) | (6,924,448) | (3,272,019) | | | | (LOSS) BEFORE INCOME TAXES | (11,473,137) | (5,320,974) | | | | Income taxes - current benefit | - | - | | | | NET (LOSS) | (11,473,137) | (5,320,974) | | | | Noncontrolling interest in EZ-Clone Enterprises, Inc. | 28,355 | - | | | | NET LOSS ATTRIBUTABLE TO GROWLIFE, INC. AND SUBSIDIARIES | $(11,444,782) | $(5,320,974) | COMMON SHAREHOLDERS | | | | | | Basic and diluted (loss) per share | $(0.00) | $(0.00) | | | | Weighted average shares of common stock outstanding- basic and diluted | 2,978,812,920 | 2,044,521,389 |
GROWLIFE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) | | Series B Convertible Preferred Stock | | | Series C Convertible Preferred Stock | | | Common Stock | | | | | | Additional Paid in | | | Accumulated | | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Party | | | Capital | | | Deficit | | | (Deficit) | | Balance as of December 31, 2013 | | | - | | | $ | - | | | | - | | | $ | - | | | | 755,694,870 | | | $ | 75,571 | | | $ | 1,121,237 | | | $ | 17,359,932 | | | $ | (24,400,704 | ) | | $ | (5,843,964 | ) | Options exercised for cash | | | - | | | | - | | | | - | | | | - | | | | 2,351,187 | | | | 235 | | | | - | | | | 44,438 | | | | - | | | | 44,673 | | Cashless exercise of options | | | - | | | | - | | | | - | | | | - | | | | 3,570,455 | | | | 357 | | | | - | | | | (357 | ) | | | - | | | | - | | Shares issued related to the conversion of principal and interest related to convertible notes payable | | | - | | | | - | | | | - | | | | - | | | | 102,507,839 | | | | 10,251 | | | | - | | | | 1,875,684 | | | | - | | | | 1,885,935 | | Shares issued for services rendered | | | - | | | | - | | | | - | | | | - | | | | 15,219,420 | | | | 1,522 | | | | - | | | | 2,720,078 | | | | - | | | | 2,721,600 | | Stock based compensation for stock options | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 724,267 | | | | - | | | | 724,267 | | Unrealized loss on investment in related party | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,121,237 | ) | | | - | | | | - | | | | (1,121,237 | ) | Change in fair value of derivative liability | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 23,475,908 | | | | - | | | | 23,475,908 | | Value of warrants expensed issued to CANX USA LLC or its assignees | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 62,500,000 | | | | - | | | | 62,500,000 | | Net loss for the year ended December 31, 2014 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (86,626,099 | ) | | | (86,626,099 | ) | Balance as of December 31, 2014 | | | - | | | | - | | | | - | | | | - | | | | 879,343,771 | | | | 87,936 | | | | - | | | | 108,699,950 | | | | (111,026,803 | ) | | | (2,238,917 | ) | Stock based compensation for stock options | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 175,661 | | | | - | | | | 175,661 | | Shares issued for debt conversion | | | - | | | | - | | | | - | | | | - | | | | 7,772,725 | | | | 777 | | | | - | | | | 170,223 | | | | - | | | | 171,000 | | Shares issued for services rendered | | | - | | | | - | | | | - | | | | - | | | | 4,000,000 | | | | 400 | | | | | | | | 39,600 | | | | - | | | | 40,000 | | Issuance of Series B Convertible Preferred Stock | | | 150,000 | | | | 15 | | | | - | | | | - | | | | - | | | | (15 | ) | | | - | | | | 1,500,000 | | | | - | | | | 1,500,000 | | Issuance of Series C Convertible Preferred Stock | | | - | | | | - | | | | 51 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Net loss for the year ended December 31, 2015 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (5,688,845 | ) | | | (5,688,845 | ) | Balance as of December 31, 2015 | | | 150,000 | | | $ | 15 | | | | 51 | | | $ | - | | | | 891,116,496 | | | $ | 89,098 | | | $ | - | | | $ | 110,585,434 | | | $ | (116,715,648 | ) | | $ | (6,041,101 | ) |
The accompanying notes are an integral part of these consolidated financial statements. GROWLIFE, INC. AND SUBSIDIARIES | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2016 | 51 | $- | 1,656,120,083 | $165,600 | $117,537,822 | $(124,410,332) | $(6,706,910) | | | | | | | | | Stock based compensation for stock options | - | - | - | - | 29,251 | - | 29,251 | Stock based compensation for warrants | - | - | - | - | 187,292 | - | 187,292 | Shares issued for debt conversion | - | - | 64,869,517 | 6,487 | 542,052 | - | 548,539 | Shares issued for services rendered | - | - | 10,000,000 | 1,000 | 75,000 | - | 76,000 | Shares issued for convertible note and interest conversion | - | - | 636,644,422 | 63,665 | 4,768,954 | - | 4,832,619 | Cancellation of Series C Convertible Preferred Stock | (51) | - | - | - | - | - | - | Write-off of derivative liability to additional paid in capital | - | - | - | - | 537,698 | - | 537,698 | Net loss for the year ended December 31, 2017 | - | - | - | - | - | (5,320,973) | (5,320,973) | | | | | | | | | Balance as of December 31, 2017 | - | - | 2,367,634,022 | 236,752 | 123,678,069 | (129,731,305) | (5,816,484) | Stock based compensation for stock options | - | - | - | - | 44,682 | - | 44,682 | Stock based compensation for warrants | - | - | - | - | 196,750 | - | 196,750 | Shares issued for debt conversion | - | - | 2,400,000 | 240 | 32,760 | - | 33,000 | Shares issued for services rendered | - | - | 13,910,274 | 1,391 | 216,815 | - | 218,206 | Shares issued for convertible note and interest conversion | - | - | 669,032,996 | 66,904 | 9,966,328 | - | 10,033,232 | Shares issued for common stock | - | - | 65,176,818 | 6,518 | 1,293,482 | - | 1,300,000 | Rigths offering | - | - | 211,137,293 | 21,114 | 2,512,011 | - | 2,533,125 | Stock option exercise | - | - | 1,000,000 | 100 | 5,900 | - | 6,000 | Shares issued for acquisition of EZ-Clone Enterprises, Inc. | - | - | 107,307,692 | 10,731 | 1,384,270 | - | 1,395,001 | Noncontrolling interest in EZ-Clone Enterprises, Inc. | - | - | - | - | - | 28,355 | 28,355 | Net loss for the year ended December 31, 2018 | - | - | - | - | - | (11,473,137) | (11,473,137) | | | | | | | | | Balance as of December 31, 2018 | - | $- | 3,437,599,095 | $343,749 | $139,331,067 | $(141,176,087) | $(1,501,271) |
The accompanying notes are an integral part of these consolidated financial statements.
GROWLIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS F-4 | | Years Ended, | | | | December 31, 2015 | | | December 31, 2014 | | | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | Net loss | | $ | (5,688,845 | ) | | $ | (86,626,099 | ) | Adjustments to reconcile net loss to net cash (used in) | | | | | | | | | operating activities | | | | | | | | | Depreciation and amortization | | | 13,715 | | | | 33,641 | | Amortization of intangible assets | | | 106,548 | | | | 106,548 | | Change in inventory reserve | | | - | | | | 12,711 | | Stock based compensation | | | 175,661 | | | | 724,267 | | Preferred shares issued for services | | | 300,000 | | | | - | | Common stock issued for services | | | 210,985 | | | | 2,721,600 | | Amortization of debt discount | | | (158,237 | ) | | | 1,363,847 | | Change in fair value of derivative liability | | | (723,740 | ) | | | 16,252,823 | | Expense related to warrant | | | - | | | | 62,500,000 | | Accrued interest on convertible notes payable | | | 310,500 | | | | 183,214 | | Loss on class action lawsuit settlements | | | 2,000,000 | | | | - | | Issuance of Series B Convertible Preferred Stock | | | 1,500,000 | | | | - | | Write-off of patent expenses | | | 3,600 | | | | - | | Excess and obsolete inventory | | | 20,215 | | | | - | | Realized gain on sale of investment | | | - | | | | (186,791 | ) | Changes in operating assets and liabilities: | | | | | | | | | Restricted Cash | | | - | | | | 46,400 | | Accounts receivable | | | - | | | | 183,678 | | Inventory | | | 464,696 | | | | 357,660 | | Prepaid expenses | | | 41,791 | | | | (24,790 | ) | Other receivable | | | - | | | | 3,666 | | Deposits | | | 16,830 | | | | 12,589 | | Accounts payable | | | 215,362 | | | | 33,926 | | Accrued expenses | | | (209,972 | ) | | | 209,421 | | Deferred revenue | | | 25,000 | | | | (30,888 | ) | CASH (USED IN) OPERATING ACTIVITIES | | | (1,375,891 | ) | | | (2,122,577 | ) | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | Net cash proceeds from shares in Vape Holdings, Inc. | | | - | | | | 187,951 | | Capital expenditures | | | - | | | | (3,925 | ) | NET CASH PROVIDED BY INVESTING ACTIVITIES: | | | - | | | | 184,026 | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | Proceeds from the issuance of convertible note | | | 1,150,000 | | | | 350,000 | | Series B Convertible Preferred Stock | | | 15 | | | | - | | Proceeds from options exercised | | | - | | | | 44,673 | | Payments of notes payable - related party | | | - | | | | (1,160 | ) | NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 1,150,015 | | | | 393,513 | | | | | | | | | | | NET (DECREASE) IN CASH AND CASH EQUIVALENTS | | | (225,876 | ) | | | (1,545,038 | ) | | | | | | | | | | CASH AND CASH EQUIVALENTS, beginning of period | | | 286,238 | | | | 1,831,276 | | | | | | | | | | | CASH AND CASH EQUIVALENTS, end of period | | $ | 60,362 | | | $ | 286,238 | | | | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | | | Interest paid | | $ | 10,500 | | | $ | - | | Taxes paid | | $ | - | | | $ | - | | | | | | | | | | | Non-cash investing and financing activities: | | | | | | | | | 6% Senior secured convertible notes and interest converted into common stock | | $ | - | | | $ | 62,025 | | 7% Convertible notes and interest converted into common stock | | $ | - | | | $ | 1,384,207 | | 12% Senior secured convertible notes and interest converted into common stock | | $ | - | | | $ | 439,688 | | Common stock issued for cashless exercise of options | | $ | - | | | $ | 357 | | Common stock issued for conversion of accounts payable | | $ | 171,000 | | | $ | - | |
GROWLIFE, INC. AND SUBSIDIARIES | CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | Net loss | $(11,444,782) | $(5,320,974) | Adjustments to reconcile net loss to net cash (used in) | | | operating activities | | | Depreciation | 80,125 | 1,890 | Amortization of intangible assets | 142,628 | - | Stock based compensation | 241,433 | 216,543 | Common stock issued for services | 218,206 | 76,000 | Amortization of debt discount | 769,237 | 419,666 | Change in fair value of derivative liability | (977,732) | (496,306) | Accrued interest on convertible notes payable | 421,666 | 203,697 | Loss on debt conversions | 6,519,467 | 2,502,799 | Impairment of acquired assets | 61,902 | - | Write-off of derivaive liability to additional paid in capital | - | 537,698 | Changes in operating assets and liabilities: | | | Accounts receivable | 42,254 | - | Inventory | (326,986) | (47,225) | Prepaids and other assets | (3,418) | - | Deposits | (27,608) | 13,145 | Accounts payable | 232,973 | (170,934) | Accrued expenses | 116,625 | 19,503 | Deferred revenue | 79,504 | (37,995) | CASH (USED IN) OPERATING ACTIVITIES | (3,854,506) | (2,082,493) | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | Investment in purchased assets | (544,432) | (302,689) | NET CASH (USED IN) INVESTING ACTIVITIES: | (544,432) | (302,689) | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | Proceeds from the issuance of common stock rights | 2,533,125 | - | Common stock option exercise | 6,000 | - | Proceeds from notes payable, net | 2,825,000 | 3,860,344 | Proceeds from the issuance of common stock | 1,300,000 | - | Cash payoff to TCA Global Credit Master Fund, LP | - | (1,509,041) | NET CASH PROVIDED BY FINANCING ACTIVITIES | 6,664,125 | 2,351,303 | | | | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 2,265,187 | (33,879) | | | | CASH AND CASH EQUIVALENTS, beginning of period | 69,191 | 103,070 | | | | CASH AND CASH EQUIVALENTS, end of period | $2,334,377 | $69,191 | | | | Supplemental disclosures of cash flow information: | | | Interest paid | $- | $- | Taxes paid | $- | $- | | | | Non-cash investing and financing activities: | | | Shares issued for convertible note and interest conversion | $3,338,082 | $2,329,800 | Common shares issued for accounts payable | $33,000 | $548,539 | Acquisition of EZ-Clone Erterprises, Inc.- intangible assets | $3,423,081 | $- | Acquisition of EZ-Clone Erterprises, Inc. | $1,395,000 | $- | Noncontrolling interest in EZ-Clone Enterprises, Inc. | $1,931,645 | $- |
The accompanying notes are an integral part of these consolidated financial statements.
GROWLIFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
GrowLife, Inc. (“GrowLife” or the “Company”) is incorporated under the laws of the State of Delaware and is headquartered in Seattle,Kirkland, Washington. The Company was founded in 2012 with the Closing of the Agreement and Plan of Merger with SGT Merger Corporation.Corporation.
The Company’s goal of becoming the nation’s largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines has not changed. The Company’s mission is to best serve more cultivators in the design, build-out, expansion and maintenance of their facilities with products of high quality, exceptional value and competitive price. Through a nationwide network of knowledgeable representatives, regional centers and its e-commerce website, GrowLife provides essential and hard-to-find goods including media (i.e., farming soil), industry-leading hydroponics equipment, organic plant nutrients, and thousands more products to specialty grow operations across the United States.
The Company primarily sells through its wholly owned subsidiary, GrowLife Hydroponics, Inc. In addition to the promotion and sales of GrowLife owned brands, GrowLife companies distribute and sell over 3,00015,000 products through its e-commerce distribution channel, Greners.com,GrowLifeEco.com, and through our regional retail storefronts. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws.
Past Merger and Acquisition Transactions
On June 7, 2013, GrowLife Hydroponics completed the purchase of Rocky Mountain Hydroponics, LLC, a Colorado limited liability company (“RMC”), and Evergreen Garden Center, LLC, a Maine limited liability company (“EGC”). The effective date of the purchase was June 7, 2013. The Company purchased all of the assets and liabilities of the RMH and EGC Companies, and their retail hydroponics stores, which are located in Vail and Boulder, Colorado and Portland, Maine. The Company purchased RMC and EGC from Rob Hunt, who was appointed to the then Company’s Board of Directors and President of GrowLife Hydroponics, Inc.
On July 23, 2012, the Company completed the purchase of substantially all of the assets of Donna Klauenburch and Tao Klauenburch related to the online retail business Greners.com.
On October 24, 2012,3, 2017, the Company’s wholly owned subsidiary GrowLife Hydroponics, Inc., a Delaware corporation, completedCompany closed the purchaseacquisition of all51% of the shares of Soja, Inc. dba Urban Garden Supplies (the “Urban Garden”)Purchased Assets from Richard Melograno, Michael Cook,David Reichwein, a Pennsylvania resident, GIP International Ltd, a Hong Kong corporation and Scott Glass (collectively the “UG Sellers”). DPR International LLC, a Pennsylvania limited liability corporation. The Purchased Assets include intellectual property, copy rights and trademarks related to reflective tiles and flooring. The Company did not acquire business, customer list or employees. The Company acquired allits 51% interest in the Purchased Assets for $400,000. The Company funded equipment and rent of an office lease. On February 16, 2018, the Company purchased the remaining 49% of the Purchased Assets in exchange for a one-time payment of $250,000. As December 31, 2018, the Company had recorded investment in purchased assets and liabilities of Urban Garden which included the inventory of the store located at 22516 Ventura Blvd., Woodland Hills, CA 91364.$552,689.
Agreement and Plan of Merger with SGT Merger Corporation
On March 21, 2012,August 17, 2018, the Company entered into an Asset Purchase Agreement and Plan of Merger with SGT Merger Corporation,Go Green Hydroponics, Inc., a NevadaCalifornia corporation and TCA – Go Green SPV, LLC, a Florida limited liability pursuant to which the Company’s wholly-owned subsidiary, SG Technologies Corp,Company acquired the intellectual property and assumed the lease for the property located at 15721 Ventura Blvd., Encino, CA 91436. The Company intends to operate a Nevada corporation (“SGT”), Sterling C. Scott,retail store, sale over the internet and W-Net Fund I, L.P.sell on a direct basis at this location. Concurrently, the Company and Seller entered into a Security Agreement for securing the assets of Company as collateral for the obligations of Company as set forth in the Security Agreement. In consideration for the sale and assignment of the Purchased Assets, the Company agreed to pay the Seller: (i) the proceeds generated from the sale of the closing inventory until all closing inventory has been sold, and (ii) to pay the Seller 5% of all gross revenue of Company earned or in any way related to the Purchased Assets generated between October 1, 2018 and December 31, 2019, up to a maximum of $200,000. On October 15, 2018, the Company closed the Purchase and Sale Agreement with EZ-Clone Enterprises, Inc., a Delaware limited partnershipCalifornia corporation. EZ-Clone is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and current holderpropagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. The Company acquired 51% of EZ-Clone for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the Company’s common stock. The transaction closed on April 5, 2012. At the Closing, (i) The Merger Corporation was merged with and into SGT; (ii) SGT became the Company’s wholly-owned subsidiary; and (iii) all SGT sharesissuance of common stock were exchanged for shares of our common stock and shares of a new series of our preferred stock, which was designated Series A Preferred Stock. At the Closing, the Company issued to SGT’s former stockholders 157,000,000107,307,692 restricted shares of the Company’s common stock and 3,000,000 sharesat a price of Series A Preferred Stock in exchange for the 200 shares of SGT’s common stock outstanding immediately prior to the Merger. Sterling C. Scott was appointed to the then Company’s Board of Directors and Chief Executive Officer.$0.013 per share or $1,395,000.
After the Merger, former holders of SGT’s common stock owned in excess of 50% of our fully-diluted shares of common stock, and as a result of certain other factors, including that all members of our executive management are members of SGT’s management, SGT is deemed to be the acquiring company and the Company was deemed to be the legal acquirer for accounting purposes, and the Merger was accounted for as a reverse merger and a recapitalization in accordance with GAAP. The consolidated financial statements of GrowLife and its subsidiaries reflect the historical activity of SGT, and the historical stockholders’ equity of SGT has been retroactively restated for the equivalent number of shares received in the exchange.
Suspension of Trading of the Company’s Securities
On April 10, 2014, the Company received notice from the SEC that trading of the Company’s common stock on the OTCBB was to be suspended from April 10, 2014 through April 24, 2014. The SEC issued its order pursuant to Section 12(k) of the Securities Exchange Act of 1934. According to the notice received by us from the SEC: “It appears to the Securities and Exchange Commission that the public interest and the protection of investors require a suspension of trading in the securities of GrowLife, Inc. because of concerns regarding the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in GrowLife’s common stock.” The Company did not receive notice fromhas the SEC that it was being formally investigated.
The suspensionobligation to acquire the remaining 49% of trading eliminatedEZ-Clone within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the Company’s market makers, resulted in our trading on the grey sheets, resulted in legal proceedings and restricted the Company’s access to capital. On April 25, 2014,issuance of 85,000,000 shares of the Company’s common stock resumed trading onat a price of $0.013 per share or $1,105,000.
On October 17, 2017, the “grey sheets” andCompany were not formally quoted or listed on any stock exchange as of December 31, 2015.
SEC Charges of Manipulating Ourinformed by Alpine Securities
On August 5, 2014, the SEC charged four promoters Corporation (“Alpine”) that Alpine has demonstrated compliance with ties to the Pacific Northwest for manipulating the Company’s open market and conducted pre-arranged, manipulative matched orders and wash trades to create the illusion of an active market in these stocks. The promoters then sold their shares in coordination with aggressive promotional campaigns that urged investors to buy the stocks because the prices were on the verge of rising substantially.
On July 9, 2015, the SEC entered into settlements with two of the promoters. In connection with the settlement of their SEC action, the two men are liable for disgorgement of approximately $2.1 million and $306,000 in illicit profits, respectively. Earlier this year the two men were also sentenced to five and three years in prison, respectively, for their participation in the scheme.
Resumed Trading of our Common Stock
On February 18, 2016, the Company’s common stock resumed unsolicited quotation on the OTC Bulletin Board after receiving clearance from the Financial Industry Regulatory Authority (“FINRA”) on our Form 15c2-11. The Company is currently takingRule 6432 and Rule 15c2-11 under the appropriate stepsSecurities Exchange Act of 1934. We filed an amended application with the OTC Markets to uplist tolist the Company’s common stock on the OTCQB Exchange and resume priced quotations withbegin to trade on this market makers as soon as it is able.of March 20, 2018. As of March 4, 2019, the Company began to trade on the Pink Sheet stocks system.The Company’s bid price had closed below $0.01 for more than 30 consecutive calendar days.
NOTE 2 –GOING CONCERN The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of $5,688,845$11,444,782 and $86,626,099$5,320,974 for the years ended December 31, 20152018 and 2014,2017, respectively. Our net cash used in operating activities was $1,375,891$3,854,506 and $2,122,577 and$2,082,493 for the years ended December 31, 20152018 and 2014,2017, respectively.
The Company anticipates that it will record losses from operations for the foreseeable future. As of December 31, 2015, our2018, the accumulated deficit was $116,715,648.$141,176,087. The Company has experienced recurring operating losses and negative operating cash flows since inception and has financed its working capital requirements during this period primarily through the recurring issuance of convertible notes payable and advances from a related party. The audit reportopinion prepared by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 20152018 and 2017 filed with the SEC on April 14, 2016March 8, 2019 includes an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern.
Continuation of the Company as a going concern is dependent upon obtaining additional working capital. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS Basis of Presentation -The accompanying unaudited consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation of these unaudited consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”).
Principles of Consolidation- The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Inter-Company items and transactions have been eliminated in consolidation.
Cash and Cash Equivalents - The Company classifies highly liquid temporary investments with an original maturity of threenine months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit. At December 31, 2018, the Company had uninsured deposits in the amount of $1,923,046.
Accounts Receivable and Revenue -Revenue is recognized onat the sale of a product whentime the product is shipped, whichCompany sells merchandise to the customer in store. eCommerce sales include shipping revenue and are recorded upon shipment to the customer. This is when the risk of loss transfers to our customers, the fee is fixed and determinable, and collection of the sale is reasonably assured. A product is not shipped without an order from the customer and the completion of credit acceptance procedures. The majority of our sales are cash or credit card; however, we occasionally extend terms to our customers. Accounts receivable are reviewed periodically for collectability. Inventories -Inventories are recorded on a first in first out basis. Inventory consists of raw materials, purchased finished goods and components held for resale. Inventory is valued at the lower of cost or market. The reserve for inventory was $20,000$120,000 and $40,215$20,000 as of DecemberDecember 31, 20152018 and 2014, 2017, respectively. PropertyEquipment– Equipment consists of machinery, equipment, tooling, computer equipment and Equipment - Property and equipmentleasehold improvements, which are stated at cost. Assets acquired held under capital leases are initially recorded at the lower of the present value of the minimum lease payments discounted at the implicit interest rate (35% for assets currently held under capital lease) or the fair value of the asset. Major improvementscost less accumulated depreciation and betterments are capitalized. Maintenance and repairs are expensed as incurred.amortization. Depreciation is computed usingby the straight-line method over anthe estimated useful lifelives or lease period of five years. Assets acquired under capital leasethe relevant asset, generally 3-10 years, except for leasehold improvements which are depreciated over the lesser of the useful life orof the lease term. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations.
Goodwill and Intangible Assets - The Company evaluates the carrying value of goodwill, intangible assets, and long-lived assets during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, (3) an adverse action or assessment by a regulator, (4) continued losses from operations, (5) continued negative cash flows from operations, and (6) the suspension of trading of the Company’s securities. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill.
The Company amortizes the cost of other intangible assets over their estimated useful lives, which range up to ten years, unless such lives are deemed indefinite. Intangible assets with indefinite lives are tested in the fourth quarter of each fiscal year for impairment, or more often if indicators warrant.
Equity Investments – The Company classifies all highly-liquid investments with stated maturities of greater than three months from the date of purchase and remaining maturities of less than one year as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such investments are viewed as being available to support current operations. The Company classifies and accounts for short-term investments as available-for-sale and reflect realized gains and losses using the specific identification method. Changes in market value, if any, excluding other-than-temporary impairments, are reflected under stockholders’ deficit as unrealized gain/loss on related party investment.10 years.
Long Lived Assets – The Company reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.
Intangible Assets – Intangible assets are capitalized and amortized on a straight-line basis over their estimated useful life, if the life is determinable. If the life is not determinable, amortization is not recorded. We regularly perform reviews to determine if facts and circumstances exist which indicate that the useful lives of our intangible assets are shorter than originally estimated or the carrying amount of these assets may not be recoverable. When an indication exists that the carrying amount of intangible assets may not be recoverable, we assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Such impairment test is based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Impairment, if any, is based on the excess of the carrying amount over the estimated fair value of those assets. Fair Value Measurements and Financial Instruments -ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The carrying value of cash, accounts receivable, investment in a related party, accounts payables, accrued expenses, due to related party, notes payable, and convertible notes approximates their fair values due to their short-term maturities.
Derivative financial instruments -The Company evaluates all of its financial instruments 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 in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
As of December 31, 2015 and 2014, the Company had outstanding 7% convertible notes for $500,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $105,515 and $1,278,878, respectively, using the Black-Scholes-Merton option pricing model.
As of December 31, 2015 and 2014, the Company had outstanding 6% convertible notes for $350,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $54,377 and $822,037, respectively using the Black-Scholes-Merton option pricing model.
As of December 31, 2015, the Company had outstanding 18% convertible notes for $1,150,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $1,217,283 using the Black-Scholes-Merton option pricing model.
Sales Returns -We allow customers to return defective products when they meet certain established criteria as outlined in our sales terms and conditions. It is our practice to regularly review and revise, when deemed necessary, our estimates of sales returns, which are based primarily on actual historical return rates. We record estimated sales returns as reductions to sales, cost of goods sold, and accounts receivable and an increase to inventory. Returned products which are recorded as inventory are valued based upon the amount we expect to realize upon its subsequent disposition. As of December 31, 20152018 and 2014,2017, there was noa reserve for sales returns of $40,000 and $10,000, respectively, which areis minimal based upon our historical experience.
Shipping and Handling Fees and Cost - For the years ended December 31, 2015 and 2014, shipping and handling fees billed to customers totaled $95,455 and $128,351, respectively, and were included in revenue.
Stock Based Compensation - The Company has share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options and warrants to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost to employees is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period under ASC 718. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit. Grants of stock to non-employees and other parties are accounted for in accordance with the ASC 505.
Advertising Costs - Advertising costs are expensed as incurred and are recorded in general and administrative expenses. For the years ended December 31, 2015 and 2014, advertising costs of $637 and $141,369, respectively, were included in general and administrative expenses.
Net (Loss) Per Share -Under the provisions of ASC 260, “Earnings per Share,” basic loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations. The common stock equivalents have not been included as they are anti-dilutive. As of December 31, 2015,2018, there are also (i) stock option grants outstanding for the purchase of 29.0100 million common shares at a $0.028$0.010 average strikeexercise price; (ii) warrants for the purchase of 565.0902.8 million common shares at a $0.032$0.029 average exercise price; and (iii) 243.6112.8 million shares related to convertible debt that can be converted at 0.007$0.002535 per share; and (iv) 6.0 millionshare. In addition, the Company has an unknown number of common shares that mayto be issued tounder the Chicago Venture, Iliad and St. George financing agreements. As of December 31, 2017, there are also (i) stock option grants outstanding for the purchase of 56,000,000 common shares at a former executive$0.007 average exercise price; (ii) warrants for the purchase of 595 million common shares at a $0.031 average exercise price; and (iii) 241,766,075 million shares related to a severance agreement. We issued $2 million in common stock or 115,141,048 shares of our common stock pursuant to the settlement of the Consolidated Class Action and Derivative Action lawsuits alleging violations of federal securities lawsconvertible debt that were filed against the Company in United States District Court, Central District of California.can be converted at $0.002535 per share. In addition, we have an unknown number of common shares to be issued under the TCA Chicago Venture Partners, L.P. financing agreements. As of December 31, 2014, there were stock options outstanding for the purchase of 40,720,000 common shares, warrants for the purchase of 565,000,000 common shares, 209,061,571 shares related to convertible debt and 6,000,000 of shares which we may have to issue under a settlement agreement which could potentially dilute future earnings per share.
Dividend Policy - The Company has never paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities.
Use of Estimates -In preparing these unaudited interim consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in our consolidated financial statements relate to the valuation of long-lived assets, estimates of sales returns, inventory reserves and accruals for potential liabilities, and valuation assumptions related to derivative liability, equity instruments and share based compensation.
Reclassifications - Certain amounts in the consolidated financial statements for 2014 have been reclassified to conform to the 2015 presentation. These reclassifications have no effect on net income, earnings per share, or stockholders’ equity as previously reported.
Recent Accounting Pronouncements
A varietyIn July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-11, “Simplifying the Measurement of proposedInventory,” Topic 330, “Inventory” (ASU 2015-11). The amendments in ASU 2015-11, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or otherwise potential accounting standards are currently under study by standard setting organizationsretail inventory method, require that entities measure inventory at the lower of cost and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards wouldnet realizable value. The amendments in ASU 2015-11 should be material to our consolidated financial statements.
In August 2014, FASB issuedapplied on a prospective basis. ASU 2014-15—Presentation of Financial Statements—Going Concern (ASC Subtopic 205-40): “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. The update requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. All entities are required to apply the new requirements in annual periods ending2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods thereafter. Early application is permitted. As such, GrowLife, Inc. is required to adopt these provisionswithin those years. The Company adopted the amendments of ASU 2015-11 effective January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements for the year ended December 31, 2018.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” Topic 718, “Compensation-Stock Compensation” (ASU 2016-09). ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the Company’s financial statements, including income tax consequences, forfeitures and classification on the statement of cash flows. Under previous guidance, excess tax benefits and deficiencies from share-based compensation arrangements were recorded in equity when the awards vested or were settled. ASU 2016-09 requires prospective recognition of excess tax benefits and deficiencies in income tax expense, rather than paid-in-capital. The Company adopted the amendments of ASU 2016-09 effective January 1, 2018.The adoption of this standard did not have a material impact on the Company’s consolidated statements of income for the year ended December 31, 2018. In addition, under ASU 2016-09, excess tax income tax benefits from share-based compensation arrangements are classified as cash flow from operations, rather than as cash flow from financing activities. For the year ended December 31, 2018, there were no excess income tax benefits. The Company has elected to continue to estimate the number of share-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur. ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares, resulting in an immaterial decrease in diluted weighted average shares outstanding for the year ended December 31, 2018. In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” Topic 350, “Intangibles – Goodwill and Other” (ASU 2017-04). The amendments in ASU 2017-04 simplify the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the current two-step impairment test. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be recognized; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. Early adoption is permitted for annual periodand interim goodwill impairment testing dates after January 1, 2017, and the ASU is effective for the Company’s first quarter of the fiscal year ending December 31, 2016.2020. The Company is currently evaluating the impact of FASB ASU 2014-15 but does not expectthat the adoption thereofof these provisions will have on its consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, “Leases,” Topic 842, “Leases” (ASU 2016-02). ASU No. 2016-02 requires lessees to haverecognize a right-of-use asset and corresponding lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. ASU 2016-02 also requires certain quantitative and qualitative disclosures. The provisions of ASU 2016-02 are effective for the Company’s first quarter of the fiscal year ending December 31, 2020, with early adoption permitted. The Company will apply the transition provisions of ASU 2016-02 at its adoption date, rather than the earliest comparative period presented in the financial statements, as permitted by ASU 2018-11, “Leases,” Topic 842, “Targeted Improvements,” released in July 2018. The adoption of ASU 2016-02 may result in a material effectincrease to the Company’s consolidated balance sheets for lease liabilities and right-of-use assets. The Company is also performing a comprehensive review of its current processes to determine and implement changes required to support the adoption of this standard. The Company is currently evaluating the other effects the adoption of ASU 2016-02 will have on GrowLife’sits consolidated financial statements. In January 2018, the FASB issued ASU 2018-01, “Leases,” Topic 842, “Land Easement Practical Expedient for Transition to Topic 842” (ASU 2018-01). ASU 2018-01 permits an entity to elect a transition practical expedient to not assess, under Accounting Standards Codification (ASC) 842, land easements that exist or expired before the standard’s effective date that were not previously accounted for as leases under ASC 840. The Company plans to elect this practical expedient in implementing ASU 2016-02. In May 2014, the FASB issued ASU 2014-09—Revenue2014-09, “Revenue from Contracts with Customers, (Topic 606): “Section A—Summary” Topic 606, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance for revenue recognition and Amendments That Create Revenuewill replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled for the transfer of those goods or services. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. Additionally, the amendments in this ASU provide a practical expedient for entities to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less, The Company plans to elect this practical expedient upon adoption. In July 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40), Section B—Conforming Amendments to Other Topics and Subtopics in– Deferral of the Codification and Status Tables, Section C—Background Information and Basis for Conclusions”. Effective Date.” The guidance in this update affects any entity that enters into contracts with customers to transfer goods or services and supersedesFASB approved the deferral of ASU 2014-09, by extending the new revenue recognition requirements in Topic 605, Revenue Recognition. The update isstandard’s mandatory effective fordate by one year and permitting public companies to apply the new revenue standard to annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. As such, GrowLife, Inc. is required to adopt these provisions as2017. The guidance in ASU 2014-09 will be effective for the Company in the first quarter of the fiscal year ending December 31, 2016. The Company is currently evaluating the impact of FASB2019. Further to ASU 2014-09 but does not expect the adoption thereof to have a material effect on GrowLife’s financial statements. In July 2013, FASB issuedand ASU 2013-11—Income Taxes (ASC Topic 740): “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)”. The amendments in this update provide explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of FASB ASU 2013-11 did not have a material effect on GrowLife’s financial statements.
New Accounting Standards Issued but Not Yet Adopted
In February 2015,2015-14, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments2016-08, “Revenue from Contracts with Customers,” Topic 606, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (ASU 2016-08) in March 2016, ASU 2016-12, “Revenue from Contracts with Customers,” Topic 606, “Narrow-Scope Improvements and Practical Expedients” (ASU 2016-12) in May 2016 and ASU 2016-20, “Revenue from Contracts with Customers,” Topic 606, “Technical Corrections and Improvements” (ASU 2016-20) in December 2016. The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the Consolidation Analysis (“customers. ASU 2015-02”).2016-12 addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition. Additionally, the amendments in this ASU 2015-02 affects reportingprovide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The Company plans to make such election. The Company also plans to elect the practical expedient in ASU 2016-20 that provides entities do not need to disclose the transaction price allocated to performance obligations when the related contracts have a duration of one year or less. This includes loyalty rewards, which can be redeemed in the month subsequent to the quarter earned, and marketing promotions that cross accounting periods. Both of these classes of transactions are requiredcurrently immaterial to evaluate whether they should consolidatethe Company. The effective date and transition requirements for ASU 2016-08, ASU 2016-12 and ASU 2016-20 are the same as for ASU 2014-09.
The Company does not plan to early adopt the new revenue recognition guidance; adoption will be on the modified retrospective basis beginning in fiscal year 2019. The Company has substantially concluded its assessment of the impact of the adoption of this standard on its consolidated financial statements. Most of the Company’s revenue is expected to continue to be generated from point-of-sale transactions, which ASU 2014-09 treats generally consistent with current accounting standards. The Company does not expect this standard will have a material impact on the accounting for point-of-sale transactions or related areas including the right of return and customer incentives. Although the impact on the consolidated financial statements is not expected to be material, additional disclosures will be required. In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation,” Topic 718, “Improvements to Nonemployee Share-Based Payment Accounting” (ASU 2018-07) as part of its Simplification Initiative to reduce complexity when accounting for share-based payments to non-employees. ASU 2018-07 expands the scope of Topic 718 to more closely align share-based payment transactions for acquiring goods and services from non-employees with the accounting for share-based payments to employees, with certain legal entities.exceptions. The provisions of ASU 2015-02 is2018-07 are effective for us on January 1, 2016,the Company’s first quarter of the fiscal year ending December 31, 2020, with early adoption permitted. The Company does not believe that this pronouncement will have an impact on the Company’s consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective for the Company on January 1, 2016, with early adoption permitted. The Company is currently evaluating the potential changes from this ASU to the Company’s future financial reporting and disclosures.
NOTE 4 – PURCHASE – ROCKY MOUNTAIN HYDROPONICSTRANSACTIONS Acquisition of 51% of EZ-Clone Enterprises, Inc. On October 15, 2018, the Company closed the Purchase and EVERGREEN GARDEN CENTER
On June 7, 2013, GrowLife Hydroponics completed Sale Agreement with EZ-Clone Enterprises, Inc., a California corporation that was founded in January 2000. EZ-Clone is the purchasemanufacturer of Rocky Mountain Hydroponics, LLC, a Colorado limited liability company (“RMC”),multiple award-winning products specifically designed for the commercial cloning and Evergreen Garden Center, LLC, a Maine limited liability company (“EGC”). The effective datepropagation stage of the purchase was June 7, 2013. The purchase included all of the assetsindoor plant cultivation including cannabis, food, and liabilities of the RMH and EGC Companies, and their retail hydroponics stores, which are located in Vail and Boulder, Colorado and Portland, Maine.other hydroponic farming. The Company purchased RMChas proprietary products and EGC from Rob Hunt, who was appointedservices such as the Commercial Pro System, Hobbyist Cloning Systems, Cloning Tents, Coco Collars, Coco Seed Starters, Rooting Gel, and Clear Rez. Technical Support, know-how and overall knowledge is also considered proprietary. The Company trademarks are EZ CLONE and EZ CLONE CRIB.
This acquisition is expected to accelerate the Company’s Boardrevenue growth, increase the Company gross margins and add additional manufacturing and research and development personnel. The Company acquired 51% of DirectorsEZ-Clone for $2,040,000, payable as follows: (i) a cash payment of $645,000; and was appointed President(ii) the issuance of GrowLife Hydroponics, Inc.
The Company paid the former owners of the RMH and EGC Companies $550,000 in cash, $800,000 in 12% Secured Convertible Notes, and $275,000 (7,857,141 shares at $0.035/share) in107,307,692 restricted shares of the Company’s common stock.stock at a price of $0.013 per share or $1,395,000. The Company has the obligation to acquire the remaining 49% of EZ-Clone within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000.
The purchase price was allocated to specific identifiable tangible and intangible assets at their fair value at the date of the purchase in accordance with Accounting Standards Codification 805, “Business Combinations”, as follows:
Allocation | | $ | | Assets | | $ | 907,614 | | Intangible assets | | | 366,000 | | Goodwill | | | 739,000 | | Total | | | 2,012,614 | | Less fair value of liabilities | | | (387,614 | ) | Purchase price | | $ | 1,625,000 | |
The Companycost to acquire these assets has been preliminarily allocated to the assets acquired according to estimated fair values and is amortizingsubject to adjustment when additional information concerning asset valuations is finalized, but no later than October 15, 2019. The preliminary allocation is as follows: Purchase Price Allocation | | Common Stock | $1,395,000 | Cash | 645,000 | Assets acquired | (911,294) | Liabilities acquired | 939,375 | Non-controlling interest | 1,960,000 | EZ-Clone equity | (605,000) | Total purchase price | $3,423,081 |
The results of operations of EZ-Clone were included in the $366,000Consolidated Statements of intangible assets atOperations for the rate of $6,100 per month over 5 years, withperiod October 15, 2018 to December 31, 2018. The unaudited pro-forma financial data for the Company recording $106,548 of non-cash amortization expense related to these intangible assets duringacquisition for the yearsyear ended December 31, 2015 and 2014.2018, were as follows: | | | | | | | | | | | | | | | | Net revenue | $4,573,461 | $1,551,503 | $6,124,964 | Net loss | (11,473,137) | (111,671) | (11,584,808) | Net loss per share | $(0.00) | | $(0.00) |
The Company consolidatedunaudited pro-forma financial data for the results from operations from June 7, 2013.acquisition for the year ended December 31, 2017, were as follows:
NOTE 5 – TRANSACTIONS WITH CANX USA, LLC AND LOGIC WORKS LLC | | | | | | | | | | | | | | | | Net revenue | $2,452,104 | $2,648,873 | $5,100,977 | Net loss | (5,320,974) | (126,962) | (5,447,936) | Net loss per share | $(0.00) | | $(0.00) |
TransactionsThere were no material, nonrecurring items included in the reported the pro-forma results.
Termination of Agreements with CANX, LLC and Logic Works LLC
On July 10, 2014, the Company closed a Waiver and Modification Agreement, Amended and Restated Joint Venture Agreement, Secured Credit Facility and Secured Convertible Note with CANX, and Logic Works LLC, a lender and shareholder of the Company. The Agreements require the filing of a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the period ended June 30, 2014. Due to the Company’s grey sheet trading status and other issues, the Company did not file the registration statement.
Previously,February 15, 2019, the Company entered into a Joint Venture AgreementTermination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. UnderPursuant to the termsAgreement, the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, theor in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Company and CANX formed Organic Growth International, LLC (“OGI”), a Nevada limited liability company, for the purpose of expanding the Company’s operations in its current retail hydroponic businesses and in other synergistic business verticals and facilitating additional funding for commercially financeable transactions of up to $40,000,000. In connection with the closing of the Agreement, CANX agreed to provide a commitment for funding in the amount of $1,300,000 for a GrowLife Infrastructure Funding Technology program transaction and provided additional funding under a 7% Convertible Note instrument for $1,000,000, including $500,000 each from Logic Works and China West III Investments LLC, entities that are unaffiliated with CANX and operate as separate legal entities. The Company initially owned a non-dilutive forty five percent (45%) share of OGI and the Company may acquire a controlling share of OGI as provided in the Joint Venture Agreement. In accordance with the Joint Venture Agreement, the Company and CANX entered into a Warrant Agreement whereby the Company deliveredWarrants issued to CANX a warrantentitling CANX to purchase 140,000,000 shares of the Company common stock at a maximum strike price of $0.033 per share. Also in accordance with the Joint Venture Agreement, the Company issued an additional warrant to purchase 100,000,000540,000,000 shares of the Company’s common stock at a maximum strikean exercise price of $0.033 per share on$0.033.
In exchange for the Agreement and cancellation of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7, 2014.2019 closing price of $0.008, or 125,000,000 restricted common stock shares. On April 10, 2014, as a result of the suspension in the trading of the Company’s securities, the Company went into default on its 7% Convertible Notes Payable for $500,000 each from Logic Works and China West III. As a result, the Company accrued interest on these notes at the default rate of 24% per annum. Furthermore, as a result of being in default on these notes, the Holders could have, at their sole discretion, called these notes.
Waiver and Modification Agreement
The Company entered into a Waiver and Modification Agreement dated June 25, 2014 with Logic Works LLC whereby the 7% Convertible Note with Logic Works dated December 20, 2013 was modified to provide for (i) a waiver of the default under the 7% Convertible Note; (ii) a conversion price which is the lesser of (A) $0.025 or (B) twenty percent (20%) of the average of the three (3) lowest daily VWAPs occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note; (iii) the filing of a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the period ended June 30, 2014; and (iv) continuing interest of 24% per annum. China West III converted its Note into common stock on June 4, 2014. Due to the Company’s grey sheet trading status and other issues, the Company did not file the registration statement. This 20% of the average should be 70% and the Parties are working to resolve this issue.
Amended and Restated Joint Venture Agreement
The Company entered into an Amended and Restated Joint Venture Agreement dated July 1, 2014 with CANX whereby the Joint Venture Agreement dated November 19, 2013 was modified to provide for (i) up to $12,000,000 in conditional financing subject to review by GrowLife and approval by OGI for business growth development opportunities in the legal cannabis industry for up to nine months, subject to extension; (ii) up to $10,000,000 in working capital loans, with each loaning requiring approval in advance by CANX; (iii) confirmed that the five year warrants, subject to extension, at $0.033 per share for the purchase of 140,000,000 and 100,000,000 were fully earned and were not considered compensation for tax purposes by the Company; (iv) granted CANX five year warrants, subject to extension, to purchase 300,000,000 shares of common stock at the fair market price of $0.033 per share as determined by an independent appraisal; (v) warrants as defined in the Agreement related to the achievement of OGI milestones; (vi) a four year term, subject to adjustment and (vi) the filing of a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the period ended June 30, 2014. Due to the Company’s grey sheet trading status and other issues, the Company did not file the registration statement.
Secured Convertible Note and Secured Credit Facility
The Company entered into a Secured Convertible Note and Secured Credit Facility dated June 25, 2014 with Logic Works whereby Logic Works agreed to provide up to $500,000 in funding. Each funding requires approval in advance by Logic Works, provides for interest at 6% with a default interest of 24% per annum and requires repayment by June 26, 2016. The Note is convertible into common stock of the Company at the lesser of $0.0070 or (B) twenty percent (20%) of the average of the three (3) lowest daily VWAPs occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable conversion date on which Logic Works elects to convert all or part of this 6% Convertible Note, subject to adjustment as provided in the Note. The 6% Convertible Note is collateralized by the assets of the Company. The Company also has agreed to file a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the three months ended September 30, 2014 and have the registration statement declared effective within ninety days of the filing of the Company’s Form 10-Q for the three months ended June 30, 2014. Due to the Company’s grey sheet trading status and other issues, the Company did not file the registration statement.
On July 10, 2014, the Company closed a Waiver and Modification Agreement, Amended and Restated Joint Venture Agreement, Secured Credit Facility and Secured Convertible Note with CANX, and Logic Works LLC, a lender and shareholder of the Company. As of December 31, 2014, the Company has borrowed $350,000 under the Secured Convertible Note and Secured Credit Facility dated June 25, 2014 with Logic Works.
OGI was incorporated on January 7, 2014 in the State of Nevada and had no business activities as of December 31, 2015.
NOTE 65 – INVENTORY
Inventory as of December 31, 20152018 and December 31, 2014 consists2017 consisted of the following: | | | | | | | | | Raw materials | $417,570 | $110,000 | Work in process | 35,280 | - | Finished goods | 459,814 | 375,678 | Inventory reserve | (120,000) | (20,000) | Total | $792,664 | $465,678 |
| | December 31, 2015 | | | December 31, 2014 | | | | (Audited) | | | (Audited) | | | | | | | | | Finished goods | | $ | 418,439 | | | $ | 923,565 | | Inventory reserve | | | (20,000 | ) | | | (40,215 | ) | Total | | $ | 398,439 | | | $ | 8 |
Raw materials consist of supplies for the flooring product line and EZ-Clone. Finished goods inventory relates to product at the Company’s retail stores, which is product purchased from distributors, and in some cases directly from the manufacturer, and resold at our stores.stores and EZ- Clone.
The Company reviews its inventory on a periodic basis to identify products that are slow moving and/or obsolete, and if such products are identified, the Company records the appropriate inventory impairment charge at such time.
NOTE 76 – INVESTMENT IN VAPE HOLDINGS, INC.PROPERTY AND EQUIPMENT
In May 2013, the Company made an investment in the amount of $1,160 in Vape Holdings, Inc., a Nevada corporation,Property and received 200,428 shares.
Sterling C. Scott, the Company’s then Chief Executive Officer, also owned 257,320 shares of Vape’s common stock. Furthermore, the former President of GrowLife, Inc., Kyle Tracey, was the Chief Executive Officer of Vape. As a result, the Company deemed Vape to be a related party and therefore has recorded the Company’s investment in Vape as an “Investment in a related party” on its balance sheet.
The value of the Company’s investment in Vapeequipment as of December 31, 20132018 and 2017 consists of the following:
| | | | | | | | | Machinery, equipment and tooling | $943,326 | $365,861 | Furniture and fixtures | - | 49,787 | Computer equipment | 16,675 | 52,304 | Leasehold improvements | 14,703 | 56,965 | Total property and equipment | 974,704 | 524,917 | Less accumulated depreciation and amortization | (261,839) | (222,228) | Net property and equipment | $712,866 | $302,689 |
Fixed assets, net of accumulated depreciation, were $712,866 and $302,689 as of December 31, 2018 and 2017, respectively. Accumulated depreciation was $5.60 per share, or $1,122,397.$261,839 and $222,228 as of December 31, 2018 and 2017, respectively. Total depreciation expense was $80,125 and $1,890 for the years ended December 31, 2018 and 2017, respectively. All equipment is used for manufacturing, selling, general and administrative purposes and accordingly all depreciation is classified in cost of goods sold, selling, general and administrative expenses. The Company sold 200,428 sharesbegan depreciation on the purchased machine January 1, 2018 when significant operations began. On October 3, 2017, the Company closed the acquisition of Vape’s common stock during51% of the Purchased Assets from David Reichwein, a Pennsylvania resident, GIP International Ltd, a Hong Kong corporation and DPR International LLC, a Pennsylvania limited liability corporation. The Purchased Assets include intellectual property, copy rights and trademarks related to reflective tiles and flooring. The Company did not acquire business, customer list or employees.
The Company acquired its 51% interest in the Purchased Assets for $400,000. The Company funded equipment and rent of an office lease. On February 16, 2018, the Company purchased the remaining 49% of the Purchased Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the Company had recorded investment in purchased assets of $552,689. On October 15, 2018, the Company acquired 51% of EZ-Clone Enterprises, Inc. and acquired $244,203 of net property and equipment.
During the year ended December 31, 2014 for net proceeds of $186,791 which was recorded as “other income” in the statement of operations. As of December 31, 2014,2018, the Company recorded a $1,122,397 loss in the valueretired fully depreciated assets of its investment in Vape by decreasing its “Investment in a related party” balance sheet account while also recording a corresponding decrease to “Unrealized loss on investment in a related party” in the Stockholders’ deficit section of the Company’s balance sheet.$358,156.
NOTE 87 – INTANGIBLE ASSETS Intangible assets as of December 31, 20152018 and 2017 consisted of the following: | Estimated | | | | Useful Lives | | | | | | | Customer lists | 3 years | $1,604,341 | $- | Patents | 3 years | 1,818,740 | | Less: accumulated amortization | | (142,628) | - | Intangible assets, net | | $3,280,453 | $- |
Intangible Assets: | | | | Cost | | | Accumulated Amortization | | | Net Book Value | | RMH/EGC acquisition- customer contracts | | 5 years | | $ | 366,000 | | | $ | (189,100 | ) | | $ | 176,900 | | Greners acquisition- customer contracts | | 5 years | | | 230,000 | | | | (163,296 | ) | | | 66,704 | | Phototron acquisition- customer contracts | | 5 years | | | 215,000 | | | | (215,000 | ) | | | - | | Soja, Inc. (Urban Garden Supply) acquisition- customer contracts | | 5 years | | | 60,000 | | | | (60,000 | ) | | | - | | Total intangible assets | | | | $ | 871,000 | | | $ | (627,396 | ) | | $ | 243,604 | |
Total amortization expense was $106,548$142,628 and $0 for the years ended December 31, 20152018 and 2014,2017, respectively.
On October 15, 2018, the Company closed the Purchase and Sale Agreement with EZ-Clone Enterprises, Inc., a California corporation that was founded in January 2000. The Company acquired 51% of EZ-Clone for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of the Company’s common stock at a price of $0.013 per share or $1,395,000. The Company has the obligation to acquire the remaining 49% of EZ-Clone within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000. The fair value of the intellectual property associated with the assets acquired detailed above,was $3,423,081 estimated by using a discounted cash flow approach based on future economic benefits associated with agreements with customers, or through expected continued business activities with its customers.benefits. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results.
NOTE 98- ACCOUNTS PAYABLE Accounts payable were $1,054,371 and $821,398 as of December 31, 2018 and December 31, 2017, respectively. Such liabilities consisted of amounts due to vendors for inventory purchases, audit, legal and other expenses incurred by the Company. NOTE 9- ACCRUED EXPENSES Accrued expenses were $261,954 and $133,988 as of December 31, 2018 and, 2017, respectively. Such liabilities consisted of amounts due to Go Green Hydroponics, Inc. and TCA – Go Green SPV, LLC and sales tax and payroll liabilities. On August 17, 2018, the Company entered into an Asset Purchase Agreement with Go Green Hydroponics, Inc. and TCA – Go Green SPV, LLC. The Company acquired the inventory of Go Green but agreed to pay the Seller 100% of the proceeds generated from the sale of the closing inventory until all closing inventory has been sold. The Company recorded accrued expenses $98,150 as of December 31, 2018 related to the sale of inventory. Also, the Company agreed to pay 5% of all gross revenue of Company earned or in any way related to the Purchased Assets generated between October 1, 2018 and December 31, 2019, up to a maximum of $200,000. The Company estimated gross revenue for that period to be approximately $1,200,000 and recorded a $60,000 liability. The Company recorded an impairment of acquired assets in the amount of $60,000 as of December 31, 2018. In addition, the Company recorded an additional accrued liability of $1,986 as of December 31, 2018. NOTE 10 – CONVERTIBLE NOTES PAYABLE, NET Convertible notes payable as of December 31, 2018 consisted of the following: | | | | | | | | | | | | | | | 10% OID Convertible Promissory Notes | $2,982,299 | $135,780 | $- | $3,118,079 | 7% Convertible note ($850,000) | 270,787 | 15,267 | - | 286,054 | | $3,253,086 | $151,047 | $- | $3,404,133 |
Convertible notes payable as of December 31, 2017 consisted of the following: | | | | | | | | | | | | | | | 6% Secured convertible note (2014) | $39,251 | $1,974 | $- | $41,225 | 7% Convertible note ($850,000) | 250,000 | 321,652 | - | 571,652 | 10% OID Convertible Promissory Notes | 2,980,199 | 120,492 | (698,547) | 2,402,144 | | $3,269,450 | $444,118 | $(698,547) | $3,015,021 |
6% Secured Convertible Note and Secured Credit Facility (2014) On March 13, 2018, the Company, received a Notice of Conversion from Logic Works LLC converting principal and interest of $41,690 owed under that a 6% Convertible Note into 16,445,609 shares of our common stock with a fair value of $248,329. As of March 13, 2018, the outstanding balance on the Convertible Note was $0. 7% Convertible Notes Payable As of December 31, 2017, the outstanding principal on the 7% convertible note was $250,000 and accrued interest was $321,652, which results in a total liability of $571,652. On February 12, 2018, the Company received a Notice of Conversion from Forglen LLC converting principal and interest of $321,945 owed under that 7% Convertible Note as amended June 19, 2014 into 127,000,000 shares of the Company’s common stock with a fair value of $2,235,200. On March 12, 2018, the Company entered into a Second Amendment to the Note. Pursuant to the Amendment, the Note’s maturity date has been extended to December 31, 2019, and interest accrues at 7% per annum, compounding on the maturity date. Additionally, after review of the Note and accrued interest, the Parties agreed that as of March 12, 2018, the outstanding balance on the Note was $270,787. As of December 31, 2018, the outstanding principal on this 7% convertible note was $270,787 and accrued interest was $15,267, which results in a total liability of $286,054. 10% Convertible Promissory Notes Funding from Chicago Venture Partners, L.P. (“Chicago Venture”) As of December 31, 2017, the outstanding principal balance due to Chicago Venture was $2,980,199, accrued interest was $120,492, net of the discount of $698,547, which results in a total amount of $2,402,144. As of December 31, 2018, the outstanding principal balance due to Chicago Venture is $1,112,200 and accrued interest was $90,931, which results in a total amount of $1,203,230. During the year ended December 31, 2018, Chicago Venture converted principal and interest of $3,104,181 into 525,587,387 shares of our common stock at a per share conversion price of $0.0059 with a fair value of $7,756,330. The Company recognized $6,565,415 loss on debt conversions during the year ended December 31, 2018. During the year ended December 31, 2018, the Company recorded an OID debt discount expense of $660,472 to interest expense related to the Chicago Venture financing. Securities Purchase Agreement, Secured Promissory Notes and Security Agreement with Iliad Research and Trading, L.P. (“Iliad”) On August 10, 2018, the Company closed the transactions described below with Iliad. On August 7, 2018, the Company executed the following agreements with Iliad: (i) Securities Purchase Agreement; (ii) Secured Promissory Notes; and (iii) Security Agreement (collectively the “Iliad Agreements”). The Company entered into the Iliad Agreements with the intent to acquire working capital to grow our businesses. The total amount of funding under the Iliad Agreements is $1,500,000. The Convertible Promissory Note carries an original issue discount of $150,000 and a transaction expense amount of $5,000, for total debt of $1,655,000. The Company agreed to reserve three times the number of shares based on the redemption value with a minimum of 150 million shares of its common stock for issuance upon conversion of the Debt, if that occurs in the future. If not converted sooner, the Debt is due on or before August 7, 2019. The Debt carries an interest rate of ten percent (10%). The Debt is convertible, at Iliad’s option, into our common stock at $0.015 per share subject to adjustment as provided for in the Secured Promissory Notes. The Company’s obligation to pay the Debt, or any portion thereof, is secured by all of our assets. The Company has $504,098 available under this debt financing. Securities Purchase Agreement, Secured Promissory Notes and Security Agreement with Iliad On October 15, 2018, we executed the following agreements with Iliad: (i) Securities Purchase Agreement; (ii) Secured Promissory Notes; (iii) Security Agreement; and (iv) Warrant to Purchase Shares of Common Shares (collectively the “Iliad Agreements”). The Company entered into the Iliad Agreements with the intent to acquire EZ-Clone Enterprises, Inc. The total amount of funding under the Iliad Agreements is $700,000. The Convertible Promissory Note carries an original issue discount of $70,000 and a transaction expense amount of $5,000, for total debt of $775,000. The Company agreed to reserve 350 million shares of its common stock for issuance upon conversion of the Debt, if that occurs in the future. If not converted sooner, the Debt is due on or before July 15, 2018. The Debt carries an interest rate of ten percent (10%). The Debt is convertible, at Iliad’s option, into the Company’s common stock at 65% of the lowest trading prices in the twenty trading days before conversion. The Warrant is exercisable for a period of five (5) years from the Closing, for the purchase of up to $387,500 shares of our Common Stock at the market price as of the date of exercise as defined in the agreements. The Warrant is subject to a cashless exercise option at the election of Iliad and other adjustments as detailed in the Warrant. The fair value of the warrant is $118,615 at December 31, 2018. Our obligation to pay the Debt, or any portion thereof, is secured by all of the Company’s assets. At December 31, 2018 the outstanding principal balance due to Iliad Research and Trading, L.P. is $1,870,000, accrued interest of $44,849 resulting in a total of $1,914,849. On January 17, 2019, the Company repaid $650,000 to Iliad. NOTE 11 – DERIVATIVE LIABILITY
In April 2008, the FASB issued a pronouncement that provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect If the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants or conversion features with such provisions are no longer recorded in equity. Down-round provisions reduce the exercise price of a warrant orconventional convertible instrument if a company either issues equity sharesdebt provide for a pricerate of conversion that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that havebelow market value, this feature is characterized as a lower exercise price.
7% Convertible Notes
As of December 31, 2013,beneficial conversion feature (BCF). A BCF is recorded by the Company had outstanding 7%as a debt discount pursuant to ASC Topic 470-20. Debt with Conversion and Other Options. In those circumstances, the convertible notes for $1,850,000 thatdebt is recorded net of the Company determined were a derivative liability duediscount related to the “reset” clause associated with the note’s conversion price. The Company had valued the derivative liability of these notes at $9,324,000 using the Black-Scholes-Merton option pricing model. As of December 31, 2014, the Company had outstanding 7% convertible notes for $500,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $1,278,878 using the Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques. As of December 31, 2015, the Company had outstanding 7% convertible notes for $500,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $105,515 using the Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions (i) dividend yield of 0%; (ii) expected volatility of 133.2%; (iii) risk free rate of .001%, (iv) stock price of $.005, (v) per share conversion price of $0.007, and (vi) expected term of .25 years, as the Company estimates that these notes will be converted by March 31, 2016.
6% Convertible Notes
As of December 31, 2014, the Company had outstanding 6% convertible notes for $350,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $822,037 using the Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques. As of December 31, 2015, the Company had outstanding unsecured 6% convertible notes for $350,000 that the Company determined were a derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $54,377 using the Black-Scholes-Merton option pricing model. which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions (i) dividend yield of 0%; (ii) expected volatility of 133.2%; (iii) risk free rate of 0.34%, (iv) stock price of $.005, (v) per share conversion price of $0.007, and (vi) expected term of .56 years.
Secured Convertible Debenture Transaction with TCA Global Credit Master Fund LP
On July 9, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP, an accredited investor, whereby the Company agreed to sell and TCA agreed to purchase up to $3,000,000 of senior secured convertible redeemable debentures, of which $700,000 was purchased on July 9, 2015 and up to $2,300,000 may be purchased in additional closings. The closing of the Transaction occurred on July 9, 2015.
On July 9, 2015, the Company valued the conversion feature as a derivative liability of this senior secured convertible redeemable debenture at $888,134 and discounted debt by $700,000 and recorded interest expense of $188,134. The Company valued the derivative liability of this debenture at $888,134 using the Black-Scholes-Merton option pricing model. which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions (i) dividend yield of 0%; (ii) expected volatility of 160.0%; (iii) risk free rate of 0.25%, (iv) stock price of $0.02, (v) per share conversion price of $0.011, and (vi) expected term of 1.0 years.
Committed Equity Facility Transaction with TCA Global Credit Master Fund LP
On August 6, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP, whereby the Company agreed to sell and TCA agreed to purchase a $100,000 senior secured convertible redeemable debentureBCF and the Company agreedamortizes the discount to issue and sell to TCA, from time to time, and TCA agreed to purchase frominterest expense over the Company up to $3,000,000life of the debt using the effective interest method. The debt is convertible at the lesser of 65% of the fair value of the Company’s common stock pursuant to a Committed Equity Facility. The closing of the Transaction occurred on August 6, 2015.
On August 6 2015, the Company valuedor $0.009 requiring the conversion feature to be bifurcated from the host debt contract and accounting for separately as a derivative, resulting in periodic revaluations.
There was a derivative liability of this senior secured convertible redeemable debenture at $66,668 and discounted debt by $66,668. The Company valued the derivative liability of this debenture at $66,668 using the Black-Scholes-Merton option pricing model. which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions (i) dividend yield of 0%; (ii) expected volatility of 160.0%; (iii) risk free rate of 0.25%, (iv) stock price of $0.02, (v) per share conversion price of $0.018, and (vi) expected term of 1.0 years.
Amended and Restated Securities Purchase Agreement with TCA Global Credit Master Fund LP
On October 27, 2015, the Company entered into an Amended and Restated Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP whereby we agreed to sell, and TCA agreed to purchase $350,000 of senior secured convertible, redeemable debentures. The Company and TCA previously entered into a Securities Purchase Agreement dated$1,795,473 as of April 30, 2015 and effective as of July 9, 2015 to purchase up to $3,000,000 in Debentures. To date, the Company has sold $1,050,000 in Debentures to TCA and up to $1,950,000 in Debentures remains for sale by the Company. The closing of the transaction occurred on October 27, 2015.
The Company valued the conversion feature as a derivative liability at $340,924 and discounted debt by $340,924. The company value the derivative liability of this debenture using the Black-Scholes-Merton option pricing model which approximates the Monte Carlo and other binomial valuation techniques, with the following assumption (i) dividend yield of 0%, (ii) expected volatility of 160.0%; (iii) risk free rate of 0.25%, (iv) stock price of $0.007, (v) per share conversion price of $0.0065, and (vi) expected term of 1.0 years.
The risk-free rate of return reflects the interest rate for the United States Treasury Note with similar time-to-maturity to that of the warrants.
| | Fair Value Measurements Using Inputs | | | Carrying Amount at September 30, | | Financial Instruments | | Level 1 | | | Level 2 | | | Level 3 | | | 2015 | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | Derivative Instruments - Warrants | | $ | - | | | $ | 1,377,175 | | | $ | - | | | $ | 1,377,175 | | | | | | | | | | | | | | | | | | | Total | | $ | - | | | $ | 1,377,175 | | | $ | - | | | $ | 1,377,175 | |
December 31, 2018.For the year ended December 31, 2015,2018, the Company recorded non-cash income of $723,740$977,732 related to the “change in fair value of derivative” expense related to its 6%, 7%the Chicago Venture and 18% convertible notes.Iliad financing. The income related to a decline in the share price and Chicago Venture converted principal and interest of $3,104,181 into 525,587,387 shares of our common stock at a per share conversion price of $0.0059.
| | Fair Value Measurements Using Inputs | | | December 31, | | Financial Instruments | | Level 1 | | | Level 2 | | | Level 3 | | | 2014 | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | Derivative Instruments - Warrants | | $ | - | | | $ | 2,100,915 | | | $ | - | | | $ | 2,100,915 | | | | | | | | | | | | | | | | | | | Total | | $ | - | | | $ | 2,100,915 | | | $ | - | | | $ | 2,100,915 | |
For the year ended Derivative liability as of December 31, 2015, the Company recorded non-cash income of $16,252,823 related to the “change in fair value of derivative” expense related to its 6%, 7% and 12% convertible notes.2018 was as follows:
| | | | | | Fair Value Measurements Using Imputs | | Financial Instruments | | | | | Liabilities: | | | | | Derivative Instruments | $- | $1,795,473 | $- | $1,795,473 | | | | | | Total | $- | $1,795,473 | $- | $1,795,473 |
NOTE 1012 – RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS
Since January 1, 2014,2017, the Company engaged in the following reportable transactions with our directors, executive officers, holders of more than 5% of our voting securities, and affiliates or immediately family members of our directors, executive officers and holders of more than 5% of our voting securities.
Certain Relationships
Please see the transactions with CANX, LLC and Logic Works LLC in Note 5 and TCA Global Credit Master Fund LP asChicago Venture Partners, L.P. discussed in NoteNotes 10, 11, 13 and 12.17.
TransactionTransactions with Marco Hegyi
On October 21, 2018 and 2017, a Mr. Hegyi warrantWarrant to purchase up to twenty five million10,000,000 shares of the Company’sour common stock at an exercise price of $0.08 per share was reduced to $0.01 per share onvested. The Warrant is exercisable for 5 years. The warrants were valued at $390,000 and $192,000 we recorded $178,750 and $195,000 as compensation expense for the years ended December 18, 2015. The reduction in31, 2018 and 2017, respectively. On October 15, 2018, Mr. Hegyi received Warrants to purchase up to 48,000,000 shares of our common stock at an exercise price resulted in no additionalof $0.012 per share and which vest on October 15, 2018, 2019 and 2020. The Warrants are exercisable for 5 years. The warrant that vested on October 15, 2018 was valued at $96,000 and we recorded this amount compensation expense atfor the year ended December 31, 2015.2018. On October 15, 2018, the Board of Directors approved an Employment Agreement with Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its Chief Executive Officer through October 15, 2021. See Note 15 for additional details. Transactions with an Entity Controlled by Mark E. Scott
AnOn October 15, 2018, an entity controlled by Mr. Scott receivedwas granted an option to purchase sixteen million20,000,000 shares of the Company’s common stock at an exercise price of $0.07$0.012 per shareshare. On October 15, 2017, an entity controlled by Mr. Scott was reducedgranted an option to $0.01 per share on December 18, 2015. The reduction inpurchase 12,000,000 shares of common stock at an exercise price resulted in no additionalof $0.006 per share. The stock option grants vest quarterly over three years and are exercisable for 5 years. The stock option grants were valued at $40,000 and $18,000. The Company recorded $8,833 and $1,500 as compensation expense at December 31, 2015. Two million shares vested on August 17, 2015 withfor the Company’s resolution of the class action lawsuits.
Loans and Advances from Sterling C. Scott
Sterling Scott, our former CEO, advanced various amounts to us. As of December 31, 2011, the amount due the former CEO was $183,103, and additional advances of $98,897 were made to us through April 5, 2012. On April 5, 2012, Mr. Scott converted $282,000 of these advances into a 6% senior convertible note. Mr. Scott made further advances during the yearyears ended December 31, 2012 which were converted into the 6% senior convertible note. As of December 31, 2013, total amount owed to Mr. Scott was $453,932, which consisted of $413,680 in principal2018 and $40,252 in accrued interest. As of September 10, 2014, the outstanding principal balance on Mr. Scott’s 6% convertible note was $413,680 and accrued interest were sold to two parties not related to us.
Investment in Vape Holdings, Inc.
Please see the transactions with Vape Holding, Inc. as discussed in Note 7.
NOTE 11– CONVERTIBLE NOTES PAYABLE, NET
Convertible notes payable as of December 31, 2015 consists of the following:2017, respectively.
| | | | | Accrued | | | Debt | | | December 31, | | | | Principal | | | Interest | | | Discount | | | 2015 | | 6% Senior secured convertible notes (2012) | | $ | 413,680 | | | $ | 172,494 | | | $ | - | | | $ | 586,174 | | 6% Secured convertible note (2014) | | | 350,000 | | | | 30,641 | | | | (83,924 | ) | | | 296,717 | | 7% Convertible note ($850,000) | | | 250,000 | | | | 104,137 | | | | - | | | | 354,137 | | 7% Convertible note ($1,000,000) | | | 250,000 | | | | 134,469 | | | | - | | | | 384,469 | | 18% Senior secured redeemable convertible debenture ($1,050,000) | | | 1,150,000 | | | | 68,510 | | | | (552,139 | ) | | | 666,371 | | | | | | | | | | | | | | | | | | | | | $ | 2,413,680 | | | $ | 510,251 | | | $ | (636,063 | ) | | $ | 2,287,868 | |
On April 10, 2014, as a result ofOctober 15, 2018, the SEC suspension in the trading of our securities, the Company went into default on its 6% Senior Secured Convertible Notes Payable and 7% Convertible Notes Payable. As a result, the Company accrued interest on these notes at the default rate of 12% and 24% per annum, respectively. Furthermore, as a result of being in default on these notes, the Holders could, at their sole discretion, call these notes. Although no such action has been taken by the Holders, the Company classified these notes as a current liability rather than long-term debt as of June 30, 2014.
6% Senior Secured Convertible Notes Payable (2012)
On September 28, 2012, the Company entered into an Amendment and Exchange Agreement (“Exchange Agreement”) with investors, including Sterling Scott, our then CEO. The Exchange Agreement provided for the issuance of new 6% Senior Secured Convertible Notes that replaced the 6% Senior Secured Convertible Notes that were previously issued during 2012. The 6% Notes accrued interest at the rate of 6% per annum and had a maturity date of April 15, 2015. No cash payments were required; however, accrued interest is due at maturity. In the event of a default the investors may declare the entire principal and accrued interest to be due and payable. Default interest accrued at the rate of 12% per annum. The 6% Notes were secured by substantially all of the assetsCompensation Committee of the Company and are convertible intoapproved an Employment Agreement with Mark E. Scott pursuant to which the Company engaged Mr. Scott as its Chief Financial Officer through October 15, 2021. Mr. Scott’s previous Agreement was cancelled. See Note 15 for additional details.
Transaction with Joseph Barnes On October 15, 2018, Mr. Barnes was granted an option to purchase 18,000,000 shares of common stock at the ratean exercise price of $0.012 per share. On October 25, 2017, Mr. Barnes was granted an option to purchase 10,000,000 shares of common stock at an exercise price of $0.007 per share. The stock option grants vest quarterly over three years and are exercisable for 5 years. The stock option grants were valued at $36,000 and $24,000. The Company determined thatrecorded $8,550 and $2,000 as compensation expense for the conversion featureyears ended December 31, 2018 and 2017, respectively On October 15, 2018, the Compensation Committee of the Company approved an Employment Agreement with Joseph Barnes pursuant to which the Company engaged Mr. Barnes as President of the GrowLife Hydroponics Company through October 15, 2021. Mr. Barnes’s previous Agreement was cancelled. See Note 15 for additional details. Transactions with Michael E. Fasci On February 4, 2017, the Company issued 1,000,000 shares of our common stock to Michael E. Fasci pursuant to a beneficial conversion feature.
Asservice award for $15,000. The shares were valued at the fair market price of September 10, 2014, the outstanding principal balance on Mr. Scott’s 6% convertible note was $413,680 and accrued interest were sold to two parties not related to us.$0.015 per share. On April 27, 2015, the Company entered into Amendment One of the Amended and Restated 6% Senior Secured Convertible Note, which increased the interest rate to 12% effective April 8, 2014 and extended the maturity to September 15, 2015.
On July 9, 2015, the two investors each entered into Amendment Two of the Amended and Restated 6% Senior Secured Convertible Note which provide for an increase in the interest rate from 6% to 10% and the default interest rate from 12% to 20% on the 6% Senior Secured Convertible Notes for so long as the Company remains in technical default on said notes due to its delisting from its Primary Trading Market April 2014. The Company further agreed that said 20% default interest will be applied to the date of default on April 10, 2014 and continuing through the present.
During the year ended December 31, 2014, the Company recorded interest expense of $66,568 and $81,609 of non-cash interest expense related to the amortization of the debt discount associated with these 6% convertible notes, respectively. As of December 31, 2014, the outstanding principal on these 6% convertible notes was $413,680, accrued interest was $71,669, and unamortized debt discount was $20,486, which results in a net amount of $464,683. The Company accrued interest on these notes at the default rate of 12% from April 10, 2014 to July 10, 2014.
During the year ended December 31, 2015, the Company recorded interest expense of $100,825 and $20,486 of non-cash interest expense related to the amortization of the debt discount associated with these 6% convertible notes, respectively. As of December 31, 2015, the outstanding principal on these 6% convertible notes was $413,680, accrued interest was $172,494, and unamortized debt discount was $0, which results in a net amount of $586,174.
6% Secured Convertible Note and Secured Credit Facility (2014)
The Company entered into a Secured Convertible Note and Secured Credit Facility dated June 25, 2014 with Logic Works whereby Logic Works agreed to provide up to $500,000 in funding. Each funding requires approval in advance by Logic Works, provides for interest at 6% with a default interest of 24% per annum and requires repayment by June 26, 2016. The Note is convertible into common stock of the Company at the lesser of $0.0070 or (B) twenty percent (20%) of the average of the three (3) lowest daily VWAPs occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable conversion date on which Logic Works elects to convert all or part of this 6% Convertible Note, subject to adjustment as provided in the Note. The 6% Convertible Note is collateralized by the assets of the Company. The Company also has agreed to file a registration statement on Form S-1 within 10 days of the filing of the Company’s Form 10-Q for the three months ended June 30, 2014 and have the registration statement declared effective within ninety days of the filing of the Company’s Form 10-Q for the three months ended June 30, 2014. Due to the Company’s grey sheet trading status and other issues, the Company did not file the registration statement.
On July 10, 2014, the Company closed a Waiver and Modification Agreement, Amended and Restated Joint Venture Agreement, Secured Credit Facility and Secured Convertible Note with CANX, and Logic Works LLC, a lender and shareholder of the Company. As of December 31, 2014, the Company has borrowed $350,000 under the Secured Convertible Note and Secured Credit Facility, accrued interest was $9,641 and the unamortized debt discount was $261,308, which results in a net amount of $98,333.
During the year ended December 31, 2015, the Company recorded interest expense of $21,000 and $177,384 of non-cash interest expense related to the amortization of the debt discount associated with these 6% convertible notes, respectively. As of December 31, 2015, the Company has borrowed $350,000 under the Secured Convertible Note and Secured Credit Facility, accrued interest was $30,641 and the unamortized debt discount was $83,924, which results in a net amount of $296,717.
7% Convertible Notes Payable
On October 11, 2013,2017, the Company issued 7% Convertible Notes in1,000,000 shares of our common stock to Michael E. Fasci pursuant to a service award for $9,000. The shares were valued at the aggregate amountfair market price of $850,000 to investors, including Forglen LLC. The principal balance due to Forglen as of December 31, 2014 and 2015 is $250,000 was due September 30, 2015. The current annual rate of interest is 24% per annum. The conversion price is $0.007$0.009 per share. The Company determined that the conversion feature was a beneficial conversion feature.
On July 14, 2014, the Board of Directors approved a Settlement Agreement and Waiver of Default dated June 19, 2014 with Forglen related to the 7% Convertible Note. The Company cancelled the April 9, 2014 conversion as a result of the SEC suspension in the trading of the Company’s securities and Forglen has $250,000 of principal and interest outstanding on its note payable.
On December 20, 2013,27, 2017, the Company issued 7% Convertible Notes2,000,000 shares of our common stock to Michael E. Fasci pursuant to a consulting agreement for $1,000,000, including $500,000 from Logic Works LLC.$18,000. The principal balance due to Logic Works asshares were valued at the fair market price of December 31, 2014 and 2015 is $250,000 was due September 30, 2015. The current annual rate of interest is 24% per annum. The conversion price is $0.007$0.009 per share. The Company determined that the conversion feature was a beneficial conversion feature.
During the year ended December 31, 2014,On November 2, 2017, the Company recorded interest expenseissued 2,000,000 shares of $136,980 and $1,502,260our common stock to Michael E. Fasci pursuant to a consulting agreement for $10,000. The shares were valued at the fair market price of non-cash interest expense related to the amortization of the debt discount associated with these 7% convertible notes, respectively. As of December 31, 2014, the outstanding principal on these 7% convertible notes was $500,000, accrued interest was $118,441, and unamortized debt discount was $196,032, which results in a net amount of $422,409.$0.005 per share.
During the year ended December 31, 2015,On February 1, 2018, the Company recorded interest expenseissued 3,789,041 shares of $120,165 and $196,032 of non-cash interest expense related to the amortization of the debt discount associated with these 7% convertible notes, respectively. As of December 31, 2015, the outstanding principal on these 7% convertible notes was $500,000, accrued interest was $238,606, and unamortized debt discount was $0, which results in a net amount of $738,606.
Secured Convertible Debenture Transaction with TCA Global Credit Master Fund LP
On July 9, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP, an accredited investor, whereby the Company agreed to sell and TCA agreed to purchase up to $3,000,000 of senior secured convertible redeemable debentures, of which $700,000 was purchased on July 9, 2015 and up to $2,300,000 may be purchased in additional closings. The closing of the Transaction occurred on July 9, 2015.
Securities Purchase Agreement
As set forth above, the Company entered into the Securities Purchase Agreement on July 9, 2015 with the Purchaser whereby the Purchaser agreed to purchase up to $3,000,000 of the Debentures of which $700,000 was purchased at Closing. In connection with the Securities Purchase Agreement, the Company, at the discretion of Purchaser, may request in writing at any time after the Closing that Purchaser purchase additional Debentures at agreed upon time periods and amounts.
The Securities Purchase Agreement also provides that the Company shall, within ninety days of Closing, file any and all periodic reports with the SEC required under the Exchange Act to become current with the Company’s reporting requirements under the Securities Exchange Act of 1934 and shall use its best efforts to obtain approval for the listing and quotation of the Company’sour common stock on the OTC Bulletin Board, or another Principal Trading Market more senior and established than the OTC Pink Sheets and approved by Purchaser, and to have such Common Stock trading in such Principal Trading Market.
In consideration for advisory services provided by Purchaser to the Company prior to the Closing, the Company paid to Purchaser a fee by issuing to Purchaser 10,000,000 shares of Common StockMr. Fasci that was valued at $0.02 per share equalor $75,781. On December 6, 2018, the Company issued Mr. Fasci 5,000,000 shares of our common stock that was valued at $0.01 per share or $50,000. On December 6, 2018, Michael E. Fasci resigned as a Member of the Board of Directors.
Transactions with Katherine McLain Ms. Katherine McLain was appointed as a director on February 14, 2017. On June 28, 2017, the Company issued 1,000,000 shares of our common stock to $200,000.Ms. McLain pursuant to a service award for $9,000. The Advisory Fee Sharesshares were valued at athe fair market price equal to the lowest volume weighted average price for the Common Stock for the five (5) Business Days immediately prior to the Effective Date, as reported by Bloomberg (the “VWAP”). The Advisory Fee Shares are subject to adjustment as provided in the Securities Purchase Agreement. If the Advisory Fee Shares are still in possession of the holder at twelve months the holder may require$0.009 per share. On October 23, 2017, the Company to redeem that numberissued 1,000,000 shares of shares for cash, not to exceed $200,000. As theour common stock is conditionally redeemable, the Company has recorded the common stock as mezzanine equity in the accompanying consolidated balance sheet.
The Company also paid certain transaction, due diligence and document review and legal fees to the Purchaser in connection with the Transaction.
Senior Secured, Convertible, Redeemable Debenture
The Company entered into an initial Debenture dated July 9, 2015 with the Purchaser whereby the Purchaser purchased $700,000 in senior secured, convertible, redeemable debentures in exchange for $700,000 in immediately available and lawful money of the United States of America. The Company promised to pay Purchaser, by no later than October 9, 2016 the outstanding principal together with interest on the outstanding principal amount under the Debenture, at the rate of 18% per annum simple interest. The Company shall make monthly payments of principal and interest on the Debenture to Purchaser, while this Debenture is outstanding, until the Maturity Date, based on the payment, amortization and redemption premium schedule attached as Schedule A to the Debenture.
The indebtedness evidenced by this Debenture is also secured by a first priority lien and security interest in all of the assets and property of the Company and various other instruments as set forth in the Transaction Documents, subject to the terms and conditions of the Intercreditor Agreement described below.
At any time while the Debenture is outstanding on or after the Closing, (i) if mutually agreed upon by the parties or (ii) at the sole option of the Purchaser upon the occurrence of an Event of Default, the Purchaser may convert all or any portion of the outstanding principal, accrued and unpaid interest redemption premium and any other sums due and payable hereunder or under any of the other Transaction Documents into shares of Common Stock of the Company at a price equal to: (i) the Conversion Amount (the numerator); divided by (ii) 90% of the lowest of the average daily volume weighted average price of the Company’s Common Stock during the 5 trading days immediately prior to the Conversion Date (the denominator).
Security Agreement(s)
In connection with the Securities Purchase Agreement and Debenture, the Company entered into a Security Agreement dated July 9, 2015 with the Purchaser whereby the Company agreed to grant to Purchaser an unconditional and continuing, first priority security interest in all of the assets and property of the Company to secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Debentures, the Purchase Agreement and the other Transaction Documents, subject to the terms and conditions of the Intercreditor Agreement set forth below.
In addition, each of the Company’s operating subsidiaries also agreed to grant to Purchaser an unconditional and continuing, first priority security interest in all of the assets and property of each of the subsidiaries to further secure the prompt payment, performance and discharge in full of all of Company’s obligations under the Debentures, the Purchase Agreement and the other Transaction Documents.
Guaranty Agreement(s)
In connection with the Securities Purchase Agreement and Debenture, each of the Company’s operating subsidiaries entered into Guaranty Agreements dated July 9, 2015 with the Purchaser whereby the subsidiaries agreed to guarantee and become surety to Purchaser for the full, prompt and unconditional payment of the Liabilities and payment and performance of the Company’s obligations and the full, prompt and unconditional performance of each term and condition to be performed by Company under the Debentures and the other Transaction Documents.
Pledge Agreement(s)
In connection with the Securities Purchase Agreement and Debenture, the Company entered into Pledge Agreements dated July 9, 2015 with the Purchaser whereby the Company agreed to pledge to Purchaser its shares in each of its operating subsidiaries as further security for the payment and performance of the Company’s obligations and the full, prompt and unconditional performance of each term and condition to be performed by Company under the Debentures and the other Transaction Documents.
Intercreditor Agreement and Related Creditor Documentation
On July 9, 2015, the Company, each of its subsidiaries, Purchaser and Logic Works LLC (an existing senior secured creditor) entered into an Intercreditor Agreement whereby Purchaser and Logic Works agreed that their outstanding senior secured loans to the Company be secured on a pari passu basis with respect to all assets and property of the Company and its subsidiaries. As a result of the Intercreditor Agreement, all sums secured or owing to Purchaser and Logic Works shall be held by them on a pari passu and pro-rata basis between them, in proportion to such party’s outstanding principal amount owing under their respective loan documents.
In addition, the Company, each of its subsidiaries, Purchaser and Jordan Scott and Andrew Gentile, respectively, each entered into Subordination Agreements dated July 9, 2015 whereby Scott and Gentile agreed to subordinate their existing 6% Senior Secured Convertible Notes, dated March 16, 2012, as amended, all of their indebtedness, obligations and security interests to the Purchaser’s security interests as more fully set forth in the Transaction Documents.
On July 9, 2015, Jordan Scott and Andrew Gentile each entered into Amendment Two of the Amended and Restated 6% Senior Secured Convertible Note which provide for an increase in the interest rate from 6% to 10% and the default interest rate from 12% to 20% on the 6% Senior Secured Convertible Notes for so long as the Company remains in technical default on said notes due to its delisting from its Primary Trading Market April 2014. The Company further agreed that said 20% default interest will be applied to the date of default on April 10, 2014 and continuing through the present.
On July 9, 2015, the Company valued the derivative liability of this senior secured convertible redeemable debenture at $888,134 and reduced debt by $700,000 and recorded interest expense of $188,134.
Committed Equity Facility Transaction with TCA Global Credit Master Fund LP
On August 6, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP, whereby the Company agreed to sell and TCA agreed to purchase a $100,000 senior secured convertible redeemable debenture and the Company agreed to issue and sell to TCA, from time to time, and TCA agreed to purchase from the Company up to $3,000,000 of the Company’s common stockMs. McLain pursuant to a Committed Equity Facility.service award for $5,000. The closingshares were valued at the fair market price of the Transaction occurred on August 6, 2015.
In consideration for advisory services provided by Purchaser to$0.005 per share. On February 1, 2018, the Company prior to the, the Company paid to Purchaser a fee by issuing to Purchaser 5,000,000issued 2,893,151 shares of Common Stockour common stock to Katherine McLain that was valued at $0.02 per share equalor $57,863.
Transaction with Thom Kozik Mr. Kozik was appointed as a director on October 5, 2017. On October 23, 2017, the Company issued 2,000,000 shares of our common stock to $100,000.Mr. Kozik pursuant to a service award for $10,000. The Advisory Fee Sharesshares were valued at price equal to the lowest volume weighted average price for the Common Stock for the five (5) Business Days immediately prior to the issuance. The Advisory Fee Shares are subject to adjustment as provided in the Securities Purchase Agreement. If the Advisory Fee Shares are still in possession of the holder at twelve months, the holder may require the Company to redeem that number of shares for cash, not to exceed $100,000. As the common stock is conditionally redeemable, the Company has recorded the common stock as mezzanine equity in the accompanying consolidated balance sheet. The Company also paid certain transaction, due diligence and document review and legal fees in connection with the Transaction.
The Company entered into a Debenture dated August 6, 2015 with the Purchaser whereby the Purchaser purchased $100,000 in a senior secured, convertible, redeemable debenture from the Company in exchange for $100,000. The Company promised to pay Purchaser, by no later than August 6, 2016 the outstanding principal together with interest on the outstanding principal amount under the Debenture, at the rate of 18% per annum simple interest. The Debenture is convertible only at the option of Purchaser upon an event of default at a conversionfair market price of 90% of the lowest of the average daily volume weighted average price of the Company’s Common Stock during the 5 trading days immediately prior to the conversion date.
In addition, the Company entered into a Committed Equity Facility, dated August 6, 2015, with the Purchaser in which the Company agreed to issue and sell to the Purchaser, from time to time, and the Purchaser agreed to purchase from the Company up to $3,000,000 of the Company’s common stock. At any time during the duration of the agreement and after the Company has an effective registration statement outstanding, the Company can require the Purchaser to purchase shares of its common stock which will be sold by Purchaser with the net proceeds provided to the Company, subject to the terms and conditions set forth in the Committed Equity Facility.
To facilitate the Committed Equity Facility, the Company has granted the Purchaser certain registration rights pursuant to a Registration Rights Agreement dated August 6, 2015 whereby the Company filed a registration statement to facilitate the purchase and sale of the common stock under the Committed Equity Facility.
The Company’s obligation to repay the Debenture disclosed herein as well as the Debenture entered into by and between the Company and Purchaser on July 9, 2015, are secured by security agreements, guaranty agreements and pledge agreements previously disclosed on the Company’s Current Report on Form 8-K filed July 16, 2015 and incorporated herein by reference. The Company has additionally entered into an Authorization Agreement, dated August 6, 2015, with Purchaser whereby scheduled re-payments to the Purchaser will be debited from the Company’s account according to the payment schedule of both the Debenture disclosed herein and the Debenture previously entered into on July 9, 2015.
$0.005 per share. On August 6, 2015, the Company valued the derivative liability of this senior secured convertible redeemable debenture at $66,668 and reduced debt by $66,668.
Amended and Restated Securities Purchase Agreement with TCA Global Credit Master Fund LP
On October 27, 2015, the Company entered into an Amended and Restated Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP whereby we agreed to sell, and TCA agreed to purchase $350,000 of senior secured convertible, redeemable debentures. The Company previously entered into a Securities Purchase Agreement dated as of April 30, 2015 and effective as of July 9, 2015 to purchase up to $3,000,000 in Debentures. As of October 27, 2015, the Company sold $1,050,000 in Debentures to TCA and up to $1,950,000 in Debentures remains for sale by us. The closing of the transaction occurred on October 27, 2015. In addition, TCA has advanced the Company an additional $100,000 for a total of $1,150.000. Also, on October 21, 2015February 1, 2018, the Company issued 150,000 Series B Preferred Stock978,082 shares of our common stock to Thom Kozik that was valued at a stated value equal to $10.00$0.02 per share to TCA that is convertible into the Company’s common stock. On October 21, 2015, the Company also issued 51 shares of Series C Preferred Stock at $0.0001 par value per share to TCA that is not convertible into the Company’s common stock. In the event of a default under the Amended and Restated TCA Transaction Documents, TCA can exercise voting control over the Company’s common stock with their Series C Preferred Stock voting rights
Amended and Restated Securities Purchase Agreement
As set forth above, the Company entered into the Amended and Restated Securities Purchase Agreement on October 27, 2015 with the Purchaser whereby the Purchaser agreed to purchase $350,000 of the Debentures.
In addition, in consideration for advisory services provided by Purchaser to the Company prior to the closing (the “Second Closing Advisory Fee”), the Company paid to Purchaser a fee by issuing to Purchaser 150,000 Series B Preferred Stock valued at $1,500,000 and convertible into common stock of the Company.
Purchaser was also granted 51 shares of Series C Preferred Stock as further security for the Company’s completion of post-closing obligations under the Amended and Restated Transaction Documents as further discussed below.
Series B Preferred Stock Designation
In connection with the Amended and Restated Securities Purchase Agreement, the Board of Directors, on October 21, 2015, approved the authorization of a Series B Preferred Stock as provided in the Company’s Certificate of Incorporation, as amended.
The Series B Preferred Stock has authorized 150,000 shares with a stated value equal to $10.00 per share. Dividends payable to other classes of stock are restricted until repayment of the aggregate value of Series B Preferred Stock. Upon liquidation or dissolution of the Company, Series B Preferred Stock has no priority or preference with respect to distributions of any assets of the Company. The Series B Preferred Stock is convertible into common stock by dividing the stated value of the shares being converted by 100% of the average of the five (5) lowest closing bid prices for the common stock during the ten (10) consecutive trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
The Purchaser was issued 150,000 shares of Series B Preferred Stock. However, in no event will Purchaser be entitled to hold in excess of 4.99% of the outstanding shares of common stock of the Company.
Series C Preferred Stock Designation
In connection with the Amended and Restated Securities Purchase Agreement, the Board of Directors, on October 21, 2015, approved the authorization of a Series C Preferred Stock as provided in the Company’s Certificate of Incorporation, as amended, and the issuance of 51 shares of Series C Preferred Stock. These shares only have voting rights in the event of a default by the Company under the Amended and Restated Transaction Documents.
The Series C Preferred Stock Designation authorizes 51 shares of Series C Preferred Stock. Series C Preferred Stock is not entitled to dividend or liquidation rights and is not convertible into common stock of the Company.
In the event of a default under the Amended and Restated Transaction Documents, each share of Series C Preferred Stock shall have voting votes equal to 0.019607 multiplied by the total issued and outstanding common stock and preferred stock eligible to vote divided by .49 minus the numerator. For example, if the total issued and outstanding common stock eligible to vote is 5,000,000, the voting rights of one share of Series C Preferred Stock shall be equal to 102,036 (e.g. ((0.019607 x 5,000,000/0.49) – (0.019607 x 5,000,000) = 102,036).
Amended and Restated Senior Secured, Convertible, Redeemable Debenture
In connection with the Amended and Restated Securities Purchase Agreement, the Company, on October 27, 2015, also entered into the Amended and Restated Debenture which was amended to increase the balance of the original Debenture from $700,000 to $1,050,000 as a result of the additional $350,000 advanced.
As of April 14, 2016, the Company is in default on our repayment obligations in its Agreements with TCA and owes TCA approximately $254,000 in principal and interest payments. The Company is working to resolve these issues.
During the year ended December 31, 2015, the Company recorded interest expense of $68,510 and $552,139 of non-cash interest expense related to the amortization of the debt discount associated with the senior secured convertible redeemable debentures, respectively. As of December 31, 2015, the Company has borrowed $1,150,000 under the senior secured convertible redeemable debentures, accrued interest was $68,510 and the unamortized debt credit was $552,139, which results in a net amount of $666,371.$19,562.
NOTE 1213 – EQUITY Authorized Capital Stock The Company has authorized 6,010,000,000 shares of capital stock, of which 6,000,000,000 are shares of voting common stock, of 3,000,000,000 shares at $0.0001 par value and 10,000,000 shares of non-voting preferred stock with a par value of $0.0001 as authorized by the shareholders. In addition, on October 21, 2015 the Company issued 150,000 Series B Preferred Stock at a stated value equal to $10.00 per share, and convertible into our common stock. 10,000,000 are shares of preferred stock, par value $0.0001 per share. On October 21, 2015,24, 2017 the Company also issued 51filed a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of the State of Delaware to increase the authorized shares of Series C Preferred Stock at $0.0001 par value per share that have certain voting rights but are not convertible into our common stock from 3,000,000,000 to 6,000,000,000 shares.
Non-Voting Preferred Stock Under the terms of our articles of incorporation, the Company’s board of directors is authorized to issue shares of non-voting preferred stock in one or more series without stockholder approval. The Company’s board of directors has the discretion to determine the rights, preferences, privileges and restrictions, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of non-voting preferred stock. The purpose of authorizing the Company’s board of directors to issue non-voting preferred stock and determine itsthe Company’s rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of non-voting preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Other than the Series B and C Preferred Stock discussed below, there are no shares of non-voting preferred stock presently outstanding and the Companywe have no present plans to issue any shares of preferred stock. Series B Preferred Stock Designation
In connection with the Amended and Restated Securities Purchase Agreement, the Board of Directors, on October 21, 2015, approved the authorization of a Series B Preferred Stock as provided in our Certificate of Incorporation, as amended.
The Series B Preferred Stock has authorized 150,000 shares with a stated value equal to $10.00 per share. Dividends payable to other classes of stock are restricted until repayment of the aggregate value of Series B Preferred Stock. Upon our liquidation or dissolution, Series B Preferred Stock has no priority or preference with respect to distributions of any assets by us. The Series B Preferred Stock is convertible into common stock by dividing the stated value of the shares being converted by 100% of the average of the five lowest closing bid prices for the common stock during the ten consecutive trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
TCA was issued 150,000 shares of Series B Preferred Stock. However, in no event will Purchaser be entitled to hold in excess of 4.99% of the outstanding shares of common stock of the Company.
Series C Preferred Stock Designation
In connection with the Amended and Restated Securities Purchase Agreement, the Board of Directors, on October 21, 2015, approved the authorization of a Series C Preferred Stock as provided in our Certificate of Incorporation, as amended, and the issuance of 51 shares of Series C Preferred Stock. These shares only have voting rights in the event of a default by us under the Amended and Restated Transaction Documents. The Series C Preferred Stock is cancelled with the repayment of the TCA debt.
The Series C Preferred Stock Designation authorizes 51 shares of Series C Preferred Stock. Series C Preferred Stock is not entitled to dividend or liquidation rights and is not convertible into our common stock.
In the event of a default under the Amended and Restated Transaction Documents, each share of Series C Preferred Stock shall have voting votes equal to 0.019607 multiplied by the total issued and outstanding common stock and preferred stock eligible to vote divided by .49 minus the numerator. For example, if the total issued and outstanding common stock eligible to vote is 5,000,000, the voting rights of one share of Series C Preferred Stock shall be equal to 102,036 (e.g. ((0.019607 x 5,000,000/0.49) – (0.019607 x 5,000,000) = 102,036).
Common Stock
Unless otherwise indicated, all of the following sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as noted below). All of the shares issued were issued in transactions not involving a public offering, are considered to be restricted stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect.
The Company has compensated consultants and service providers with restricted common stock during the development of our business and when our capital resources were not adequate to provide payment in cash.
During the year ended December 31, 2015,2018, the Company had had the following sales of unregistered sales of equity securities:securities to accredited investors unless otherwise indicated:
On June 16, 2015,February 7, 2018, the Company issued 7,772,7257,660,274 shares of its common stock to Horwitz + Armstrong LLP pursuant a conversion of debt for $171,000.three directors. The shares were valued at the fair market price of $0.022 per share.
On December 18, 2015, the Company issued 2,000,000 shares to two if its former independent Board Directors. The Company valued the 4,000,000 shares at $0.01$0.020 per share or $40,000.$153,205. The shares were issued for annual director service to the Company.
On February 12, 2018, the Company received a Notice of Conversion from Forglen LLC converting principal and interest of $321,945 owed under that certain 7% Convertible Note as amended June 19, 2014 into 127,000,000 shares of the Company’s common stock with a fair value of $2,235,200. On March 13, 2018, the Company, received a Notice of Conversion from Logic Works LLC converting principal and interest of $41,690 owed under that a 6% Convertible Note into 16,445,609 shares of our common stock with a fair value of $248,329. As of March 13, 2018, the outstanding balance on the Convertible Note was $0. During the year ended December 31, 2014, the Company had had the following sales of unregistered sales of equity securities: On January 3, 2014,2018, the Company issued 4,700,1962,400,000 shares of its common stock to Carla Badaracco relateda service provider pursuant to the conversionconversions of $30,000 of principal and $2,901 of accrued interest at a per share conversion price of $0.007 of the Company’s 6% Senior Secured Convertible Notes Payable.
On January 31, 2014, the Company issued 12,562,518 shares of its common stock related to the conversion of $408,000 of principal and $31,688 of accrued interest at a per share conversion price of $0.035 of the Company’s 12% Senior Secured Convertible Notes Payable.
On January 31, 2014, the Company issued 2,351,187 shares of its common stock to Doug Braun related to the exercise of a stock option granted in fiscal year 2011. The Company received $44,673 or $0.019 per share.
On February 13, 2014, the Company issued 29,420 shares of its common stock to Alby Segall, a third party consultant and non-accredited investor, as payment in full for services rendered.debt totaling $33,000. The shares were valued at the fair market price of $0.3399$0.0138 per share.
On February 16, 2014,During the year ended December 31, 2018, the Company issued 1,250,0006,250,000 shares of its common stock to Integrity Media, Inc.a service provider and a former director related to a November 16, 2013 Service Agreement for investor relations.services. The shares were valued at the fair market price of $0.38$0.0104 per share.share or $65,000.
On March 7, 2014,During the Company issued 2,000,000year ended December 31, 2018, Chicago Venture converted principal and interest of $3,104,181 into 525,587,387 shares of itsour common stock to Adam Liebross related to the conversion of $50,000 of principal at a per share conversion price of $0.025$0.0059 with a fair value of the Company’s 7% Convertible Notes Payable.
On March 18, 2014, the Company issued 22,727,668 shares of its common stock to Adam Liebross (8,300,260 shares), Myli Burger Holdings LLC (4,122,248 shares) and Europa International Inc. (10,304,800 shares) related to the total conversion of $550,000 of principal and $18,192 of accrued and interest at a per share conversion price of $0.025 of the Company’s 7% Convertible Notes Payable.
On March 20, 2014, the Company issued 2,775,000 shares of its common stock to Doug Braun related to the cashless exercise of a stock option granted in fiscal year 2011 to purchase 4,500,000 shares of the Company’s common stock at $0.23 per share.
On March 31, 2014, the Company issued 500,000 shares to each of its four independent Board Directors,$7,756,330. The Company valued the 2,000,000 shares at $0.58 per share which was the closing price of the Company’s common stockrecognized $6,565,415 loss on March 31, 2014. The Company recorded stock based compensation of $1,160,000 during the three months ended March 31, 2014. On April 25, 2014, the Company entered into four Restricted Stock Cancellation Agreements with the four independent members of the Company’s Board of Directors, pursuant to which the Directors agreed to each cancel 500,000 shares of the Company’s restricted common stock granted to each Director on March 31, 2014. The Company recorded a reduction in common stock and an increase in additional paid in capital of $200debt conversions during the year ended December 31, 2014 are related2018.
During the year ended December 31, 2018, an employee exercised a stock option grant for 1,000,000 shares at $0.006 or $6,000. Securities Purchase Agreements with St. George Investments, LLC On February 9, 2018, the Company executed the following agreements with St. George Investments LLC, a Utah limited liability company: (i) Securities Purchase Agreement; and (ii) Warrant to cancellationPurchase Shares of Common Stock. The Company entered into the St. George Agreements with the intent to acquire working capital to grow the Company’s businesses. Pursuant to the St. George Agreements, the Company agreed to sell and to issue to St. George for an aggregate purchase price of $1,000,000: (a) 48,687,862 Shares of newly issued restricted Common Stock of the RestrictedCompany; and (b) the Warrant. St. George has paid the entire Purchase Price for the Securities. The Warrant is exercisable for a period of five (5) years from the Closing, for the purchase of up to 48,687,862 shares of the Company’s Common Stock Agreements.at an exercise price of $0.05 per share of Common Stock. The Warrant is subject to a cashless exercise option at the election of St. George and other adjustments as detailed in the Warrant. On March 20, 2018, the Company entered into and closed on a Common Stock Purchase Agreement with St. George Investments, LLC, a Utah limited liability company. The Company issued St. George 6,410,256 shares of newly issued restricted Common Stock of the Company at a purchase price of $0.0156 per share. On April 26, 2018, the Company entered into and closed on a Common Stock Purchase Agreement with St. George Investments, LLC, Pursuant to the St. George Agreements, the Company sold and agreed to issue to St. George 4,950,495 shares of newly issued restricted Common Stock of the Company at a purchase price of $0.0202 per share. On May 25, 2018, the Company entered into and closed on a Common Stock Purchase Agreement with St. George Investments, LLC, Pursuant to the St. George Agreements, the Company sold and agreed to issue to St. George 5,128,205 shares of newly issued restricted Common Stock of the Company at a purchase price of $0.0195 per share. On October 15, 2018, the Company closed the Purchase and Sale Agreement with EZ-Clone and issued 107,307,692 restricted shares of our common stock at a price of $0.013 per share or $1,395,000. On April 9, 2014,November 30, 2018, the Company closed its Rights Offering. We received $2,533,648 under the Rights Offering and issued 5,347,032211,137,293 shares of its common stock at $0.012 per share. During the year ended December 31, 2017, the Company had had the following sales of unregistered of equity securities to Forglen LLC related to the conversion of $125,000 ofaccredited investors unless otherwise indicated: On February 28, 2017, Logic Works converted principal and $8,676interest of accrued interest at a per share conversion price of $0.025 of the Company’s 7% Convertible Notes Payable. On July 14, 2014, the Board of Directors approved a Settlement Agreement and Waiver of Default dated June 19, 2014 with Forglen related to the 7% Convertible Note. The Company cancelled the April 9, 2014 conversion as a result of the SEC suspension in the trading of the Company’s securities.
On June 4, 2014, the Company issued 20,640,548 shares of the Company’s common stock to China West III Investments LLC related to the conversion of $500,000 of principal and $16,014 of accrued interest at a per share conversion price of $0.033 of the Company’s 7% Convertible Notes Payable.
On July 1, 2014, Horwitz and Armstrong LLP converted debt of $100,000 debt$291,044 into 500,00082,640,392 shares of the Company’s common stock at a per share conversion price of $0.11 and a cash payment$0.004.
During the year ended December 31, 2017, five vendors converted debt of $35,000.
On July 3, 2014, Sterling Scott exercised his option on a cashless basis and was issued 795,455$559,408 into 64,869,517 shares of restrictedthe Company’s common stock at $.085 per share. Mr. Scott was awarded a stock option grant on November 3, 2013 for 12,000,000 shares and had vested 3,500,000 shares as of his resignation on May 19, 2014. The shares were valued at the fair market price of $0.085$0.0086 per share.
On July 3, 2014, Robert Shapero, a HolderDuring the year ended December 31, 2017, four directors were issued 10,000,000 shares of the Company’s 6% Convertible Notes Payable,common stock at the fair market price of $0.0076 per share for 2017 director services.
During the year ended December 31, 2017, Chicago Venture converted $25,000 of principal and $4,136 of accrued interest of $2,688,000 into 4,162,623554,044,030 shares of the Company’s common stock at a per share conversion price of $0.007.$0.0049. Warrants The Company issued the following warrants during the year ended December 31, 2018: On JulyFebruary 9, 2018, the Company executed the following agreements with St. George Investments LLC and issued a warrant to purchase of up to 48,687,862 shares of the Company’s Common Stock at an exercise price of $0.05 per share. The Warrant is subject to a cashless exercise option at the election of St. George and other adjustments as repricing as detailed in the Warrant. On October 15, 2014,2018, Mr. Hegyi received Warrants to purchase up to 48,000,000 shares of our common stock at an exercise price of $0.012 per share and which vest on October 15, 2018, 2019 and 2020. The Warrants are exercisable for 5 years. The warrant that vested on October 15, 2018 was valued at $96,000 and we recorded this amount compensation expense for the year ended December 31, 2018. The Warrant is exercisable for a period of five (5) years from the Closing, for the purchase of up to $387,500 shares of our Common Stock at the market price as of the date of exercise as defined in the agreements. The Warrant is subject to a cashless exercise option at the election of Iliad and other adjustments as detailed in the Warrant. The fair value of the warrant is $118,615 at December 31, 2018. On November 30, 2018, the Company closed its Rights Offering. The Company received $2,533,648 under the Rights Offering and issued 211,137,293 shares of common stock at $0.012 per share. The Company also issued five year warrants to acquire 105,568,642 shares of common stock exercisable at $.018 and five year warrants to acquire 105,568,642 shares of common stock exercisable $.024 per share.
On February 15, 2019, the Company entered into a SeveranceTermination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. Pursuant to the Agreement, with Mr. Genesi whereby Mr. Genesi resigned as Chief Financial Officer and the Parties cancelled the Executive Employment Agreement dated November 3, 2013. The Company agreed to issue 6,000,000 sharesterminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, restricted common stock. The shares were valued ator in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the fair market price of $0.08 per share.
On July 31, 2014, Logic Works, a Holder of the Company’s 7% Convertible Notes Payable, converted $250,000 of principal into 35,714,286Warrants issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at a per share conversion price of $0.007.
On August 1, 2014, the Company issued 300,000 shares of its common stock to Joseph Barnes pursuant to a Manager Services Agreement with Mr. Barnes dated August 1, 2013. The shares were valued at the fair market price of $0.08 per share.
On August 15, 2014, the Company issued 300,000 shares of its common stock to Dennis Kuznetsov pursuant to an Employment Agreement with Mr. Kuznetsov dated August 15, 2013. The shares were valued at the fair market price of $0.06 per share.
On August 27, 2014, the Company issued 5,000,000 shares of its common stock to D. Weckstein and Co., Inc. pursuant to an Investment Banking Letter. The shares were valued at the fair market price of $0.08 per share.
On September 15, 2014, the Company issued 80,000 shares of its common stock to Josh Nash pursuant to an Employment Agreement with Mr. Nash dated September 15, 2013. The shares were valued at the fair market price of $0.07 per share.
On October 1, 2014, the Company issued 100,000 shares of its common stock to Jeremy Belmont pursuant to an Employment Agreement with Mr. Belmont dated October 1, 2013. The shares were valued at the fair market price of $0.06 per share.
On October 8, 2014, Fifth Avenue Law Group PLLP converted debt of $68,000 debt into 1,360,000 shares of the Company’s common stock at a per share conversion price of $0.05.
On October 31, 2014, the Company issued 100,000 shares of its common stock to Frank Hariton pursuant to a Legal Agreement with Mr. Hariton dated August 14, 2014. The shares were valued at the fair market price of $0.05 per share.
On December 10, 2014, the Company issued 200,000 shares of its common stock to Velomedia, Inc. pursuant to a debt conversion. The shares were valued at the fair market price of $0.05 per share.
Warrants
On November 19, 2013, the Company issued a warrant for 140,000,000 common shares to CANX or its assignees in accordance with the Joint Venture Agreement. The warrants have a five-year term with an original exercise price of $0.033 per share. The warrants vest immediately$0.033.
In exchange for the Agreement and are exercisable in whole, or in part, at any timecancellation of the CANX Agreements and from timeWarrants, the Company agreed to time on or after the issue date and on or before the termination date. The Company valued the warrants$1,000,000 of restricted common stock priced at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 24.82%; (iii) risk free rate of 0.05% and (iv) an expected term of one year. The Company expensed the entire $5,040,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately. On February 7, 2014, the Company issued a warrant for 100,000,000 common shares to CANX or its assignees in accordance with the Joint Venture Agreement. The warrants have a five-year term with an original exercise2019 closing price of $0.033 per share The warrant was earned by CANX upon completion of the Company’s increase in the number of authorized common shares from 1 billion to 3 billion shares. This increase in authorized shares was effective with the shareholder approval on February 7, 2014. The Company valued the warrants at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 200%; (iii) risk free rate of 0.78% and (iv) an expected term of five years. The Company expensed the entire $33,700,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately.
The Company entered into an Amended and Restated Joint Venture Agreement dated July 1, 2014 with CANX and granted on July 10, 2014 CANX five year warrants, subject to extension, to purchase 300,000,000 shares of$0.008, or 125,000,000 restricted common stock at the fair market price of $0.033 per share as determined by an independent appraisal; The warrants vest immediately and are exercisable in whole, or in part, at any time and from time to time on or after the issue date and on or before the termination date. The Company valued the warrants at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 161.0%; (iii) risk free rate of 0.78% and (iv) an expected term of five years. The Company expensed the entire $28,800,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately.shares.
On December 11, 2013, the Company issued a warrant for 25,000,000 common shares to Hegyi, LLC, an entity controlled by Marco Hegyi, President of the Company. The warrants have a five-year term with an original exercise price of $0.08 per share. On December 18, 2015, the Company reduced the warrant exercise price to $0.01 per share. The warrants vest immediately and are exercisable in whole, or in part, at any time and from time to time on or after the issue date and on or before the termination date. The Company valued the warrants at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 88.81%; (iii) risk free rate of 0.02% and (iv) an expected term of three years. The Company expensed the entire $1,725,000 at the time of issuance because the warrants vested immediately and were also exercisable immediately.
A summary of the warrants issued as of December 31, 2015 were2018 is as follows:
December 31, 2015 | | | | | | | | | | | Weighted | | | | | | | | | Average | | | | | | | | | Exercise | | | | | | Shares | | | Price | | | | Outstanding at beginning of period | | | 565,000,000 | | | $ | 0.032 | | 595,000,000 | $0.029 | Issued | | | - | | | | - | | 307,825,146 | 0.025 | Exercised | | | - | | | | - | | - | Forfeited | | | - | | | | - | | - | Expired | | | - | | | | - | | - | Outstanding at end of period | | | 565,000,000 | | | $ | 0.032 | | 902,825,146 | $0.029 | Exerciseable at end of period | | | 565,000,000 | | | | | | 902,825,146 | |
A summary of the status of the warrants outstanding as of December 31, 20152018 is presented below:
December 31, 2015 | | Number of | | | | | | | | | Shares | | | | | Warrants | | | Life | | | Price | | | Exerciseable | | | Price | | | 540,000,000 | | | | 3.31 | | | $ | 0.033 | | | | 540,000,000 | | | $ | 0.033 | | | 25,000,000 | | | | 2.94 | | | | 0.010 | | | | 25,000,000 | | | | 0.010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 565,000,000 | | | | 3.30 | | | $ | 0.032 | | | | 565,000,000 | | | $ | 0.032 | |
| | | | | | | | | | | | | | | | | | | | | | 540,000,000 | 0.33 | $0.033 | 540,000,000 | $0.033 | 55,000,000 | 7.67 | 0.010 | 55,000,000 | 0.010 | 48,000,000 | 5.75 | 0.012 | 16,000,000 | 0.012 | 48,687,862 | 4.08 | 0.050 | 48,687,862 | 0.050 | 211,137,284 | 2.92 | 0.021 | 211,137,284 | 0.021 | 902,825,146 | 1.44 | $0.029 | 870,825,146 | 0.029 |
Warrants totaling 565,000,000 shares of common stock have anhad no intrinsic value of $0 as of December 31, 2015.2018.
The warrants were valued using the following assumptions: Assumptions | | Dividend yield | 0% | Expected life | | Expected volatility | 200% | Risk free interest rate | 0.78% |
NOTE 13–14– STOCK OPTIONS
Description of Stock Option Plan In fiscal year 2011,On December 6, 2018, the Company authorized aCompany’s shareholders voted to approve the First Amended and Restated 2017 Stock Incentive Plan whereby a maximum of 18,870,184 shares of the Company’s common stock could be granted in the form of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, and Other Stock-Based Awards. On April 18, 2013, the Company’s Board of Directors voted to increase the shares issuable under the plan from 100 million to 35,000,000 the maximum allowable200 million. The Company has 100,000,000 shares of the Company’s common stock allocated to the 2011 Stock Incentive Plan.available for issuance. The Company has outstanding unexercised stock option grants totaling 29,020,000100,000,000 shares at an average exercise price of $0.010 per share as of December 31, 2015. All grants are non-qualified as2018. The Company filed registration statements on Form S-8 to register 200,000,000 shares of the plan was not approved byCompany’s common stock related to the shareholders within one year of its adoption.2017 Stock Incentive Plan and First Amended and Restated 2017 Stock Incentive Plan.
Determining Fair Value under ASC 505 The Company records compensation expense associated with stock options and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of stock options granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company estimates the volatility of our common stock based on the historical volatility of its own common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on our common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and adjusts share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed.
Stock Option Activity
During the year ended December 31, 2015,2018, the Company had the following stock option activity:
Mr. Adam Edwards resigned July 11, 2015 andOn February 23, 2018, an employee was granted an option to purchase four million five hundred thousand2,000,000 shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at $0.05an exercise price of $0.020 per shares expired on October 10, 2015.share. The stock option grant vests quarterly over two years and is exercisable for 5 years. The stock option grant was valued at $13,000.
Ms. Tina Qunell resigned July 2, 2015 andOn February 23, 2018, an employee was granted an option to purchase seven million1,000,000 shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at $0.05an exercise price of $0.020 per share expired on Octobershare. The stock option grant vests quarterly over one year and is exercisable for 5 years. The stock option grant was valued at $6,500.
On May 1, 2015.
Resigned employees forfeited options2018, an employee was granted an option to purchase 200,0002,000,000 shares of the Company’s common stock under at an exercise price of $0.020 per share. The stock option grant vests quarterly over one year and is exercisable for 5 years. The stock option grant was valued at $13,000.
On June 1, 2018, an employee was granted an option to purchase 2,000,000 shares of common stock at an exercise price of $0.020 per share. The stock option grant vests quarterly over one year and is exercisable for 5 years. The stock option grant was valued at $13,000. On October 15, 2018, an entity controlled by Mr. Scott was granted an option to purchase 20,000,000 shares of common stock at an exercise price of $0.012 per share. The stock option grant vests quarterly over three years and are exercisable for 5 years. The stock option grants were valued at $40,000 and the Company’s 2011 Stock Incentive Plan at $0.05 per share expired duringCompany recorded this amount as compensation expense for the year ended December 31, 2015.2018.
On July 31, 2014, the Company’s Board of DirectorsOctober 15, 2018, Mr. Barnes was granted Mr. Scott an option to purchase 16,000,00018,000,000 shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at an exercise price of $0.07$0.012 per share, the fair market price on July 31, 2014. On December 18, 2015,share. The stock option grant vests quarterly over three years and are exercisable for 5 years. The stock option grants were valued at $36,000 and the Company reducedrecorded this amount as compensation expense for the exercise price to $0.01 per share. Two million shares vested immediately upon the Company’s resolution of the class action lawsuits on of August 17, 2015).year ended December 31, 2018.
As of December 31, 2015,2018, there are 29,020,000100,000,000 options to purchase common stock at an average exercise price of $0.028$0.010 per share outstanding under the 20112017 Amended and Restated Stock Incentive Plan. The Company recorded $175,661$44,682 and $724,267$29,250 of compensation expense, net of related tax effects, relative to stock options for the years ended December 31, 20152018 and 20142017 in accordance with ASC 505. Net loss per share (basic and diluted) associated with this expense was approximately ($0.00). As of December 31, 2015,2018, there is $244,011$140,970 of total unrecognized costs related to employee granted stock options that are not vested. These costs are expected to be recognized over a period of approximately 3.853.79 years.
During the year ended December 31, 2017, the Company had the following stock option activity: On June 28, 2017, the Company’s Compensation Committee granted four advisory committee members each an option to purchase 500,000 shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at an exercise price of $0.009 per share, the fair market price on June 28, 2017. On October 1, 2017, Mr. Reichwein was granted an option to purchase 20,000,000 shares of our common stock under our 2011 Stock Incentive Plan at $0.006 per share. The shares vest as follows: | | | | i | Ten million shares vested immediately; | | | | | ii | Ten million shares vest on a quarterly basis over two years beginning on the date of grant. |
The stock option grants are exercisable for 5 years and were valued at $20,000. On October 15, 2017, an entity controlled by Mr. Scott was granted an option to purchase 12,000,000 shares of common stock at an exercise price of $0.006 per share. The stock option grant vests quarterly over three years and is exercisable for 5 years. The stock option grant was valued at $18,000. On October 25, 2017, Mr. Barnes was granted an option to purchase 10,000,000 shares of common stock at an exercise price of $0.007 per share. The stock option grant vests quarterly over three years and is exercisable for 5 years. The stock option grant was valued at $24,000. Stock option activity for the years ended December 31, 20152018 and 20142017 is as follows: | | | | | | | | Outstanding as of December 31, 2016 | 12,010,000 | $0.010 | $120,500 | Granted | 44,000,000 | 0.006 | 280,000 | Exercised | - | - | - | Forfeitures | (10,000) | (0.050) | (500) | Outstanding as of December 31, 2017 | 56,000,000 | 0.007 | 400,000 | Granted | 45,000,000 | 0.013 | 596,000 | Exercised | (1,000,000) | 0.006 | (6,000) | Forfeitures | - | - | - | Outstanding as of December 31, 2018 | 100,000,000 | $0.010 | $990,000 |
| | Weighted Average | | | | Options | | | Exercise Price | | | $ | | Granted | | | 49,720,000 | | | $ | 0.075 | | | $ | 3,706,000 | | Exercised | | | (5,126,187 | ) | | | (0.133 | ) | | | (682,922 | ) | Forfeitures | | | (44,725,000 | ) | | | (0.092 | ) | | | (4,132,751 | ) | Outstanding as of December 31, 2014 | | | 40,720,000 | | | | 0.058 | | | | 2,356,000 | | Granted | | | - | | | | - | | | | (960,000 | ) | Exercised | | | - | | | | - | | | | - | | Forfeitures | | | (11,700,000 | ) | | | (0.050 | ) | | | (585,000 | ) | Outstanding as of December 31, 2015 | | | 29,020,000 | | | $ | 0.028 | | | $ | 811,000 |
The following table summarizes information about stock options outstanding and exercisable at December 31, 2015:2018
Range of Exercise | | | Number | | | | | | | | | Number | | | | | Prices | | | Outstanding | | | Years | | | Exerciseable | | | Exerciseable | | | Exerciseable | | $ | 0.05 | | | | 13,020,000 | | | | 4.00 | | | $ | 0.050 | | | | 7,120,000 | | | $ | 0.050 | | | 0.01 | | | | 16,000,000 | | | | 3.77 | | | | 0.010 | | | | 7,833,333 | | | | 0.010 | | | | | | | 29,020,000 | | | | 3.85 | | | $ | 0.028 | | | | 14,953,333 | | | $ | 0.043 |
| | | | | | | | | | | | | | | | | | | | | | | | $0.006 | 31,000,000 | 3.75 | $0.006 | 18,333,333 | $0.006 | 0.007 | 10,000,000 | 3.75 | 0.007 | 4,166,667 | 0.007 | 0.009 | 2,000,000 | 1.50 | 0.009 | 1,000,000 | 0.009 | 0.010 | 12,000,000 | 0.88 | 0.010 | 12,000,000 | 0.010 | 0.012 | 38,000,000 | 4.75 | 0.012 | 3,166,667 | 0.012 | | 7,000,000 | 4.39 | 0.020 | 1,416,667 | 0.020 | | 100,000,000 | 3.79 | $0.010 | 40,083,333 | $0.008 |
Stock option grants totaling 29,020,00031,000,000 shares of common stock have an intrinsic value of $0$18,333 as of December 31, 2015.2018.
The stock option grants were valued using the following assumpti0ns: Assumptions | | Dividend yield | 0% | Expected life | | Expected volatility | 140% | Risk free interest rate | 0.02% |
NOTE 1415 – COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
Legal Proceedings
TheFrom time to time, the Company is involved in the disputes andmay become subject to various legal proceedings described below. In addition, as a public company, the Company is also potentially susceptible to litigation, such as claims asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. The Company accrues any contingent liabilities that are likely.
Class Actions Alleging Violations of Federal Securities Laws
Beginning on April 18, 2014, three class action lawsuits alleging violations of federal securities laws were filed against the Company in United States District Court, Central District of California (the “Court”). At a hearing held on July 21, 2014, the three class action lawsuits were consolidated into one case with Lawrence Rosen as the lead plaintiff (the “Consolidated Class Action,” styled Romero et al. vs. GrowLife et al.). On May 15, 2014 and August 4, 2014, respectively two shareholder derivative lawsuits were filed against the Company with the Court (the “Derivative Actions”). On October 20, 2014, AmTrust North America, the Company’s insurer, filed a lawsuit contesting insurance coverage on the above legal proceedings. The Company made a general appearance in this action. On January 20, 2015, the Court ordered all of the above actions stayed pending completion of mediation of the dispute.
The parties then worked diligently to finalize settlement documentation on the above actions. On April 27, 2015, the Court preliminarily approved the proposed settlement of the Consolidated Class Action.
On June 1, 2015, the Court preliminarily approved the proposed settlement of the Derivative Actions pursuant to a proposed stipulated settlement agreement.
On August 3, 2015, the Court entered a Final Order and Judgment resolving the Consolidated Class Action litigation in its entirety. The Consolidated Class Action was thereby dismissed in its entirety with prejudice and without costs.
On August 10, 2015, pursuant to a settlement by and between the Company and AmTrust North America, AmTrust’s lawsuit contesting insurance coverage of the Consolidated Class Action and Derivative Actions was dismissed in its entirety with prejudice pursuant to a Stipulation for Dismissal of Entire Action with Prejudice executed by and between AmTrust and the Company.
On August 17, 2015, the Court entered a Final Order and Judgment resolving the Derivative Actions in their entirety. The Derivative Actions were thereby dismissed in their entirety with prejudice.
As a result of the foregoing, all litigation discussed herein is resolved in full at this time.
The Company issued $2 million in common stock or 115,141,048 shares of the Company’s common stock on April 6, 2016 pursuantincidental to the settlementordinary conduct of its business. Although we cannot accurately predict the Consolidated Class Actionamount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and Derivative Action lawsuits alleging violations of federal securities laws that were filed against the Company in United States District Court, Central District of California. The Company accrued $2,000,000 as lossreasonably estimable. These provisions are based on class action lawsuitscurrent information and contingent liabilities during the year ending December 31, 2015.
Sales and Payroll Tax Liabilities
As of December 31, 2015, the Company owes approximately $102,000 in sales tax and $20,000 in payroll taxes. The Company is currently negotiating or operating under payment plans on these liabilities.
Other Legal Proceedingsmay be adjusted from time to time according to developments.
TheOther than those certain legal proceedings as reported in the Company’s annual report on Form 10-K filed with the SEC on March 8, 2019, the Company’s know of no material, existing or pending legal proceedings against our Company, nor is in default on our Portland, Maine, Boulder, Colorado and Plaistow, New Hampshire store leases for non-payment of lease payments and the Company involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any director, officer or any affiliates, or any registered or beneficial shareholder, is negotiating withan adverse party or has a material interest adverse to the landlords. The Company is currently subject to legal actions with various vendors.Company’s interest.
It is possible that additional lawsuits may be filed and served on the Company.
Operating Leases
Current Operating Leases
UponOn May 31, 2018, the Company rented space at 5400 Carillon Point, Kirkland, Washington 98033 for $623 per month for the Company’s acquisitioncorporate office and use of Rocky Mountainspace in the Regus network, including California. The Company’s agreement expires May 31, 2019.
On October 1, 2017, GrowLife Hydroponics, LLCInc. entered into a lease in Calgary, Canada. The monthly lease is approximately $3,246. The lease expires September 30, 2022. On December 19, 2017, GrowLife Innovations, Inc. entered into a lease in Grand Prairie, Texas dated October 9, 2017, for 5,000 square feet for the manufacturing and Evergreen Garden Center, LLC, the Company assumed thedistribution of its flooring products. The monthly lease payment is $15,000. The lease expires December 1, 2022 and can be renewed. On July 2, 2018, GrowLife Hydroponics, Inc. entered into a store lease for the RMH/EGC retail hydroponics store located1,950 square feet in Portland, Maine. The monthly lease commencement date was May 1, 2013is approximately $2,113, with an expiration date of April 30, 2016. The monthly rent for year one of the lease was $4,917, with monthly rent of $5,0653% increases in year two and three. The lease expires July 2, 2021 and can be extended. On August 31, 2018, GrowLife, Inc. entered into the Fourth Amendment to the Lease Agreement for the store in Encino, California. The monthly rent of $5,217 in year three oflease is approximately $6,720, with a 3% increase on March 1, 2019. The lease expires September 1, 2019 and the lease. The Company has an optionis required to extend the lease for two three year terms as long it is not in default underprovide six months’ notice to terminate the lease.
On October 21, 2013, the CompanyDecember 14, 2018, GrowLife, Inc. entered into a lease agreement with Pensco Trust Company for retaila 28,000 square feet industrial space at 10170 Croydon Way, Sacramento, California 95827 used for its hydroponics store in Avon (Vail), Colorado.the assembly and sales of plastic parts by EZ-Clone. The monthly lease payment is $17,000 and increased approximately 3% per year. The lease expires on September 30, 2018. Monthly rent for year one of the lease is $2,606 and increases 3.5% per year thereafter through the end of the lease. The Company does not have an option to extend the lease.December 31, 2023.
On June 18, 2014, the Company rented space at 500 Union Street, Suite 810, Seattle, Washington for its corporate office. The Company rents the space on a month to month basis for $1,700 per month.
Terminated Operating Leases
In May 2011, the Company entered into a lease for our Phototron business unit to rent a warehouse facility in Gardena, California. The terms of the lease provide for monthly rental expense of $4,065 with annual rent increases through the expiration of the lease on May 31, 2014. During the last twelve months of the lease the monthly rent was $4,313. The Company terminated this lease as of May 31, 2014.
Upon the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, the Company assumed the lease for the RMH/EGC retail hydroponics store located in Plaistow, New Hampshire. The lease commencement date was May 1, 2013 with an expiration date of January 31, 2016. The monthly rent throughout the term of the lease is $2,105. The Company vacated this store and terminated this lease during 2015.
On June 5, 2013, the Company entered into a lease to rent office space in Woodland Hills, California for the Company’s corporate headquarters. The landlord was 20259 Ventura Blvd LP, which was a previous affiliate of a stockholder of our company. The term was for ninety days and can be renewed, or terminated, by either party with thirty days written notice. The monthly rent was $6,758. The Company terminated this lease as of June 30, 2014.
On May 30, 2013, the Company entered into a lease to rent retail space in Woodland Hills, California for its Urban Garden Supply (Soja, Inc.) hydroponics store. The term was for ninety days and can be renewed, or terminated, by either party with ninety days written notice. The monthly rent was $3,257. The Company terminated this lease as of June 1, 2015.
On August 26, 2013, the Company entered into a lease agreement for warehouse and retail space for its Greners (Business Bloom, Inc.) business unit in Santa Rosa, California. The lease commencement date was September 1, 2013 with an expiration date of August 31, 2015. The monthly rent is $3,000. The Company terminated this lease as of November 25, 2014.
On September 23, 2013, the Company entered into an Assignment and Assumption and Amendment of Lease Agreement for the Company’s retail hydroponics store in Peabody, Massachusetts. The original lease between the landlord and Evergreen Garden Center, LLC was assigned from Evergreen Garden Center, LLC to GrowLife Hydroponics, Inc. In addition, the term of the lease was extended from the original expiration date of October 31, 2013 to October 31, 2014. The monthly rent remained at $4,500 through October 31, 2014. The Company’s lease expired on October 31, 2014.
On January 23, 2014, the Company entered into a lease agreement for retail space for its hydroponics store in Boulder, Colorado. The lease commenced on February 1, 2014 and expires on May 31, 2017. Monthly rent for year one of the lease was $4,051, with monthly rent of $4,173 in year two, $4,298 in year three, and $4,427 for month 37 through 39. The Company had an option to extend the lease for one three year terms as long it is not in default under the lease. The Company vacated the retail space as of November 30, 2015. The landlord has filed a collection claim for $179,920 against GrowLife Hydroponics. The Company expects to contest this claim.
The Company is in default on our Portland, Maine, Boulder, Colorado and Plaistow, New Hampshire store leases for non-payment of the lease payments and is negotiating with the landlords.
The aggregate future minimum lease payments under operating leases, to the extent the leases have early cancellation options and excluding escalation charges, are as follows:
Years Ended December 31, | | Total | | | 2016 | | $ | 76,929 | | | 2017 | | | 34,675 | | | 2018 | | | 28,365 | | | 2019 | | | 0 | | $534,795 | 2020 | | | - | | 925,511 | 2021 | | 549,776 | 2022 | | - | 2023 | | - | Beyond | | | - | | - | Total | | $ | 139,969 | | $2,010,082 |
Employment and Consulting Agreements
Employment Agreement with Marco Hegyi
On December 4, 2013,October 15, 2018, the Company entered intoBoard of Directors of GrowLife, Inc. (the “Company”) approved an Employment Agreement with Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its President from December 4, 2013Chief Executive Officer through December 4, 2016October 15, 2021. Mr. Hegyi’s previous Employment Agreement was set to provide consulting and management services. Per the terms of the Hegyi Agreement, Mr. Hegyi established an office in Seattle, Washington while also maintaining operations in the Southern California area. expire on October 21, 2018. Mr. Hegyi’s annual compensation is $150,000 for the first year of the Hegyi Agreement; $250,000 for the second year; and $250,000 for the third year.$275,000. Mr. Hegyi is also entitled to receive an annual bonus equal to four percent (4%) of the Company’s EBITDA for that year. The annual bonus shall be paid no later than 31 days (i.e., by January 31st) following the end of each calendar year. Mr. Hegyi’s first annual bonus will be calculated based on the Company’s EBITDA for calendar year 2014, with such bonus payable on or before January 31, 2015. If Mr. Hegyi’s employment is terminated for any reason prior to the expiration of the Term, as applicable, his annual bonus will be prorated for that year based on the number of days worked in that year. At the commencement of Mr. Hegyi’s employment, an entity affiliated with Mr. Hegyi received a Warrant to purchase up to 25,000,00016,000,000 shares of common stock of the Company at an exercise price of $0.08$0.012 per share which vest immediately. In addition, Mr. Hegyi received two Warrants to purchase up to 16,000,000 shares of common stock of the Company at an exercise price of $0.012 per share which vest on October 15, 2019 and 2020, respectively. The Warrants are exercisable for 5 years. Mr. Hegyi will be entitled to participate in all group employment benefits that are offered by the Company to the Company’s senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. In addition, the Company will purchase and maintain during the Term an insurance policy on Mr. Hegyi’s life in the amount of $2,000,000 payable to Mr. Hegyi’s named heirs or estate as the beneficiary. If the Company terminates Mr. Hegyi’s employment at any time prior to the expiration of the Term without Cause, as defined in the Employment Agreement, or if Mr. Hegyi terminates his employment at any time for “Good Reason” or due to a “Disability”, Mr. Hegyi will be entitled to receive (i) his Base Salary amount through the end of the Term; and (ii) his Annual Bonus amount for each year during the remainder of the Term. Employment Agreement with Mark E. Scott On October 15, 2018, the Compensation Committee of the Company approved an Employment Agreement with Mark E. Scott pursuant to which the Company engaged Mr. Scott as its Chief Financial Officer through October 15, 2021. Mr. Scott’s previous Agreement was cancelled. Mr. Scott’s annual compensation is $165,000. Mr. Scott is also entitled to receive an annual bonus equal to two percent (2%) of the Company’s EBITDA for that year. The annual bonus shall be paid no later than 31 days following the end of each calendar year. The Company’s Board of Directors granted Mr. Scott an option to purchase twenty million shares of the Company’s Common Stock under the Company’s 2018 Amended and Restated Stock Incentive Plan at an exercise price of $0.012 per share. The Hegyi WarrantShares vest quarterly over three years. All options will have a five-year life and allow for a cashless exercise. The stock option grant is exercisable for five years. On June 20, 2014,subject to the terms and conditions of the Company’s Amended and Restated Stock Incentive Plan, including vesting requirements. In the event that Mr. Scott’s continuous status as employee to the Company and Mr. Hegyi reduced the warrant life from ten to five years. On January 25, 2016,is terminated by the Company reducedwithout Cause or Mr. Scott terminates his employment with the warrant exercise price to $0.01 per share effective December 18, 2015.Company for Good Reason as defined in the Scott Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Amended and Restated Stock Incentive, then 100% of the total number of Shares shall immediately become vested.
Mr. Hegyi wasScott is entitled to participate in all group employment benefits that are offered by the Company to the Company’s senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. In addition, the Company is required to purchase and maintain during the Term a “key manager” insurance policy on Mr. Hegyi’s life in the amount of $4,000,000, paid as $2,000,000 payable to Mr. Hegyi’s named heirs or estate as the beneficiary, and $2,000,000 payable to the Company. The Company and Mr. Hegyi waived this $2,000,000 key manager insurance. If, prior to the expiration of the Term, the Company terminates Mr. Hegyi’s employment for “Cause”, or if Mr. Hegyi voluntarily terminates his employment without “Good Reason”, or if Mr. Hegyi’s employment is terminated by reason of his death, then all of the Company’s obligations hereunder shall cease immediately, and Mr. Hegyi will not be entitled to any further compensation beyond any pro-rated base salary due and bonus amounts earned through the effective date of termination. Mr. Hegyi will also be reimbursed for any expenses incurred prior to the date of termination for which he was not previously reimbursed. If the Company terminates Mr. Hegyi’s employment at any time prior to the expiration of the Term without Cause, or if Mr. Hegyi terminates his employment at any time for “Good Reason” or due to a “Disability”, Mr. Hegyi will be entitled to receive (i) his base salary amount through the end of the Term; and (ii) his annual bonus amount for each year during the remainder of the Term, which bonus amount shall be equal to the greater of (A) the annual bonus amount for the immediately preceding year, or (B) the bonus amount that would have been earned for the year of termination, absent such termination. If there has been a “Change in Control” and the Company (or its successor or the surviving entity) terminates Mr. Hegyi’s employment without Cause as part of or in connection with such Change in Control (including any such termination occurring within one (1) month prior to the effective date of such Change in Control), then in addition to the benefits set forth above, Mr. Hegyi will be entitled to (i) an increase of $300,000 in his annual base salary amount (or an additional $25,000 per month) through the end of the Term; plus (ii) a gross-up in the annual base salary amount each year to account for and to offset any tax that may be due by Mr. Hegyi on any payments received or to be received by Mr. Hegyi under this Agreement that would result in a “parachute payment” as described in Section 280G of the Internal Revenue Code of 1986, as amended. If the Company (or its successor or the surviving entity) terminates Mr. Hegyi’s employment without Cause within twelve (12) months after the effective date of any Change in Control, or if Mr. Hegyi terminates his employment for Good Reason within twelve (12) months after the effective date of any Change in Control, then in addition to the benefits set forth above, Mr. Hegyi will be entitled to (i) an increase of $300,000 in his annual base salary amount (or an additional $25,000 per month), which increased annual base salary amount shall be paid for the remainder of the Term or for two (2) years following the Change in Control, whichever is longer; (ii) a gross-up in the annual base salary amount each year to account for and to offset any tax that may be due by Mr. Hegyi on any payments received or to be received by Mr. Hegyi under this Letter Agreement that would result in a “parachute payment” as described in Section 280G of the Internal Revenue Code of 1986, as amended; (iii) payment of Mr. Hegyi’s annual bonus amount as set forth above for each year during the remainder of the Term or for two (2) years following the Change in Control, whichever is longer; and (iv) health insurance coverage provided for and paid by the Company for the remainder of the Term or for two (2) years following the Change in Control, whichever is longer.
Consulting Chief Financial Officer Agreement with an Entity Controlled by Mark E. Scott
On July 31, 2014, the Company entered into a Consulting Chief Financial Officer Letter with an entity controlled by Mark E. Scott pursuant to which the Company engaged Mr. Scott as its Consulting CFO from July 1, 2014 through September 30, 2014, and continuing thereafter until either party provides sixty day notice to terminate the Letter or Mr. Scott enters into a full-time employment agreement.
Per the terms of the Scott Agreement, Mr. Scott’s compensation is $150,000 on an annual basis for the first year of the Scott Agreement. Mr. Scott is also entitled to receive an annual bonus equal to two percent of the Company’s EBITDA for that year. The Company’s Board of Directors granted Mr. Scott an option to purchase sixteen million shares of the Company’s Common Stock under the Company’s 2011 Stock Incentive Plan at an exercise price of $0.07 per share, the fair market price on July 31, 2014. On December 18, 2015, the Company reduced the exercise price to $0.01 per share. The shares vest as follows:
| | | | i | Two million shares vest immediately upon securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB (earned as of February 18, 2016); | | | | | ii | Two million shares vest immediately upon the successful approval and effectiveness of the Company’s S-1 (not earned as of December 31, 2015); | | | | | iii | Two million shares vest immediately upon the Company’s resolution of the class action lawsuits (earned as of August 17, 2015); and, | | | | | iv | Ten million shares will vest on a monthly basis over a period of three years beginning on the July 1, 2014. |
All options will have a five-year life and allow for a cashless exercise. The stock option grant is subject to the terms and conditions of the Company’s Stock Incentive Plan, including vesting requirements. In the event that Mr. Scott’s continuous status as consultant to the Company is terminated by the Company without Cause or Mr. Scott terminates his employment with the Company for Good Reason as defined in the Scott Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive Plan except for CANX USA, LLC, then 100% of the total number of shares shall immediately become vested.
Mr. Scott will be entitled to participate in all group employment benefits that are offered by the Company to the Company’s senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. In addition, the Company is required to purchase and maintain an insurance policy on Mr. Scott’s life in the amount of $2,000,000 payable to Mr. Scott’s named heirs or estate as the beneficiary. Finally, Mr. Scott is entitled to twenty days of vacation annually and also has certain insurance and travel employment benefits.
If the Company terminates Mr. Scott’s employment at any time prior to the expiration of the Term without Cause, as defined in the Company terminates Mr. Scott’s employment for Cause,Employment Agreement, or if Mr. Scott voluntarily terminates his employment without Good Reason, or if Mr. Scott’s employment is terminated by reason of his death, then all of the Company’s obligations hereunder shall cease immediately, and Mr. Scott will not be entitled to any further compensation beyond any pro-rated base salary due and bonus amounts earned through the effective date of termination. Mr. Scott will also be reimbursed for any expenses incurred prior to the date of termination for which he was not previously reimbursed. Mr. Scott may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Mr. Scott terminates his employment at any time for Good Reason are discussed above.“Good Reason” or due to a “Disability”, Mr. Scott will be entitled to receive (i) his Base Salary amount for ninety days; and (ii) his Annual Bonus amount for each year during the remainder of the Term.
Promotion LetterEmployment Agreement with Joseph Barnes
On October 10, 2014,15, 2018, the Compensation Committee of the Company entered into a Promotion Letterapproved an Employment Agreement with Joseph Barnes which was effective October 1, 2014 pursuant to which the Company engaged Mr. Barnes as its Senior Vice-President of Business Development from October 1, 2014 on an at will basis. This Promotion Letter supersedes and canceled the Manager Services Agreement with Mr. Barnes dated August 1, 2013.
Per the termsPresident of the Barnes Agreement,GrowLife Hydroponics Company through October 15, 2021. Mr. Barnes’s previous Agreement was cancelled.
Mr. Barnes’s annual compensation is $90,000 on an annual basis.$165,000. Mr. Barnes received a bonus of $6,500 and is also entitled to receive a quarterlyan annual bonus based on growthequal to two percent (2%) of the Company’s growth margin dollars. No quarterly bonuses were earned under this Promotion Letter.EBITDA for that year. The annual bonus shall be paid no later than 31 days following the end of each calendar year. The Company’s Board of Directors granted Mr. Barnes was granted an option to purchase eighteighteen million shares of the Company’s common stockCommon Stock under the Company’s 20112017 Amended and Restated Stock Incentive Plan at an exercise price on the date of grant.$0.012 per share. The sharesShares vest as follows: | | | | i | Two million shares vested immediately; | | | | | iv | Six million shares vest on a monthly basis over a period of three years beginning on the date of grant. |
quarterly over three years. All options will have a five-year life and allow for a cashless exercise. The stock option grant is subject to the terms and conditions of the Company’s and Amended and Restated Stock Incentive Plan, including vesting requirements. In the event that Mr. Barnes’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Barnes terminates his employment with the Company for Good Reason as defined in the Barnes Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Amended and Restated Stock Incentive Plan, then 100% of the total number of sharesShares shall immediately become vested.
Mr. Barnes wasis entitled to participate in all group employment benefits that are offered by the Company to the Company’s senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. In addition, the Company is required purchase and maintain an insurance policy on Mr. Barnes’s life in the amount of $2,000,000 payable to Mr. Barnes’s named heirs or estate as the beneficiary. Finally, Mr. Barnes is entitled to fifteentwenty days of vacation annually and also has certain insurance and travel employment benefits.
Mr. Barnes may receive severance benefits and the Company’s obligation under a termination byIf the Company terminates Mr. Barnes’s employment at any time prior to the expiration of the Term without Cause, as defined in the Employment Agreement, or if Mr. Barnes terminates his employment at any time for Good Reason are discussed above.
Agreements with Robert Hunt
On June 7, 2013, the Company entered into an Executive Services Agreement with Robert Hunt, pursuant“Good Reason” or due to which the Company engageda “Disability”, Mr. Hunt, from June 8, 2013 through June 7, 2015 to provide consulting and management services as the President of GrowLife Hydroponics, Inc.
On May 30, 2014, the Company announced the resignation of Robert Hunt effective May 23, 2014 as Executive Vice President of GrowLife, Inc., President of GrowLife Hydroponics. On June 3, 2014, the Board of Directors accepted the resignation of Robert Hunt effective June 2, 2014 as a Director of the Company. On October 17, 2014, the Company entered into a Settlement Agreement and Release with Mr. Robert Hunt, whereby the Parties cancelled the Executive Services Agreement ("ESA") dated June 7, 2013 and his stock option grant for 12,000,000 shares. The Company agreed to issue 6,000,000 shares of restricted common stock under certain conditions that have not been met (issuance not triggered as of December 31, 2015), paid cash severance totaling $50,000 monthly over five month starting October 25, 2014 and reimbursed Mr. Hunt for health insurance benefits and other expenses monthly over five months starting October 25, 2014. The Parties entered into a release agreement.
Promotion Letter with Jeremy Belmont
On October 10, 2014, the Company entered into a Promotion Letter with Jeremy Belmont which was effective October 1, 2014 pursuant to which the Company engaged Mr. Belmont as Vice President of Sales from October 1, 2014 on an atBarnes will basis. This Promotion Letter superseded and canceled the Manager Services Agreement with Mr. Belmont dated October 1, 2013.
Per the terms of the Belmont Agreement, Mr. Belmont’s compensation was $72,000 on an annual basis. Mr. Belmont received a bonus of $6,500 and is alsobe entitled to receive a quarterly bonus based on growth(i) his Base Salary amount for ninety days; and (ii) his Annual Bonus amount for each year during the remainder of the Company’s growth margin dollars. No quarterly bonuses were earned under this Promotion Letter. Mr. Barnes was granted an option to purchase five million shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at an exercise price on the date of grant. The Shares vest as follows:
| | | | i | One million four hundred thousand shares vested immediately; | | | | | iv | Three million six hundred thousand shares will vest on a monthly basis over a period of three years beginning on the date of grant. |
All options had a five-year life and allow for a cashless exercise. The stock option grant is subject to the terms and conditions of the Company’s Stock Incentive Plan, including vesting requirements. In the event that Mr. Belmont’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Belmont terminates his employment with the Company for Good Reason as defined in the Belmont Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive, then 100% of the total number of Shares shall immediately become vested.
Mr. Belmont was entitled to participate in all group employment benefits that are offered by the Company to the Company’s senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. Finally, Mr. Belmont was entitled to fifteen days of vacation annually and also had certain insurance and travel employment benefits.Term.
Mr. Belmont may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Mr. Belmont terminated his employment for Good Reason are discussed above.
Mr. Belmont resigned January 13, 2016.
Promotion Letter with Adam Edwards
On October 10, 2014, the Company entered into a Promotion Letter with Adam Edwards which was effective October 1, 2014 pursuant to which the Company engaged Mr. Edwards as Vice President of Sales from October 1, 2014 on an at will basis.
Per the terms of the Edwards Agreement, Mr. Edwards’s compensation is $72,000 on an annual basis. Mr. Edwards received a bonus of $6,500 and was also entitled to receive a quarterly bonus based on growth of the Company’s growth margin dollars. No quarterly bonuses were earned under this Promotion Letter. Mr. Edwards was granted an option to purchase four million five hundred thousand shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at an exercise price on the date of grant. The shares vested quarterly over thirty six months.
All options had a five-year life and allow for a cashless exercise. The stock option grant is subject to the terms and conditions of the Company’s Stock Incentive Plan, including vesting requirements. In the event that Mr. Edwards’s continuous status as employee to the Company is terminated by the Company without Cause or Mr. Edwards terminates his employment with the Company for Good Reason as defined in the Edwards Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive, then 100% of the total number of shares shall immediately become vested.
Mr. Edwards was entitled to participate in all group employment benefits that are offered by the Company to the Company’s senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. Finally, Mr. Edwards was entitled to fifteen days of vacation annually and also has certain insurance and travel employment benefits.
Mr. Edwards may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Mr. Edwards terminated his employment for Good Reason are discussed above.
Mr. Edwards resigned July 11, 2015.
Offer Letter with Tina Qunell
On November 20, 2014, the Company entered into an Offer Letter with Tina Qunell which was effective November 24, 2014 pursuant to which the Company engaged Ms. Qunell as Vice President of Marketing on an at will basis.
Per the terms of the Qunell Agreement, Ms. Qunell’s compensation was $72,000 on an annual basis. Ms. Qunell was granted an option to purchase seven million shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at an exercise price on the date of grant. One million of the shares vested immediately and six million vest quarterly over thirty six months.
All options had a five-year life and allow for a cashless exercise. The stock option grant was subject to the terms and conditions of the Company’s Stock Incentive Plan, including vesting requirements. In the event that Ms. Qunell’s continuous status as employee to the Company was terminated by the Company without Cause or Mr. Qunell terminates her employment with the Company for Good Reason as defined in the Qunell Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive, then 100% of the total number of shares shall immediately become vested.
Ms. Qunell was entitled to participate in all group employment benefits that are offered by the Company to the Company’s senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. Finally, Ms. Qunell was entitled to fifteen days of vacation annually and also has certain insurance and travel employment benefits.
Ms. Qunell may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Ms. Qunell terminated her employment for Good Reason are discussed above.
Ms. Qunell resigned July 2, 2015.
Investment Banking Letter with D. Weckstein and Co. Inc.
On August 27, 2014, the Company issued 5,000,000 shares of its common stock to D. Weckstein and Co., Inc. pursuant to an Investment Banking Letter. The shares were valued at the fair market price of $0.08 per share.
NOTE 1516 – INCOME TAXES
The Company has incurred losses since inception, which have generated net operating loss carryforwards. The net operating loss carryforwards arise from United States sources.
Pretax losses arising from United States operations were $11,473,137 for the year ended December 31, 2018. Pretax losses arising from United States operations were approximately $5,700,000 and $87,000,000 and$5,320,974 for the yearsyear ended December 31, 2015 and 2014, respectively.2018.
The Company has net operating loss carryforwards of approximately $17,000,000,$19,101,728, which expire in 2023-2033.2022-2036. Because it is not more likely than not that sufficient tax earnings will be generated to utilize the net operating loss carryforwards, a corresponding valuation allowance of approximately $6,700,000$4,011,363 was established as of December 31, 2015.2018. Additionally, under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating losses may be limited in certain circumstances, including a change in control.
Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. There can be no assurance that the Company will be able to utilize any net operating loss carryforwards in the future. The Company is subject to possible tax examination for the years 2012 through 2018
For the year ended December 31, 2015,2018, the Company’s effective tax rate differs from the federal statutory rate principally due to net operating losses warrantsand equity issued for services, changeservices. U.S. Tax Reform On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Reform Act). The Tax Reform Act significantly revises the future ongoing federal income tax by, among other things, lowering U.S. corporate income tax rates effective January 1, 2018. The Company has calculated a blended U.S. federal income tax rate of approximately 21% for the fiscal year ending December 31, 2018 and 21.0% for subsequent fiscal years. Remeasurement of the Company’s deferred tax balance under the Tax Reform Act resulted in fair valuea non-cash tax benefit reduction of derivativeapproximately $2.5 million for the year ended December 31, 2018. The changes included in the Tax Reform Act are broad and debt discount.complex. The final transition impacts of the Tax Reform Act may differ from the above estimate due to, among other things, changes in interpretations of the Tax Reform Act, any legislative action to address questions that arise because of the Tax Reform Act and any changes in accounting standards for income taxes or related interpretations in response to the Tax Reform Act.
The principal components of the Company’s deferred tax assets at December 31, 20152018 and 20142017 are as follows:
| | 2015 | | | 2014 | | | 2013 | | U.S. operations loss carry forward and state at statutory rate of 40% | | $ | 6,713,538 | | | $ | 5,038,976 | | | $ | 3,612,736 | | Less valuation allowance | | | (6,713,538 | ) | | | (5,038,976 | ) | | | (3,612,736 | ) | Net deferred tax assets | | | - | | | | - | | | | - | | Change in valuation allowance | | $ | (6,713,538 | ) | | $ | (5,038,976 | ) | | $ | (3,612,736 | ) |
| | | U.S. operations loss carry forward and state at statutory rate of 40% | $4,011,363 | $3,068,992 | Less valuation allowance | 4,011,363 | 3,068,992 | Net deferred tax assets | - | - | Change in valuation allowance | $4,011,363 | $3,068,992 |
A reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the years ended December 31, 20152018 and 20142017 is as follows:
| | 2015 | | | 2014 | | | | Federal statutory rate | | | -34.0 | % | | | -34.0 | % | -21.0% | State income tax rate | | | -6.0 | % | | | -6.0 | % | -6.0% | Change in valuation allowance | | | 40.0 | % | | | 40.0 | % | 27.0% | Effective tax rate | | | 0.0 | % | | | 0.0 | % | 0.0% |
The Company’s tax returns for 20102012 to 20142018 are open to review by the Internal Revenue Service.
NOTE 16 –17– SUBSEQUENT EVENTS
The Company evaluates subsequent events, for the purpose of adjustment or disclosure, up through the date the financial statements are available.
SubsequentThere were the material events subsequent to December 31, 2015, the following material transactions occurred:
Resumed Trading of our Common Stock
On February 18, 2016, our common stock resumed unsolicited quotation on the OTC Bulletin Board after receiving clearance from the Financial Industry Regulatory Authority (“FINRA”) on our Form 15c2-11. The Company is currently taking the appropriate steps to uplist to the OTCQB Exchange and resume priced quotations with market makers as soon as it is able.
Equity Issuances
On January 4, 2016, the Company issued 3,000,000 shares of its common stock to an entity affiliated with Mark E. Scott, the Company’s Chief Financial Officer, pursuant to a conversion of debt for $30,000. The shares were valued at the fair market price of $0.01 per share.
On January 16, 2016, the Company issued 1,400,000 shares of its common stock to a former consultant pursuant a conversion of debt for $40,000. The shares were valued at the fair market price of $0.01 per share.2018:
Transactions with CANX, LLC
On January 27, 2016,February 15, 2019, the Company entered into a Termination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Warrants issued 1,500,000to CANX entitling CANX to purchase 540,000,000 shares of its common stock to Michael E. Fasci, a Board Director, pursuant to a service award for $15,000. The shares were valued at the fair market price of $0.01 per share.
During March 2016, Holder of the Company’s Convertiblecommon stock at an exercise price of $0.033.
In exchange for the Agreement and cancellation of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7, 2019 closing price of $0.008, or 125,000,000 restricted common stock shares. Repayment of Securities Purchase Agreement, Secured Promissory Notes Payables, converted principal and accruedSecurity Agreement with Iliad On January 17, 2019, the Company repaid $650,000 to Iliad due under the October 15, 2018 funding transaction with Iliad. Trading on Pink Sheet Stock Systems As of March 4, 2019, the Company began to trade on the Pink Sheet stocks system.The Company’s bid price had closed below $0.01 for more than 30 consecutive calendar days.
GROWLIFE, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS | | | ASSETS | | | | | | CURRENT ASSETS: | | | Cash and cash equivalents | $126,302 | $2,334,377 | Accounts receivable - trade, net of allowance for doubtful accounts of $5,690 as of 6/30/2019 and 12/31/2018 | 323,425 | 42,254 | Inventory, net | 942,694 | 792,664 | Prepaid costs | 17,983 | 3,418 | Deposits | 58,416 | 51,916 | Current portion of right of use asset | 336,681 | - | Total current assets | 1,805,501 | 3,224,629 | | | | EQUIPMENT, NET | 633,507 | 712,866 | INTANGIBLE ASSETS | 2,709,939 | 3,280,453 | NON-CURRENT PORTION OF RIGHT OF USE ASSET | 748,729 | - | TOTAL ASSETS | $5,897,676 | $7,217,948 | | | | LIABILITIES AND STOCKHOLDERS' (DEFICIT) | | | | | | CURRENT LIABILITIES: | | | Accounts payable - trade | $1,430,201 | $1,054,371 | Accrued expenses | 285,884 | 261,954 | Accrued expenses - related parties | 24,793 | 73,585 | Derivative liability | 1,286,743 | 1,795,473 | Current portion of convertible notes payable | 2,685,122 | 3,404,133 | Current portion of notes payable- related parties | 102,830 | 100,020 | Current portion of capital lease | 3,780 | 8,534 | Deferred revenue | - | 89,504 | Current portion of right of use liability | 328,923 | - | Total current liabilities | 6,148,276 | 6,787,574 | | | | NON-CURRENT PORTION OF RIGHT OF USE LIABILITY | 760,366 | - | | | | COMMITMENTS AND CONTINGENCIES | - | - | | | | STOCKHOLDERS' DEFICIT | | | Preferred stock - $0.0001 par value, 10,000,000 shares authorized, no shares | | | issued and outstanding | - | - | Common stock - $0.0001 par value, 6,000,000,000 shares authorized, 3,759,717,098 | | | and 3,437,599,095 shares issued and outstanding at 6/30/2019 and 12/31/2018, respectively | 375,960 | 343,749 | Additional paid in capital | 141,886,782 | 139,331,067 | Accumulated deficit | (145,198,634) | (141,176,087) | Total stockholders' deficit | (2,935,892) | (1,501,271) | | | | NON CONTROLLING INTEREST IN EZ-CLONE ENTERPRISES, INC. | 1,924,926 | 1,931,645 | | | | TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $5,897,676 | $7,217,948 |
The accompanying notes are an integral part of these consolidated financial statements.
GROWLIFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS | | | | | | | | | | | | | NET REVENUE | $2,200,733 | $1,208,415 | $4,445,012 | $1,917,351 | COST OF GOODS SOLD | 1,524,960 | 1,096,934 | 2,998,331 | 1,729,451 | GROSS PROFIT | 675,773 | 111,481 | 1,446,681 | 187,900 | GENERAL AND ADMINISTRATIVE EXPENSES | 2,052,769 | 924,813 | 4,182,725 | 2,104,270 | OPERATING LOSS | (1,376,996) | (813,332) | (2,736,044) | (1,916,370) | | | | | | OTHER INCOME (EXPENSE): | | | | | Change in fair value of derivative | 21,457 | (703,346) | 508,730 | 1,655,098 | Interest expense, net | (107,303) | (320,929) | (227,343) | (709,233) | Loss on debt conversions | (228,099) | (244,549) | (1,574,609) | (5,353,526) | Total other (expense) | (313,945) | (1,268,824) | (1,293,222) | (4,407,661) | | | | | | (LOSS) BEFORE INCOME TAXES | (1,690,941) | (2,082,156) | (4,029,266) | (6,324,031) | | | | | | Income taxes - current benefit | - | - | - | - | | | | | | NET (LOSS) | (1,690,941) | (2,082,156) | (4,029,266) | (6,324,031) | | | | | | Noncontrolling interest in EZ-Clone Enterprises, Inc. | (18,809) | - | 6,719 | - | | | | | | NET LOSS ATTRIBUTABLE TO GROWLIFE, INC. AND SUBSIDIARIES | $(1,709,750) | $(2,082,156) | $(4,022,547) | $(6,324,031) | COMMON SHAREHOLDERS | | | | | | | | | | Basic and diluted (loss) per share | $(0.00) | $(0.00) | $(0.00) | $(0.00) | | | | | | Weighted average shares of common stock outstanding- basic and diluted | 3,639,091,893 | 2,938,882,290 | 3,716,729,634 | 2,824,194,733 |
The accompanying notes are an integral part of these consolidated financial statements.
GROWLIFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | Net loss | $(4,022,547) | $(6,324,031) | Adjustments to reconcile net loss to net cash (used in) | | | operating activities | | | Depreciation | 84,678 | 30,553 | Amortization of intangible assets | 570,514 | - | Stock based compensation | 80,247 | 113,629 | Common stock issued for services | 174,362 | 153,206 | Amortization of debt discount | - | 498,658 | Change in fair value of derivative liability | (508,730) | (1,662,346) | Accrued interest on convertible notes payable | 126,898 | 101,674 | Loss on debt conversions | 1,574,609 | 5,529,319 | Noncontrolling interest in EZ-Clone Enterprises, Inc. | 6,719 | - | Changes in operating assets and liabilities: | | | Accounts receivable | (281,171) | - | Inventory | (150,030) | 30,010 | Prepaids and other assets | (14,565) | - | Deposits | (6,500) | - | Right of use, net | 3,879 | - | Accounts payable | 375,830 | (14,951) | Accrued expenses | (22,052) | (123,964) | Deferred revenue | (89,504) | - | CASH (USED IN) OPERATING ACTIVITIES | (2,097,363) | (1,668,243) | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | Investment in purchased assets | (5,319) | (250,000) | NET CASH (USED IN) INVESTING ACTIVITIES: | (5,319) | (250,000) | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | Repayment of convertible notes payable | (590,909) | - | Proceeds from notes payable | 490,000 | - | Repayment on capital lease | (4,754) | - | Cash provided from Convertible Promissory Note with Chicago Venture Partners, L.P. | - | 685,000 | Share issuances to St. George Investments LLC | - | 1,300,000 | NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (105,663) | 1,985,000 | | | | NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (2,208,345) | 66,757 | | | | CASH AND CASH EQUIVALENTS, beginning of period | 2,334,377 | 69,191 | | | | CASH AND CASH EQUIVALENTS, end of period | $126,032 | $135,947 | | | | Supplemental disclosures of cash flow information: | | | Interest paid | $- | $- | Taxes paid | $- | $- | | | | Non-cash investing and financing activities: | | | Shares issued for convertible note and interest conversion | $368,000 | $2,673,590 | Common shares issued for accounts payable | $- | $18,000 | Shares issued for purchase of warrant | $1,000,000 | $- |
The accompanying notes are an integral part of these consolidated financial statements.
GROWLIFE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION The accompanying unaudited consolidated condensed financial statements have been prepared by GrowLife, Inc. (“us,” “we,” or “our”) in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of our management, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the financial position, results of operations, and cash flows for the fiscal periods presented have been included. These financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report filed on Form 10-K for the year ended December 31, 2018. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results expected for the full fiscal year, or for any other fiscal period. GrowLife, Inc. (“GrowLife” or the “Company”) is incorporated under the laws of the State of Delaware and is headquartered in Kirkland, Washington. The Company was founded in 2012 with the Closing of the Agreement and Plan of Merger with SGT Merger Corporation. The Company’s goal of becoming the nation’s largest cultivation facility service provider for the production of organics, herbs and greens and plant-based medicines has not changed. The Company’s mission is to best serve more cultivators in the design, build-out, expansion and maintenance of their facilities with products of high quality, exceptional value and competitive price. Through a nationwide network of knowledgeable representatives, regional centers and its e-commerce website, GrowLife provides essential and hard-to-find goods including media (i.e., farming soil), industry-leading hydroponics equipment, organic plant nutrients, and thousands more products to specialty grow operations across the United States. The Company primarily sells through its wholly owned subsidiary, GrowLife Hydroponics, Inc. GrowLife companies distribute and sell over 15,000 products through its e-commerce distribution channel, GrowLifeEco.com, and through our regional retail storefronts. GrowLife and its business units are organized and directed to operate strictly in accordance with all applicable state and federal laws. On June 7, 2013, GrowLife Hydroponics completed the purchase of Rocky Mountain Hydroponics, LLC, a Colorado limited liability company (“RMC”), and Evergreen Garden Center, LLC, a Maine limited liability company (“EGC”). The effective date of the purchase was June 7, 2013. On October 3, 2017, the Company closed the acquisition of 51% of the Purchased Assets from David Reichwein, a Pennsylvania resident, GIP International Ltd, a Hong Kong corporation and DPR International LLC, a Pennsylvania limited liability corporation. The Purchased Assets include intellectual property, copy rights and trademarks related to reflective tiles and flooring. The Company did not acquire business, customer lists or employees. The Company acquired its 51% interest in the Purchased Assets for $400,000. The Company funded equipment and rent of $608,905an office lease. On February 16, 2018, the Company purchased the remaining 49% of the Purchased Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the Company had recorded investment in purchased assets of $552,689. On August 17, 2018, the Company entered into 86,986,437an Asset Purchase Agreement with Go Green Hydroponics, Inc., a California corporation and TCA – Go Green SPV, LLC, a Florida limited liability pursuant to which the Company acquired the intellectual property and assumed the lease for the property located at 15721 Ventura Blvd., Encino, CA 91436. The Company intends to operate a retail store, sale over the internet and sell on a direct basis at this location. Concurrently, the Company and Seller entered into a Security Agreement for securing the assets of Company as collateral for the obligations of Company as set forth in the Security Agreement. In consideration for the sale and assignment of the Purchased Assets, the Company agreed to pay the Seller: (i) the proceeds generated from the sale of the closing inventory until all closing inventory has been sold, and (ii) to pay the Seller 5% of all gross revenue of Company earned or in any way related to the Purchased Assets generated between October 1, 2018 and December 31, 2019, up to a maximum of $200,000. On October 15, 2018, the Company closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation. EZ-CLONE is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. The Company acquired 51% of EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of the Company’s common stock at a price of $0.013 per share conversion price of $0.007.or $1,395,000.
The Company issued $2 million in common stock or 115,141,048has the obligation to acquire the remaining 49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000. On October 17, 2017, the Company was informed by Alpine Securities Corporation (“Alpine”) that Alpine has demonstrated compliance with the Financial Industry Regulatory Authority (“FINRA”) Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of 1934. We filed an amended application with the OTC Markets to list the Company’s common stock on April 6, 2016 pursuantthe OTCQB and begin to trade on this market as of March 20, 2018. As of March 4, 2019, the Company began to trade on the Pink Sheet stocks system.The Company’s bid price had closed below $0.01 for more than 30 consecutive calendar days. NOTE 2 – GOING CONCERN The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of $4,029,266, $11,444,782, and $5,320,974 for the six months ended June 30, 2019 and the years ended December 31, 2018 and 2017 respectively. Our net cash used in operating activities was $2,097,363, $3,854,506, and $2,082,493 for the six months ended June 30, 2019 and the years ended December 31, 2018 and 2017 respectively. The Company anticipates that it will record losses from operations for the foreseeable future. As of June 30, 2019, the accumulated deficit was $145,198,634. The Company has experienced recurring operating losses and negative operating cash flows since inception and has financed its working capital requirements during this period primarily through the recurring issuance of convertible notes payable and advances from a related party. The audit opinion prepared by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 2018 and 2017 filed with the SEC on March 8, 2019 includes an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern. Continuation of the Company as a going concern is dependent upon obtaining additional working capital. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). Principles of Consolidation- The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Inter-Company items and transactions have been eliminated in consolidation. Cash and Cash Equivalents- The Company classifies highly liquid temporary investments with an original maturity of nine months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit. At June 30, 2019, the Company had uninsured deposits in the amount of $0. Accounts Receivable and Revenue - Revenue is recognized at the time the Company sells merchandise to the customer in store. eCommerce sales include shipping revenue and are recorded upon shipment to the customer. This is when the risk of loss transfers to our customers, the fee is fixed and determinable, and collection of the sale is reasonably assured. A product is not shipped without an order from the customer and the completion of credit acceptance procedures. The majority of our sales are cash or credit card; however, we occasionally extend terms to our customers. Accounts receivable are reviewed periodically for collectability. Inventories - Inventories are recorded on a first in first out basis. Inventory consists of raw materials, purchased finished goods and components held for resale. Inventory is valued at the lower of cost or market. The reserve for inventory was $30,000 and $120,000 as of June 30, 2019 and December 31, 2018, respectively. Equipment– Equipment consists of machinery, equipment, tooling, computer equipment and leasehold improvements, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives or lease period of the relevant asset, generally 3-10 years, except for leasehold improvements which are depreciated over the lesser of the life of the lease or 10 years.
Long Lived Assets– The Company reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results. Intangible Assets – Intangible assets are capitalized and amortized on a straight-line basis over their estimated useful life, if the life is determinable. If the life is not determinable, amortization is not recorded. We regularly perform reviews to determine if facts and circumstances exist which indicate that the useful lives of our intangible assets are shorter than originally estimated or the carrying amount of these assets may not be recoverable. When an indication exists that the carrying amount of intangible assets may not be recoverable, we assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Such impairment test is based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Impairment, if any, is based on the excess of the carrying amount over the estimated fair value of those assets. Fair Value Measurements and Financial Instruments - ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The carrying value of cash, accounts receivable, investment in a related party, accounts payables, accrued expenses, due to related party, notes payable, and convertible notes approximates their fair values due to their short-term maturities. Derivative financial instruments -The Company evaluates all of its financial instruments 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 in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the Consolidated Class Actionderivative instrument could be required within twelve months of the balance sheet date. Sales Returns - We allow customers to return defective products when they meet certain established criteria as outlined in our sales terms and Derivative Action lawsuits alleging violationsconditions. It is our practice to regularly review and revise, when deemed necessary, our estimates of federal securities laws that were filed againstsales returns, which are based primarilyon actual historical return rates. We record estimated sales returns as reductions to sales, cost of goods sold, and accounts receivable and an increase to inventory. Returned products which are recorded as inventory are valued based upon the amount we expect to realize upon its subsequent disposition. As of June 30, 2019, and December 31, 2018, there was a reserve for sales returns of $0, respectively, which is minimal based upon our historical experience. Stock Based Compensation- The Company has share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options and warrants to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost to employees is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period under ASC 718. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit. Grants of stock to non-employees and other parties are accounted for in United States District Court, Central Districtaccordance with the ASC 505. Net (Loss) Per Share -Under the provisions of California.ASC 260, “Earnings per Share,” basic loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations. The common stock equivalents have not been included as they are anti-dilutive.
As of June 30, 2019, there are also (i) stock option grants outstanding for the purchase of 82.5 million common shares at a $0.010 average exercise price; (ii) warrants for the purchase of 362.8 million common shares at a $0.023 average exercise price; and (iii) 116.5 million shares related to convertible debt that can be converted at $0.0025 per share. In addition, we have an unknown number of common shares to be issued under the Chicago Venture, Iliad and St. George financing agreements because the number of shares ultimately issued to Chicago Venture depends on the price at which Chicago Venture converts its debt to shares and exercises its warrants. The lower the conversion or exercise prices, the more shares that will be issued to Chicago Venture upon the conversion of debt to shares. We won’t know the exact number of shares of stock issued to Chicago Venture until the debt is actually converted to equity. As of June 30, 2018, there are also (i) stock option grants outstanding for the purchase of 63 million common shares at a $0.009 average exercise price; (ii) warrants for the purchase of 595 million common shares at a $0.031 average exercise price; and (iii) 109 million shares related to convertible debt that can be converted at $0.0025 per share. In addition, we have an unknown number of common shares to be issued under the Chicago Venture Partners, L.P. financing agreements. Dividend Policy- The Company accrued $2,000,000has never paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities. Use of Estimates - In preparing these unaudited interim consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as loss on class action lawsuitsof the date of the consolidated financial statements and contingent liabilitiesthe reported amount of revenues and expenses during the year ending December 31, 2015.reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in our consolidated financial statements relate to the valuation of long-lived assets, estimates of sales returns, inventory reserves and accruals for potential liabilities, and valuation assumptions related to derivative liability, equity instruments and share based compensation.
Stock Option VestingRecent Accounting Pronouncements
On February 18, 2016, an entity affiliated with Mark E. Scott,A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s Chief Financial Officer, hadconsolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new standard effective January 1, 2019 on a two million share stock option grant issued at $0.01 per share vest immediately uponmodified retrospective basis and did not restate comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allows the Company securingto carryforward our historical lease classification, our assessment on whether a market makercontract is or contains a lease, and the Company’s initial direct costs for any leases that exist prior to adoption of the new standard. The Company also elected to combine lease and non-lease components and to keep leases with an approved 15c2-11 resultinginitial term of twelve months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The Company determines if an arrangement is a lease at inception. Operating and finance leases are included in Right of Use ("ROU") assets, and lease liability obligations in the Company’s relistingconsolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liability obligations represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on OTCBB.
Dissolutionthe present value of Certain Non-Operating Subsidiaries
lease payments over the lease term. The Company determined that certain wholly-owned subsidiaries were unnecessaryaccounts for the ongoing operationslease agreements with lease and non-lease components and account for such components as a single lease component. As most of the Company’s businessleases do not provide an implicit rate, we estimated our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The ROU asset also includes any lease payments made and electedexcludes lease incentives and lease direct costs. The Company’s lease terms may include options to dissolve these entities and/extend or surrender their foreign status interminate the lease when it is reasonably certain jurisdictionsthat we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. Please refer to Note 8 for the purpose of reducing unnecessary compliance costs.additional information.
The Company is dissolving SG Technologies Corp., a Nevada corporation, and is surrendering its qualification to do business in California due to the fact that
NOTE 4 – TRANSACTIONS Acquisition of 51% of EZ-CLONE Enterprises, Inc. On October 15, 2018, the Company no longer operates any business under this wholly-owned subsidiary.
The Company is dissolving Phototron, Inc.closed the Purchase and GrowLife Productions, Inc., all California corporations, due to the fact that the Company no longer operates any business under these wholly-owned subsidiaries.
The Company is dissolving Business Bloom,Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation that was founded in January 2000. EZ-CLONE is the manufacturer of multiple award-winning products specifically designed for the commercial cloning and propagation stage of indoor plant cultivation including cannabis, food, and other hydroponic farming. The Company has proprietary products and services such as the Commercial Pro System, Hobbyist Cloning Systems, Cloning Tents, Coco Collars, Coco Seed Starters, Rooting Gel, and Clear Rez. Technical Support, know-how and overall knowledge is withdrawing its foreign entity status in Colorado duealso considered proprietary. The Company trademarks are EZ-CLONE and EZ-CLONE CRIB.
This acquisition is expected to accelerate the fact thatCompany’s revenue growth, increase the Company no longer operates any business under this wholly-owned subsidiary.
The Company is surrendering its qualification to do business in California due to the fact that the Company has moved its headquarters to Seattle, Washingtongross margins and is no longer required to register as a foreign entity in California.
Potential Convertible Note Defaults
Several of the Company’s convertible promissory notes remain outstanding beyond their respective maturity dates. This may trigger an event of default under the respective agreements. The Company is working with these noteholders to convert their notes into common stockadd additional manufacturing and intends to resolve these outstanding issues as soon as practicable.
Enactment of Heightened Corporate Governance Measures Pursuant to Derivative Action Settlement
In connection with the settlement of the Derivative Actions related to alleged violations of federal securities laws, the Company agreed to expansive corporate governance measures.
During 2015research and 2016, the Company has enacted and continues to enact heightened corporate governance measure pursuant to the Derivative Action Settlement. The Company plans to hold a special shareholder meeting in the coming months to further implement measures associated with the Derivative Action Settlement.
Employment and Consulting Agreements Defaultsdevelopment personnel.
The Company owes Marco Hegyi approximately $53,287 in payroll acquired 51% of EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of $645,000; and expenses as(ii) the issuance of December 31, 2015 and is in default under the Employment Agreement with Mr. Hegyi.
The Company owes Mark Scott approximately $71,537 in payroll and expenses as of December 31, 2015 and is in default under the Consulting Agreement with Mr. Scott.
Expiration of Stock Option Grants
Mr. Belmont resigned January 13, 2016 and an option to purchase five million107,307,692 restricted shares of the Company’s common stock underat a price of $0.013 per share or $1,395,000. The Company has the obligation to acquire the remaining 49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s 2011 Stock Incentive Plan expired on April 13, 2016.common stock at a price of $0.013 per share or $1,105,000.
The cost to acquire these assets has been preliminarily allocated to the assets acquired according to estimated fair values and is subject to adjustment when additional information concerning asset valuations is finalized, but no later than October 15, 2019. The preliminary allocation is as follows: Purchase Price Allocation | $
| Common Stock | $1,395,000 | Cash | 645,000 | Assets acquired | (911,294) | Liabilities acquired | 939,375 | Non-controlling interest | 1,960,000 | EZ-CLONE equity | (605,000) | | | | | | | | | Total purchase price | $3,423,081 |
The results of operations of EZ-CLONE were included in the Consolidated Statements of Operations for the period October 15, 2018 to December 31, 2018. The unaudited pro-forma financial data for the acquisition for the year ended December 31, 2018, were as follows: | | | | | | | | | | | | | | | | Net revenue | $4,573,461 | $1,551,503 | $6,124,964 | Net loss | (11,473,137) | (111,671) | (11,584,808) | Net loss per share | $(0.00) | | $(0.00) |
Entry into Securities Purchase Agreement
The unaudited pro-forma financial data for the acquisition for the year ended December 31, 2017, were as follows:
| | | | | | | | | | | | | | | | Net revenue | $2,452,104 | $2,648,873 | $5,100,977 | Net loss | (5,320,974) | (126,962) | (5,447,936) | Net loss per share | $(0.00) | | $(0.00) |
There was no material, nonrecurring items included in the reported the pro-forma results. Termination of Agreements with CANX, LLC On April 5, 2016,February 15, 2019, the Company entered into a Termination of Existing Agreements and closedRelease with CANX USA, LLC, a Securities PurchaseNevada limited liability company. Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, or in any way related to that certain Waiver and Modification Agreement and relatedAmended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements (the “Transaction Documents”) withor instruments thereto, including, but not limited to, the Warrants issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an accredited investor (the “Purchaser”) wherebyexercise price of $0.033. In exchange for the Agreement and cancellation of the CANX Agreements and Warrants, the Company agreed to sell,issue $1,000,000 of restricted common stock priced at the February 7, 2019 closing price of $0.008, or 125,000,000 restricted common stock shares. NOTE 5 – INVENTORY Inventory as of June 30, 2019 and December 31, 2018 consisted of the Purchaserfollowing: | | | | | | | | | Raw materials | $479,305 | $417,570 | Work in process | 88,475 | 35,280 | Finished goods | 404,914 | 459,814 | Inventory reserve | (30,000) | (120,000) | Total | $942,694 | $792,664 |
Raw materials consist of supplies for the flooring product line and EZ-CLONE. Finished goods inventory relates to product at the Company’s retail stores, which is product purchased from distributors, and in some cases directly from the manufacturer, and resold at our stores and EZ-CLONE. The Company reviews its inventory on a periodic basis to identify products that are slow moving and/or obsolete, and if such products are identified, the Company records the appropriate inventory impairment charge at such time. NOTE 6 – PROPERTY AND EQUIPMENT Property and equipment as of June 30, 2019 and December 31, 2018 consists of the following: | | | | | | | | | Machinery, equipment and tooling | $909,556 | $943,326 | Computer equipment | 16,675 | 16,675 | Leasehold improvements | 19,971 | 14,703 | Total property and equipment | 946,203 | 974,704 | Less accumulated depreciation and amortization | (312,696) | (261,839) | Net property and equipment | $633,507 | $712,866 |
Fixed assets, net of accumulated depreciation, were $633,507 and $712,866 as of June 30, 2019 and December 31, 2018, respectively. Accumulated depreciation was $312,696 and $261,839 as of June 30, 2019 and December 31, 2018, respectively. Total depreciation expense was $50,857 and $30,553 for the six months ended June 30, 2019 and December 31, 2018, respectively. All equipment is used for manufacturing, selling, general and administrative purposes and accordingly all depreciation is classified in cost of goods sold, selling, general and administrative expenses. On October 3, 2017, the Company closed the acquisition of 51% of the Purchased Assets from David Reichwein, a Pennsylvania resident, GIP International Ltd, a Hong Kong corporation and DPR International LLC, a Pennsylvania limited liability corporation. The Purchased Assets include intellectual property, copy rights and trademarks related to reflective tiles and flooring. The Company did not acquire business, customer list or employees. The Company acquired its 51% interest in the Purchased Assets for $400,000. The Company funded equipment and rent of an office lease. On February 16, 2018, the Company purchased the remaining 49% of the Purchased Assets in exchange for a one-time payment of $250,000. As of December 31, 2018, the Company had recorded investment in purchased assets of $552,689. On October 15, 2018, the Company acquired 51% of EZ-CLONE Enterprises, Inc. and acquired $244,203 of net property and equipment. During the year ended December 31, 2018, the Company retired fully depreciated assets of $358,156. NOTE 7 – INTANGIBLE ASSETS Intangible assets as of June 30, 2019 and December 31, 2018 consisted of the following: | Estimated | | | | Useful Lives | | | | | | | Customer lists | 3 years | $1,604,341 | $1,604,341 | Patents | 3 years | 1,818,740 | 1,818,740 | Less: accumulated amortization | | (713,142) | (142,628) | Intangible assets, net | | $2,709,939 | $3,280,453 |
Total amortization expense was $570,513 and $0 for the six months ended June 30, 2019 and 2018, respectively. On October 15, 2018, the Company closed the Purchase and Sale Agreement with EZ-CLONE Enterprises, Inc., a California corporation that was founded in January 2000. The Company acquired 51% of EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of $645,000; and (ii) the issuance of 107,307,692 restricted shares of the Company’s common stock at a price of $0.013 per share or $1,395,000. The Company has the obligation to acquire the remaining 49% of EZ-CLONE within one year for $1,960,000, payable as follows: (i) a cash payment of $855,000; and (ii) the issuance of 85,000,000 shares of the Company’s common stock at a price of $0.013 per share or $1,105,000. The fair value of the intellectual property associated with the assets acquired was $3,423,081 estimated by using a discounted cash flow approach based on future economic benefits. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results. NOTE 8- LEASES The Company has entered into operating leases for retail and corporate facilities. These leases have terms which range from two to five years, and often include options to renew. These operating leases are listed as separate line items on the Company's June 30, 2019 Consolidated Balance Sheet, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are also listed as separate line items on the Company's June 30, 2019 Consolidated Balance Sheet. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized right-of-use assets and lease liabilities for operating leases of approximately $1,253,000 on January 1, 2019. Operating lease right-of-use assets and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. As of June 30, 2019, total right-of-use assets and operating lease liabilities were approximately $1,085,000 and $1,089,000, respectively. In the six months ended June 30, 2019, the Company recognized approximately $399,000 in total lease costs.
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments. Information related to the Company's operating right-of-use assets and related lease liabilities as of and for the six months ended June 30, 2019 were as follows: Cash paid for operating lease liabilities | $ 227,000 | Weighted-average remaining lease term | 3.2 years | Weighted-average discount rate | 10 % | Minimum future lease payments | - |
Minimum future lease payments as of June 30, 2019 are as follows:
Year | | 2019 | $227,149 | 2020 | 461,360 | 2021 | 464,150 | 2022 | 303,687 | 2023 | 236,352 | Total lease liability | 1,692,699 | Less imputed interest | (603,410) | Net lease liability | $1,089,289 |
NOTE 9- ACCOUNTS PAYABLE Accounts payable were $1,430,201 and $1,054,371 as of June 30, 2019 and December 31, 2018, respectively. Such liabilities consisted of amounts due to vendors for inventory purchases, audit, legal and other expenses incurred by the Company. The increase relates to inventory purchased at EZ-CLONE for production for sales during the three months ended September 30, 2019. NOTE 10- ACCRUED EXPENSES Accrued expenses were $285,884 and $261,954 as of June 30, 2019 and December 31, 2018, respectively. Such liabilities consisted of amounts due to Go Green Hydroponics, Inc. and TCA – Go Green SPV, LLC and sales tax and payroll liabilities. On August 17, 2018, the Company entered into an Asset Purchase Agreement with Go Green Hydroponics, Inc. and TCA – Go Green SPV, LLC. The Company acquired the inventory of Go Green but agreed to purchase an unsecured convertible promissory note inpay the original principal amountSeller 100% of $2,755,000 (the “Note”) (collectively, the “Transaction”).
In connection withproceeds generated from the Transaction,sale of the closing inventory until all closing inventory has been sold. The Company was provided $350,000 in cashrecorded accrued expenses $134,497 as well as a series of twelve Secured Investor Notes for a total Purchase PriceSeptember 30, 2018 related to the sale of $2,500,000. The Note carries an Original Issue Discount (“OID”) of $250,000 andinventory. Also, the Company agreed to pay $5,0005% of all gross revenue of Company earned or in any way related to cover Purchaser’s legal fees, accounting coststhe Purchased Assets generated between October 1, 2018 and other transaction expenses.
The Secured Investor Notes are payable as follows: 1) $50,000 upon filing of a Registration Statement on Form S-1 (the “Registration Statement”), 2) $100,000 upon effectiveness of the Registration Statement, and 3)December 31, 2019, up to $200,000 per month over the 10 months following effectiveness at the sole discretiona maximum of the Company, subject to certain conditions.$200,000. The Company shall file the Registration Statement within forty-five (45) daysestimated gross revenue for that period to be approximately $1,200,000 and recorded a $60,000 liability. The Company recorded an impairment of the Closing and will register shares of its common stock for the benefit of Purchaser in exchange for the payments under the Secured Investor Notes.
The Purchaser has the option to convert the Note at 65% of the average of the three (3) lowest volume weighted average pricesacquired assets in the twenty (20) Trading Days immediately preceding the applicable conversion (the “Conversion Price”). However, in no event will the Conversion Price be less than $0.02 or greater than $0.09. In addition, beginning on the date that is the earlieramount of six (6) months or five (5) days after the Registration Statement becomes effective, and on the same day of each month thereafter, the Company will re-pay the Note in monthly installments in cash, or, subject to certain Equity Conditions, in the Company’s common stock at 65% of the average of the three (3) lowest volume weighted average prices in the twenty (20) Trading Days immediately preceding the applicable conversion (the “Installment Conversion Price”).
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the framework in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our principal executive officer and principal financial officer concluded that our internal control over financial reporting were not effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with United States generally accepted accounting principles.
The effectiveness of our internal control over financial reporting$60,000 as of December 31, 2015 has not been audited by PMB Helin Donovan, LLP, an independent registered public accounting firm.2018.
| | | | | | | | /s/ Marco Hegyi | | /s/ Mark E. Scott | | Marco Hegyi | | Mark E. Scott | | President | | Chief Financial Officer | |
Seattle, WA
April 14, 2016
PART II—INFORMATION NOT REQUIRED IN PROSPECTUS
NOTE 11– CONVERTIBLE NOTES PAYABLE, NET ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.Convertible notes payable as of June 30, 2019 consisted of the following: The expenses | | | | | | | | | | | | | | | 10% OID Convertible Promissory Notes | $2,156,669 | $232,997 | $- | $2,389,666 | 7% Convertible note ($850,000) | 270,787 | 24,669 | - | 295,456 | | $2,427,456 | $257,666 | $- | $2,685,122 |
Convertible notes payable by us in connection with the issuance and distributionas of December 31, 2018 consisted of the securities being registered are set forth below. Each item listed is estimated as follows:following: Securities and Exchange Commission registration fee | | $ | 400 | | Accounting fees and expenses | | | 5,000 | | Legal fees and expenses | | | 25,000 | | Registrar and transfer agent fees and expenses | | | 1,000 | | Miscellaneous | | | 3,600 | | | | | | | Total expenses | | $ | 35,000 | |
| | | | | | | | | | | | | | | 10% OID Convertible Promissory Notes | $2,982,299 | $135,780 | $- | $3,118,079 | 7% Convertible note ($850,000) | 270,787 | 15,267 | - | 286,054 | | $3,253,086 | $151,047 | $- | $3,404,133 |
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.7% Convertible Notes Payable
Under Delaware law,On March 12, 2018, the Company entered into a corporation may includeSecond Amendment to the Note. Pursuant to the Amendment, the Note’s maturity date has been extended to December 31, 2019, and interest accrues at 7% per annum, compounding on the maturity date. Additionally, after review of the Note and accrued interest, the Parties agreed that as of March 12, 2018, the outstanding balance on the Note was $270,787.
As of June 30, 2019, the outstanding principal on this 7% convertible note was $270,787 and accrued interest was $24,669, which results in its certificate of incorporation (“Certificate”) a provision that eliminates or limits the personaltotal liability of $295,456. 10% Convertible Promissory Notes Funding from Chicago Venture Partners, L.P. (“Chicago Venture”) andIliad Research and Trading, L.P. (“Iliad”) As of December 31, 2018, the outstanding principal balance due to Chicago Venture and Iliad was $2,982,299 and accrued interest was $135,780, which results in a director to the corporation or its stockholders for monetary damages for breachtotal amount of fiduciary duties as a director, but no such provision may eliminate or limit the liability of a director (a) for any breach of duty of loyalty, (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the Delaware General Corporation Law (the “DGCL”) (dealing with illegal redemptions and stock repurchases), or (d) for any transaction from which the director derived an improper personal benefit. Our Certificate limits personal liability of directors to the fullest extent permitted by Delaware law.
The Certificate also provides that we shall, to the fullest extent permitted by Section 145 of the DGCL, as amended, indemnify all persons whom it may indemnify thereto, provided that if such indemnified person initiates a proceeding, he or she shall be indemnified only if our board of directors approved such action. Section 145 of the DGCL permits indemnification against expenses, fines, judgments and settlements incurred by any director, officer or employee of a Company in the event of pending or threatened civil, criminal, administrative or investigative proceedings, if such person was, or was threatened to be made, a party by reason of the fact that he or she is or was a director, officer or employee of the Company. Section 145 and our Certificate also provide that the indemnification provided for therein shall not be deemed exclusive of any other rights to which those seeking indemnification may otherwise be entitled.
We have a directors’ and officers’ liability insurance policy in place pursuant to which its directors and officers are insured against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended and the Securities and Exchange Act of 1934, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
2012 (November 1, 2012 onwards)$3,118,079.
During the three monthsyear ended December 31, 2012, we sold 292,858 shares of our common stock at $0.035 per share for aggregate proceeds of $10,250. The securities above were offered2018, Chicago Venture and sold to accredited investors pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof. The sale of the foregoing securities was made without any form of general solicitation or advertising and all of the foregoing securities are deemed restricted securities for purposes of the Securities Act. During the three months ended December 31, 2012, we issued 41,142,857 shares of common stock relating to the conversion of Notes. The securities above were offered and sold to an accredited investor pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof. The sale of the foregoing securities was made without any form of general solicitation or advertising and all of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
During the three months ended December 31, 2012, we issued 13,457,142 shares of our common stock to consultants, employees and directors for services. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
During the three months ended December 31, 2012, we issued 4,053,012 shares of common stock for a cashless exercise of options. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
On June 7, 2013, we issued 7,857,141 shares of restricted common stock to the former owners of RMH/EGC. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
On October 14, 2013, we issued 9,000,000 shares of our common stock related to the cashless exercise of warrants by Gemini Master Fund.
During 2013, we sold 36,981,862 shares of our common stock at $0.035 per share for aggregate proceeds of $1,294,365. The securities above were offered and sold to accredited investors pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof. The sale of the foregoing securities was made without any form of general solicitation or advertising and all of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
During 2013, we issued 262,595,733 shares of common stock relating to the conversion of Notes. The securities above were offered and sold to an accredited investor pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof. The sale of the foregoing securities was made without any form of general solicitation or advertising and all of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
During 2013, we issued 3,680,773 shares of common stock for a cashless exercise of options. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
During 2013, we issued 470,237 shares of our common stock related to the exercise of a stock option grant. We received $9,000 or $0.019 per share.
During 2013, we issued 45,404,359 shares of our common stock to consultants, employees and directors for services. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
2014
During 2014, we issued 102,507,839 shares of common stock relating to the conversion of Notes. The securities above were offered and sold to an accredited investor pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof. The sale of the foregoing securities was made without any form of general solicitation or advertising and all of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
During 2014, we issued 3,570,455 shares of common stock for a cashless exercise of options. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
During 2014, we issued 2,351,187 shares of our common stock related to the exercise of a stock option grant. We received $44,438 or $0.019 per share.
During 2014, we issued 15,219,420 shares of our common stock to consultants, employees and directors for services. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
2015
On June 16, 2015, we issued 7,772,725 shares of our common stock to Horwitz + Armstrong LLP pursuant a conversion of debt for $171,000. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
On July 9, 2015, we issued 10,000,000 shares of our common stock to TCA Global Credit Master Fund LP, an accredited investor, under an Advisory Agreement related to a Securities Purchase Agreement which closed July 9, 2015. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
On August 6, 2015, we issued 5,000,000 shares of our common stock to TCA Global Credit Master Fund LP, an accredited investor, under an Advisory Agreement related to a Committed Equity Facility which closed on August 6, 2015. The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
On December 18, 2015, we issued 2,000,000 shares each to two if our former independent Board Directors. We valued the 4,000,000 shares at $0.01 per share or $40,000.
TCA was issued 150,000 shares of Series B Preferred Stock.
TCA was issued 51 shares of Series C Preferred Stock.
Subsequent to December 31, 2015
On January 4, 2016, we issued 3,000,000 shares of its common stock to an entity affiliated with Mark E. Scott, our Chief Financial Officer, pursuant to a conversion of debt for $30,000. The shares were valued at the fair market price of $0.01 per share.
On January 16, 2016, we issued 1,400,000 shares of its common stock to a former consultant pursuant a conversion of debt for $40,000. The shares were valued at the fair market price of $0.01 per share.
On January 27, 2016, we issued 1,500,000 shares of its common stock to Michael E. Fasci, a Board Director, pursuant to a service award for $15,000. The shares were valued at the fair market price of $0.01 per share.
During March 2016, Holders of our Convertible Notes Payables,Iliad converted principal and accrued interest of $608,905$3,104,181 into 86,986,437525,587,387 shares of our common stock at a per share conversion price of $0.007.$0.0059 with a fair value of $7,756,330. The Company recognized $6,565,415 loss on debt conversions during the year ended December 31, 2018.
We issued $2 millionDuring the year ended December 31, 2018, the Company recorded an OID debt discount expense of $660,472 to interest expense related to the Chicago Venture and Iliad financing.
As of June 30, 2019, the outstanding principal balance due to Chicago Venture and Iliad was $2,156,669 and accrued interest was $232,997, which results in common stock or 115,141,048a total amount of $2,389,666. During the six months ended June 30, 2019, Chicago Venture and Iliad converted principal and accrued interest of $745,000 into 171,017,865 shares of our common stock at a per share conversion price of $.0044 with a fair value of $1,293,341. The Company recognized $1,574,609 loss on debt conversions during the six months ended June 30, 2019. NOTE 12 – DERIVATIVE LIABILITY In April 6, 20162008, the FASB issued a pronouncement that provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (BCF). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20. Debt with Conversion and Other Options. In those circumstances, the settlementconvertible debt is recorded net of the Consolidated Class Actiondiscount related to the BCF and Derivative Action lawsuits alleging violations of federal securities laws that were filed against the Company amortizes the discount to interest expense over the life of the debt using the effective interest method. The debt is convertible at the lesser of 65% of the fair value of the Company’s common stock or $0.009 requiring the conversion feature to be bifurcated from the host debt contract and accounting for separately as a derivative, resulting in United States District Court, Central Districtperiodic revaluations. There was a derivative liability of California.$1,286,743 as of June 30, 2019. For the six months ended June 30, 2019, the Company recorded non-cash income of $508,730 related to the “change in fair value of derivative” expense related to the Chicago Venture and Iliad financing. During the six months ended June 30, 2019, Chicago Venture and Iliad converted principal and accrued interest of $745,000 into 171,017,865 shares of our common stock at a per share conversion price of $.0044 with a fair value of $1,293,341. The Company accrued $2,000,000 asrecognized $1,574,609 loss on class action lawsuits and contingent liabilitiesdebt conversions during the year ending December 31, 2015.six months ended June 30, 2019.
Derivative liability as of June 30, 2019 was as follows: | | | | | | Fair Value Measurements Using Inputs | | Financial Instruments | | | | | | | | | | Liabilities: | | | | | Derivative Instruments | $- | $1,286,743 | $- | $1,286,743 | | | | | | Total | $- | $1,286,743 | $- | $1,286,743 |
NOTE 13 – RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS Related Party Transactions Transactions with Katherine McLain Ms. Katherine McLain was appointed as a director on February 14, 2017. On April 15, 2016, weFebruary 22, 2019, the Company issued 1,000,0008,108,108 shares of itsour common stock to an entity affiliated with Marco Hegyi, our Chief Executive Officer, pursuant to a conversion of debt for $20,000. The shares wereKatherine McLain valued at $0.0074 per share or $60,000. Transaction with Thom Kozik Mr. Kozik was appointed as a director on October 5, 2017. On February 22, 2019, the fair market priceCompany issued 8,108,108 shares of $0.02our common stock to Mr. Kozik valued at $0.0074 per share or $60,000. NOTE 14 – EQUITY Authorized Capital Stock The Company has authorized 6,010,000,000 shares of capital stock, of which 6,000,000,000 are shares of voting common stock, par value $0.0001 per share, and 10,000,000 are shares of preferred stock, par value $0.0001 per share.On October 24, 2017 the Company filed a Certificate of Amendment of Certificate of Incorporation with the Secretary of State of the State of Delaware to increase the authorized shares of common stock from 3,000,000,000 to 6,000,000,000 shares. Non-Voting Preferred Stock Under the terms of our articles of incorporation, the Company’s board of directors is authorized to issue shares of non-voting preferred stock in one or more series without stockholder approval. The Company’s board of directors has the discretion to determine the rights, preferences, privileges and restrictions, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of non-voting preferred stock. The purpose of authorizing the Company’s board of directors to issue non-voting preferred stock and determine the Company’s rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of non-voting preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Other than the Series B and C Preferred Stock discussed below, there are no shares of non-voting preferred stock presently outstanding and we have no present plans to issue any shares of preferred stock.
Common Stock Unless otherwise indicated, all of the following sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as noted below). All of the shares issued were issued in transactions not involving a public offering, are considered to be restricted stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect. No "participating members" (as such term is defined in FINRA Rule 5110(a)(4)) provided any services to us or acquired any of our securities in connection with the foregoing transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. The exhibitsCompany has compensated consultants and service providers with restricted common stock during the development of our business and when our capital resources were not adequate to provide payment in cash. During the six months ended June 30, 2019, the Company had the following sales of unregistered equity securities to accredited investors unless otherwise indicated: During the six months ended June 30, 2019, the Company issued 22,183,471 shares to suppliers for services provided. The Company valued the shares at $174,435 per share or $0.0079. During the six months ended June 30, 2019, Chicago Venture and Iliad converted principal and accrued interest of $745,000 into 171,017,865 shares of our common stock at a per share conversion price of $.0044 with a fair value of $1,293,341. The Company recognized $582,246 loss on debt conversions during the six months ended June 30, 2019. On February 15, 2019, the Company entered into a Termination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. Pursuant to the Registration Statement are listedAgreement, the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Exhibit Index attached heretoWarrants issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an exercise price of $0.033. In exchange for the Agreement and incorporated by reference herein.cancellation of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7, 2019 closing price of $0.008, or 125,000,000 restricted common stock shares The Company recorded a loss on settlement of $986,363. On May 2, 2019, the Company issued 3,916,667 shares valued at $0.006 to a former employee related to a cashless stock option exercise. We cancelled a stock option grant for 15,083,333 shares issued at $0.006. Warrants ITEM 17. UNDERTAKINGS.The Company had the following warrant activity during the six months ended June 30, 2019:On February 15, 2019, the Company entered into a Termination of Existing Agreements and Release with CANX USA, LLC, a Nevada limited liability company. Pursuant to the Agreement, the Parties agreed to terminate, release and discharge all existing and further rights and obligations between the Parties under, arising out of, or in any way related to that certain Waiver and Modification Agreement and Amended and Restated Joint Venture Agreement made as of July 10, 2014, and any ancillary agreements or instruments thereto, including, but not limited to, the Warrants issued to CANX entitling CANX to purchase 540,000,000 shares of the Company’s common stock at an exercise price of $0.033. In exchange for the Agreement and cancellation of the CANX Agreements and Warrants, the Company agreed to issue $1,000,000 of restricted common stock priced at the February 7, 2019 closing price of $0.008, or 125,000,000 restricted common stock shares. A summary of the warrants issued as of June 30, 2019 is as follows: | | | | | | | | | | | | | | Outstanding at beginning of period | 902,825,146 | $0.029 | Issued | - | - | Exercised | - | - | Forfeited | (540,000,000) | (0.033) | Expired | - | - | Outstanding at end of period | 362,825,146 | $0.023 | Exerciseable at end of period | 362,825,146 | |
A summary of the status of the warrants outstanding as of June 30, 2019 is presented below: | | | | | | | | | | | | | | | | | | | | | | - | - | $- | - | $- | 55,000,000 | 7.16 | 0.010 | 55,000,000 | 0.010 | 48,000,000 | 5.25 | 0.012 | 16,000,000 | 0.012 | 48,687,862 | 3.58 | 0.050 | 48,687,862 | 0.050 | 211,137,284 | 2.32 | 0.021 | 211,137,284 | 0.021 | 362,825,146 | 3.30 | $0.023 | 330,825,146 | $0.023 |
Warrants had no intrinsic value as of June 30, 2019. The undersigned registrant hereby undertakes:warrants were valued using the following assumptions: (1) To file, during0% | 1-5 Years | 70-200% | 0.78-2.6% |
NOTE 15– STOCK OPTIONS Description of Stock Option Plan On December 6, 2018, the Company’s shareholders voted to approve the First Amended and Restated 2017 Stock Incentive Plan to increase the shares issuable under the plan from 100 million to 200 million. The Company has 100,000,000 shares available for issuance. The Company has outstanding unexercised stock option grants totaling 100,000,000 shares at an average exercise price of $0.010 per share as of December 31, 2018. The Company filed registration statements on Form S-8 to register 200,000,000 shares of the Company’s common stock related to the 2017 Stock Incentive Plan and First Amended and Restated 2017 Stock Incentive Plan. Determining Fair Value under ASC 505 The Company records compensation expense associated with stock options and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of stock options granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company estimates the volatility of our common stock based on the historical volatility of its own common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on our common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and adjusts share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. Stock Option Activity During the six months ended June 30, 2019, the Company had the following stock option activity: On February 6, 2019, the Company issued a stock option grant to an advisory board member for 500,000 shares of common stock at an exercise price of $0.008 per share. The stock option grant vests quarterly over three years and is exercisable for 3 years. The stock option grant was valued at $1,000.
On April 26, 2019, the Company issued stock option grants to two employees for 3,000,000 shares of common stock at an exercise price of $0.010 per share. The stock option grant vests quarterly over three years and is exercisable for 3 years. The stock option grants were valued at $3,000. On April 2, 2019, the Company amended the exercise price on stock option grants for five million shares and changed the exercise price from $0.020 to $0.010 per share. On May 2, 2019, the Company issued 3,916,667 shares valued at $0.006 to a former employee related to a cashless stock option exercise. We cancelled a stock option grant for 15,083,333 shares issued at $0.006. During the three months ended June 30, 2019, a stock option grant for 2,000,000 shares of common stock at an exercise price of $0.02 per share expired. As of June 30, 2019, there are 82,500,000 options to purchase common stock at an average exercise price of $0.0099 per share outstanding under the 2017 Amended and Restated Stock Incentive Plan. The Company recorded $32,247 and $16,129 of compensation expense, net of related tax effects, relative to stock options for the six months ended June 30, 2019 and 2018 in accordance with ASC 505. Net loss per share (basic and diluted) associated with this expense was approximately ($0.00). As of June 30, 2019, there is $112,624 of total unrecognized costs related to employee granted stock options that are not vested. These costs are expected to be recognized over a period of approximately 3.87 years. Stock option activity for the period ended June 30, 2019 is as follows: | | | | | | | | Outstanding as of December 31, 2018 | 100,000,000 | $0.0094 | $940,000 | Granted | 3,500,000 | 0.0080 | 34,000 | Exercised | (3,916,667) | (0.0060) | (23,500) | Forfeitures | (17,083,333) | (0.0076) | (130,500) | Outstanding as of June 30, 2019 | 82,500,000 | $0.0099 | $820,000 |
The following table summarizes information about stock options outstanding and exercisable at June 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | $0.006 | 12,000,000 | 3.36 | $0.006 | 6,000,000 | $0.006 | 0.007 | 10,000,000 | 3.50 | 0.007 | 5,000,000 | 0.007 | .008-.009 | 2,500,000 | 1.55 | .008-.009 | 1,375,000 | 0.008 | 0.010 | 20,000,000 | 3.36 | 0.010 | 14,916,667 | 0.010 | 0.012 | 38,000,000 | 4.00 | 0.012 | 9,500,000 | 0.012 | | 82,500,000 | 3.87 | $0.010 | 36,791,667 | $0.009 |
Stock option grants totaling 82,500,000 shares of common stock no intrinsic value as of June 30, 2019. The stock option grants were valued using the following assumptions:
0% | 1-5 Years | 70-200% | 0.78-2.6% |
NOTE 16 – COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS Legal Proceedings From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although we cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and may be adjusted from time to time according to developments. Other than those certain legal proceedings as reported in the Company’s annual report on Form 10-K filed with the SEC on March 8, 2019, the Company’s know of no material, existing or pending legal proceedings against our Company, nor is the Company involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which offersany director, officer or sales are being made,any affiliates, or any registered or beneficial shareholder, is an adverse party or has a post-effective amendmentmaterial interest adverse to this Registration Statement:the Company’s interest. Operating Leases On May 31, 2019, the Company rented space at 5400 Carillon Point, Kirkland, Washington 98033 for $623 per month for the Company’s corporate office and use of space in the Regus network, including California. The Company’s agreement expires May 31, 2020. On October 1, 2017, GrowLife Hydroponics, Inc. entered into a lease in Calgary, Canada. The monthly lease is approximately $3,246. The lease expires September 30, 2022. On December 19, 2017, GrowLife Innovations, Inc. entered into a lease in Grand Prairie, Texas dated October 9, 2017, for 5,000 square feet for the manufacturing and distribution of its flooring products. The monthly lease payment is $15,000. The lease expires December 1, 2022 and can be renewed. On July 2, 2018, GrowLife Hydroponics, Inc. entered into a store lease for 1,950 square feet in Portland, Maine. The monthly lease is approximately $2,113, with 3% increases in year two and three. The lease expires July 2, 2021 and can be extended. On August 31, 2018, GrowLife, Inc. entered into the Fourth Amendment to the Lease Agreement for the store in Encino, California. The monthly lease is approximately $6,720, with a 3% increase on March 1, 2019. The lease expires September 1, 2019 and the Company is required to provide six months’ notice to terminate the lease. On December 14, 2018, GrowLife, Inc. entered into a lease agreement with Pensco Trust Company for a 28,000 square feet industrial space at 10170 Croydon Way, Sacramento, California 95827 used for the assembly and sales of plastic parts by EZ-CLONE. The monthly lease payment is $17,000 and increased approximately 3% per year. The lease expires on December 31, 2023. The aggregate future minimum lease payments under operating leases, to the extent the leases have early cancellation options and excluding escalation charges, are as follows: Years Ended June 30, | | 2020 | $537,910 | 2021 | 925,511 | 2022 | 549,776 | 2023 | - | 2024 | - | Beyond | - | Total | $2,013,196 |
NOTE 17 – SUBSEQUENT EVENTS The Company evaluates subsequent events, for the purpose of adjustment or disclosure, up through the date the financial statements are available. The Company had the following material events subsequent to June 30, 2019: On July 23, 2019, the Company closed the transactions described below with Odyssey Research and Trading, LLC, a Utah limited liability company (“Odyssey”). Securities Purchase Agreement, Secured Promissory Notes and Security Agreement On July 23, 2019, the Company executed the following agreements with Odyssey: (i) To include any prospectus required by Section 10(a)(3)Securities Purchase Agreement; (ii) Secured Promissory Notes; and (iii) Security Agreement (collectively the “Odyssey Agreements”). The Company entered into the Odyssey Agreements with the intent to acquire working capital to grow the Company’s businesses. The total amount of funding under the Odyssey Agreements is $1,105,000. The Convertible Promissory Note carries an original issue discount of $100,000 and a transaction expense amount of $5,000, for total debt of $1,105,000. The Company agreed to reserve three times the number of shares based on the redemption value with a minimum of 500 million shares of its common stock for issuance upon conversion of the Securities ActDebt, if that occurs in the future. If not converted sooner, the Debt is due on or before July 22, 2020. The Debt carries an interest rate of 1933;ten percent (10%). The Debt is convertible, at Odyssey’s option, into the Company’s common stock at $0.010 per share subject to adjustment as provided for in the Secured Promissory Notes. The Company’s obligation to pay the Debt, or any portion thereof, is secured by all of the Company’s assets. (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
(5) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(6) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
| GROWLIFE, INC. | | | | | | | By: | /s/ Marco Hegyi | | | | Marco Hegyi | | | | Chief Executive Officer | | | | | |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities held on the dates indicated.
SIGNATURES | TITLE | DATE | | | | /s/ Marco Hegyi | Chief Executive Officer, President and Chairman of the Board | May 9, 2016 | Marco Hegyi | (Principal Executive Officer) | | | | | /s/ Mark E. Scott | Consulting Chief Financial Officer | May 9, 2016 | Mark E. Scott | (Principal Financial/Accounting Officer) | | | | | /s/ Michael E. Fasci | Secretary Director | May 9, 2016 | Michael E. Fasci | | | | | |
Exhibit Index
| Exhibit No. | | Description | | | | | | 3.1 | | Certificate of Incorporation. Filed as an exhibit to the Company’s Form 10-SB General Form for Registration of Securities of Small Business Issuers filed with the SEC on December 7, 2007, and hereby incorporated by reference. | | | | | | 3.2 | | Amended and Restated Bylaws. Filed as an exhibit to the Company’s Form 8-K filed with the SEC on June 9, 2014, and hereby incorporated by reference. | | | | | | 3.3 | | Second Amended and Restated Bylaws of GrowLife, Inc. dated October 16, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference. | | | | | | 3.4 | | Certificate of Designation for Series B Preferred Stock. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 29, 2015, and hereby incorporated by reference. | | | | | | 3.5 | | Certificate of Designation for Series C Preferred Stock. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 29, 2015, and hereby incorporated by reference. | | | | | | 4.1 | | GrowLife, Inc. 2011 Stock Incentive Plan filed as an exhibit to the Company’s Registration Statement on Form S-1 filed with the SEC on June 9, 2011, and hereby incorporated by reference. | | | | | | 5.1 | | Opinion of Horwitz + Armstrong, LLP, regarding the legality of the securities being registered. (filed herewith) | | | | | | 10.1 | | Agreement and Plan of Merger dated March 21, 2012, by and between Phototron Holdings, Inc., SGT Merger Corporation, SG Technologies Corp, Sterling C. Scott and W-Net Fund I, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference. | | | | | | 10.2 | | Securities Purchase and Exchange Agreement, dated March 16, 2012, by and between Phototron Holdings, Inc., W-Net Fund I, L.P., and Europa International Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference. | | | | | | 10.3 | | Security Agreement, dated March 16, 2012, by and between Phototron Holdings, Inc., W-Net Fund I, L.P., Europa International Inc., GrowLife, Inc., and Phototron, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference. | | | | | | 10.4 | | Intellectual Property Security Agreement, dated March 16, 2012, by and between Phototron Holdings, Inc., W-Net Fund I, L.P., Europa International Inc., GrowLife, Inc., and Phototron, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference. | | | | | | 10.5 | | Form of 6% Senior Secured Convertible Note. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on March 22, 2012, and hereby incorporated by reference. | | | | | | 10.6 | | Form of 7% Convertible Note. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 11, 2013, and hereby incorporated by reference. | | | | | | 10.7 | | Securities Purchase Agreement dated June 7, 2013, by and between GrowLife, Inc., GrowLife Hydroponics, Inc., Sequoia, LLC, Pressure Drop Holdings, LLC and Sachin Karia. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference. | | | | | | 10.8 | | Revolving Promissory Note dated June 7, 2013 issued by GrowLife, Inc. in favor of W-Net Fund I, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference. | | | | |
| 10.9 | | Form of 12% Senior Secured Convertible Note. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference. | | | | | | 10.10 | | Security Agreement dated June 7, 2013, by and between GrowLife, Inc., Sequoia, LLC, Pressure Drop Holdings, LLC, Sachin Karia and Robert E. Hunt. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 7, 2013, and hereby incorporated by reference. | | | | | | 10.11 | | Joint Venture Agreement dated November 19, 2013 by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference. | | | | | | 10.12 | | Warrant Agreement by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference. | | | | | | 10.13 | | 7% Convertible Note by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference. | | | | | | 10.14 | | Registration Rights Agreement by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference. | | | | | | 10.15 | | Commercial Lease Agreement dated March 8, 2013 by and between Evergreen Garden Center LLC and William C. Rowell Family Limited Partnership for our Portland, Maine store. Filed as an exhibit to the Company’s Form 10-K dated December 31, 2014 and filed with the SEC on September 30, 2015, and incorporated by reference.
| | | | | | 10.16 | | Lease dated October 21, 2013 by and between GrowLife Hydroponics, Inc. and Stone Creek Business Center Ltd. for our Avon (Vail), Colorado store. Filed as an exhibit to the Company’s Form 10-K dated December 31, 2014 and filed with the SEC on September 30, 2015, and incorporated by reference. | | | | | | 10. 17 | | Retail Lease Agreement dated October 21, 2013 by and between GrowLife Hydroponics, Inc. and W-ADP Meadows VII LLC for our Boulder, Colorado store. Filed as an exhibit to the Company’s Form 10-K dated December 31, 2014 and filed with the SEC on September 30, 2015, and incorporated by reference. | | | | | | 10.18 | | Amended and Restated 6% Senior Secured Convertible Note dated September 10, 2014 by and between GrowLife, Inc. and Andrew J. Gentile. Filed as an exhibit to the Company’s Form 10-K dated December 31, 2014 and filed with the SEC on September 30, 2015, and incorporated by reference. | | | | | | 10.19 | | Amended and Restated 6% Senior Secured Convertible Note dated September 10, 2014 by and between GrowLife, Inc. and Jordan W. Scott. Filed as an exhibit to the Company’s Form 10-K dated December 31, 2014 and filed with the SEC on September 30, 2015, and incorporated by reference. | | | | | | 10.20 | | Warrant related to CANX USA LLC Joint Development Agreement dated November 19, 2013. Filed as an exhibit to the Company’s Form 10-K and filed with the SEC on November 21, 2014, and hereby incorporated by reference. | | | | | | 10.21 | | Executive Services Agreement dated June 7, 2013 by and between GrowLife, Inc. and Robert Hunt. Filed as an exhibit to the Company’s Form 8-K/A2 dated June 7, 2013 and filed with the SEC on June 25, 2014, and hereby incorporated by reference. | | | | | | 10.22 | | NonCompetition, NonSolicitation and NonDisclosure Agreement dated June 7, 2013 with Robert Hunt. Filed as an exhibit to the Company’s Form 8-K/A2 dated June 7, 2013 and filed with the SEC on June 25, 2014, and hereby incorporated by reference. | | | | |
| 10.23 | | Executive Employment Agreement dated November 3, 2013 by and between GrowLife, Inc. and Sterling Scott. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on June 25, 2014, and hereby incorporated by reference. | | | | | | 10.24 | | Executive Employment Agreement dated November 3, 2013 by and between GrowLife, Inc. and John Genesi. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on June 25, 2014, and hereby incorporated by reference. | | | | | | 10.25 | | Employment Agreement for Marco Hegyi dated December 4, 2013. Attached as an exhibit to the Company’s Form 8-K/A and filed with the SEC on June 20, 2014, and hereby incorporated by reference.
| | | | | | 10.26 | | Amended Employment Agreement for Marco Hegyi dated June 20, 2014. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on June 20, 2014, and hereby incorporated by reference.
| | | | | | 10.27 | | Restricted Stock Cancellation Agreement, dated April 25, 2014, by and between the Company and Eric Shevin. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on April 30, 2014, and hereby incorporated by reference. | | | | | | 10.28 | | Restricted Stock Cancellation Agreement, dated April 25, 2014, by and between the Company and Alan Hammer. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on April 30, 2014, and hereby incorporated by reference | | | | | | 10.29 | | Restricted Stock Cancellation Agreement, dated April 25, 2014, by and between the Company and Tony Ciabattoni. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on April 30, 2014, and hereby incorporated by reference. | | | | | | 10.30 | | Consulting Letter by and between GrowLife, Inc. and Mark Scott Consulting Letter dated July 31, 2014. Filed as an exhibit to the Company’s Form 8-K filed with the SEC on August 6, 2014, and hereby incorporated by reference. | | | | | | 10.31 | | Waiver and Modification Agreement dated June 25, 2014 by and between GrowLife, Inc. and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference. | | | | | | 10.32 | | Amended and Restated Joint Venture Agreement dated July 1, 2013 by and between GrowLife, Inc. and CANX USA LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference. | | | | | | 10.33 | | Secured Credit Facility and Secured Convertible Note dated June 25, 2014 by and between GrowLife, Inc. and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference. | | | | | | 10.34 | | Closing Certificate dated July 10, 2014 by and between GrowLife, Inc. and CANX USA LLC and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference. | | | | | | 10.35 | | Form of Warrant by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference. | | | | | | 10.36 | | Settlement Agreement and Waiver of Default dated June 19, 2014 by and between GrowLife, Inc. and Forglen LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 18, 2014, and hereby incorporated by reference. | | | | |
| 10.37 | | Severance Agreement dated July 15, 2014 by and between GrowLife, Inc. and John Genesi. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 18, 2014, and hereby incorporated by reference. | | | | | | 10.38 | | Joseph Barnes Promotion Letter dated October 10, 2014. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 14, 2014, and hereby incorporated by reference. | | | | | | 10.39 | | Settlement Agreement and Release dated October 17, 2014 by and between GrowLife, Inc. and Robert Hunt. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 21, 2014, and hereby incorporated by reference. | | | | | | 10.40 | | Notice of Settlement Agreement dated February 9, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on February 12, 2015, and hereby incorporated by reference. | | | | | | 10.41 | | Amendment 1 to Amended and Restated 6% Senior Secured Convertible Note with Andrew J. Gentile. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 8, 2015, and hereby incorporated by reference. | | | | | | 10.42 | | Amendment 1 to Amended and Restated 6% Senior Secured Convertible Note with Jordan W. Scott. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 8, 2015, and hereby incorporated by reference. | | | | | | 10.43 | | Stipulation and Agreement of Compromise, Settlement and Release of the Derivative Actions dated April 6, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 17, 2015, and hereby incorporated by reference. | | | | | | 10.44 | | Securities Purchase Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | | | | | | 10.45 | | Senior Secured, Convertible, Redeemable Debenture entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | | | | | | 10.46 | | Form of Security Agreement entered into by and between GrowLife, Inc. and its subsidiaries, respectively, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | | | | | | 10.47 | | Form of Guaranty Agreement entered into by and between GrowLife, Inc.’s subsidiaries, respectively, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | | | | | | 10.48 | | Form of Pledge Agreement entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | | | | | | 10.49 | | Intercreditor Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., its subsidiaries, Logic Works LLC and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | | | | | | 10.50 | | Form of Subordination Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., its subsidiaries, TCA Global Credit Master Fund LP and Jordan Scott and Andrew Gentile, respectively. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | | | | | | 10.51 | | Form of Amendment No. 2 to 6% Senior Secured Convertible Note, dated July 9, 2015, entered into by and between GrowLife, Inc. and Jordan Scott and Andrew Gentile, respectively. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. | | | | |
| 10.52 | | Investment Banking Letter dated August 27, 2014 by and between GrowLife, Inc. and D. Weckstein & Co. Inc. Filed as an exhibit to the Company’s Form 10-K dated December 31, 2014 and filed with the SEC on September 30, 2015, and incorporated by reference. | | | | | | 10.53 | | Securities Purchase Agreement dated August 6, 2015 and entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference. | | | | | | 10.54 | | Senior Secured Convertible Redeemable Debenture dated August 6, 2015 and entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference. | | | | | | 10.55 | | Committed Equity Facility dated August 6, 2015 entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference. | | | | | | 10.56 | | Registration Rights Agreement dated August 6, 2015 entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference. | | | | | | 10.57 | | Authorization Agreement dated August 6, 2015 entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference. | | | | | | 10.58 | | Amended and Restated Securities Purchase Agreement, dated October 27, 2015, entered into by and among GrowLife, Inc., its subsidiaries, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 29, 2015, and hereby incorporated by reference. | | | | | | 10.59 | | Amended and Restated Senior Secured, Convertible, Redeemable Debenture, dated October 27, 2015, entered into by and between GrowLife, Inc. and Purchaser. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 29, 2015, and hereby incorporated by reference. | | | | | | 10.60 | | Amendment to Employment Agreement by and between GrowLife Inc. and Marco Hegyi dated January 25, 2016 but effective December 18, 2015. | | | | | | 10.61 | | Securities Purchase Agreement, dated April 5, 2016, entered into by and among GrowLife, Inc., and Chicago Venture Partners, LP Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 11, 2016, and hereby incorporated by reference. | | | | | | 10.62 | | Convertible Promissory Note, dated April 5, 2106, entered into by and between GrowLife, Inc. and Chicago Venture Partners, LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 11, 2016, and hereby incorporated by reference. | | | | | | 10.63 | | Form of Secured Investor Note, dated April 5, 2016, entered into by and between GrowLife, Inc. and Chicago Venture Partners, LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 11, 2016, and hereby incorporated by reference. | | | | | | 10.64 | | Waiver Agreement, dated April 11, 2016, by and between GrowLife, Inc. and TCA Global Credit Master Fund, LP (filed herewith). | | | | |
| 10.65 | | First Amendment to Securities Purchase Agreement, effective as of May 4, 2016, entered into by and among GrowLife, Inc., its subsidiaries, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on May 9, 2016, and hereby incorporated by reference.
| | | | | | 10.66 | | Second Replacement Debenture A, dated May 4, 2016, entered into by and between GrowLife, Inc. and Purchaser. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on May 9, 2016, and hereby incorporated by reference. | | | | | | 10.67 | | Second Replacement Debenture B, dated May 4, 2016, entered into by and between GrowLife, Inc. and Purchaser. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on May 9, 2016, and hereby incorporated by reference. | | | | | | 14.1 | | Code of Conduct and Ethics dated May 15, 2014. Attached as an exhibit to the Company’s Form 8-K filed and with the SEC on June 9, 2014, and hereby incorporated by reference. | | | | | | 21.1 | | Subsidiaries of the Registrant. Filed as an exhibit to the Company’s Form 10-K dated December 31, 2014 and filed with the SEC on September 30, 2015, and hereby incorporated by reference. | | | | | | 23.1 | | Consent of PMB Helin Donovan LLP, independent registered public accounting firm (filed herewith) | | | | | | 23.3 | | Consent of Horwitz + Armstrong, A Professional Law Corporation (included in Exhibit 5.1) (filed herewith) | | | | | | 24.1 | | Power of Attorney (included on the signature page of this registration statement). | | | | | | 99.1 | | Amended and Restated Audit Committee Charter, dated October 16, 2015. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference. | | | | | | 99.2 | | Compensation Committee Charter dated May 15, 2014. Attached as an exhibit to the Company’s Form 8-K dated June 3, 2014 and filed with the SEC on June 9, 2014, and hereby incorporated by reference. | | | | | | 99.3 | | Amended and Restated Nominations and Governance Charter, dated October 16, 2015.Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference. | | | | | | 99.4 | | Amended and Restated Insider Trading Policy, dated October 16, 2015. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference. |
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