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 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 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, 2017, the Company had recorded
investment in purchased assets of $302,689.
O
n
October 17, 2017, the Company 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. As a result, Alpine may initiate
an unpriced quotation for the Company’s common stock. The
Company expects to file an amended application with the OTC Markets
to list the Company’s common stock on the OTCQB once the
minimum share price of $0.01 per share is achieved. The Company
currently trades on the OTC Pink Sheet market. 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 the Company’s Form 15c2-11.
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
$5,320,974 and $7,694,684 for the years ended December 31, 2017 and
2016, respectively. Our net cash used in operating activities was
$2,082,493 and $1,212,192 for the years ended December 31, 2017 and
2016, respectively.
The Company anticipates that it will record losses from operations
for the foreseeable future. As of December 31, 2017, our
accumulated deficit was $129,731,305.
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 report prepared by
our independent registered public accounting firm relating to our
financial statements for the year ended December 31, 2017 and 2016
filed with the SEC on March 28, 2018 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 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.
Accounts Receivable and Revenue -
Revenue is recognized on
the sale of a product when the product is shipped, which 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 as
of Decem
ber 31, 2017 and
2016,
respectively.
Property and Equipment -
Property and equipment 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 or the fair value
of the asset. Major improvements and betterments are capitalized.
Maintenance and repairs are expensed as incurred. Depreciation is
computed using the straight-line method over an estimated useful
life of five years. Assets acquired under capital lease are
depreciated over the lesser of the useful life or 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.
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.
Fair Value Measurements and Financial Instruments -
ASC
Topic 820 defines fair value, establishes a framework for measuring
fair value, establishes a nine-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 nine 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.
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, 2017 and 2016, there was
no reserve for sales returns, which are 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 accordance with the ASC
505.
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, 2017
, there are
also (i) stock option grants outstanding for the purchase of
56,000,000 common shares at a $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 convertible debt that can be
converted at $0.002535 per share. In addition, we have an unknown
number of common shares to be issued under the
Chicago
Venture Partners, L.P.
financing
agreements.
As of
December
31
, 2016, there are also (i) stock option grants outstanding
for the purchase of 12,010,000 common shares at a $0.010 average
strike price; (ii) warrants for the purchase of 595 million common
shares at a $0.031 average exercise price; and (iii) 207,812,222
shares related to convertible debt
that can be converted at $0.0036 per share. In addition, we have an
unknown number of common shares to be issued under the
TCA
Global Credit Master Fund LP
and
Chicago Venture Partners, L.P.
financing
agreements.
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 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.
Recent Accounting Pronouncements
Recent
accounting pronouncements, other than those below, issued by the
FASB, the AICPA and the SEC did not or are not believed by
management to have a material effect on the Company’s present
or future financial statements.
Effective
January 1, 2017, the Company adopted ASU 2015-11, Inventory:
Simplifying the Measurement of Inventory, which affects reporting
entities that measure inventory using either the first-in,
first-out or average cost method. Specifically, the guidance
requires that inventory be measured at the lower of cost and net
realizable value. Net realizable value is the estimated selling
price in the ordinary course of business, less reasonably
predictable cost of completion, disposal, and transportation. This
adoption did not have a material impact on the Company’s
condensed consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-01, Clarifying the
Definition of a Business, to assist with evaluating whether
transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. This guidance is effective for fiscal
years beginning after December 15, 2017, and interim periods within
those years. Early adoption is permitted for transactions not
reported in financial statements that have been issued or made
available for issuance.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows:
Classification of Certain Cash Receipts and Cash Payments, which
reduces the diversity in practice on how certain transactions are
classified in the statement of cash flows. The guidance is
effective for fiscal years beginning after December 15, 2018, and
interim periods within fiscal years beginning after December 15,
2019. Early adoption is permitted. The Company is evaluating the
effect of adopting this pronouncement.
In
February 2016, the FASB issued ASU 2016-02, Leases, which requires
a lessee, in most leases, to initially recognize a lease liability
for the obligation to make lease payments and a right-of-use asset
for the right to use the underlying asset for the lease term. The
guidance is effective for fiscal years beginning after December 15,
2018, and interim periods within with those years. Early adoption
is permitted. The Company is evaluating the effect of adopting this
pronouncement.
In July
2017, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”)
No. 2017-11,
Earnings Per
Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480), Derivatives and Hedging (Topic 815).
The amendments in
Part I of this Update change the classification analysis of certain
equity-linked financial instruments (or embedded features) with
down round features. When determining whether certain financial
instruments should be classified as liabilities or equity
instruments, a down round feature no longer precludes equity
classification when assessing whether the instrument is indexed to
an entity’s own stock. The amendments also clarify existing
disclosure requirements for equity-classified instruments. As a
result, a freestanding equity-linked financial instrument (or
embedded conversion option) no longer would be accounted for as a
derivative liability at fair value as a result of the existence of
a down round feature. For freestanding equity classified financial
instruments, the amendments require entities that present earnings
per share (EPS) in accordance with Topic 260 to recognize the
effect of the down round feature when it is triggered. That effect
is treated as a dividend and as a reduction of income available to
common shareholders in basic EPS. Convertible instruments with
embedded conversion options that have down round features are now
subject to the specialized guidance for contingent beneficial
conversion features (in Subtopic 470-20, Debt—Debt with
Conversion and Other Options), including related EPS guidance (in
Topic 260). The amendments in Part II of this Update recharacterize
the indefinite deferral of certain provisions of Topic 480 that now
are presented as pending content in the Codification, to a scope
exception. Those amendments do not have an accounting effect. For
public business entities, the amendments in Part I of this Update
are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. For all other
entities, the amendments in Part I of this Update are effective for
fiscal years beginning after December 15, 2019, and interim
periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted for all entities, including adoption in
an interim period. If an entity early adopts the amendments in an
interim period, any adjustments should be reflected as of the
beginning of the fiscal year that includes that interim period. The
Company early adopted ASU 2017-11 and has reclassified its
financial instrument with down round features to
equity.
In May
2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718),
Scope of Modification Accounting.
The amendments in this
Update provide guidance about which changes to the terms or
conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. The amendments in this
Update are effective for all entities for annual periods, and
interim periods within those annual periods, beginning after
December 15, 2017. Early adoption is permitted, including
adoption in any interim period, for (1) public business
entities for reporting periods for which financial statements have
not yet been issued and (2) all other entities for reporting
periods for which financial statements have not yet been made
available for issuance. Management is currently assessing the
impact the adoption of ASU 2017-09 will have on the Company’s
Consolidated Financial Statements.
In
March 2016, the FASB issued Accounting Standards Update
No. 2016-09 (ASU 2016-09),
Compensation—Stock Compensation (Topic
718): Improvements to
Employee Share-Based Payment Accounting
effective for annual periods beginning after December 15,
2016, and interim periods within those annual periods. Early
application is permitted for reporting periods where financial
statements have not yet been made available for issuance. The ASU
requires different transition methods and disclosures based on the
type of amendment included in the ASU.). Management is currently
assessing the impact the adoption of ASU 2016-09 will have on the
Company’s Consolidated Financial Statements.
NOTE 4 – TRANSACTIONS WITH CANX USA, LLC AND LOGIC WORKS
LLC
Transactions with CANX, LLC and Logic Works LLC
On
November 19, 2013, the Company entered into a Joint Venture
Agreement with CANX, a Nevada limited liability
company. Under the terms of the Joint Venture Agreement,
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.
The
Company initially owned a non-dilutive 45% share of OGI and the
Company could 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 delivered to CANX a warrant to purchase
140,000,000 shares of the Company common stock that is convertible
at $0.033 per share, subject to adjustment as provided in the
warrant. The five-year warrant expires November 18, 2018. Also, in
accordance with the Joint Venture Agreement, on February 7, 2014
the Company issued an additional warrant to purchase 100,000,000
shares of our common stock that is convertible at $0.033 per share,
subject to adjustment as provided in the warrant. The five-year
warrant expires February 6, 2019.
GrowLife
received the $1 million as a convertible note in December 2013,
received the $1.3 million commitment but not executed and by
January 2014 OGI had Letters of Intent with four investment and
acquisition transactions valued at $96 million. Before the deals
could close, the SEC put a trading halt on our stock on April 10,
2014, which resulted in the withdrawal of all transactions. The
business disruption from the trading halt and the resulting class
action and derivative lawsuits ceased further investments with the
OGI joint venture. The Convertible Note was converted into
GrowLife, Inc. common stock as of the year ended December 31,
2016.
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
Amended and Restated Joint Venture Agreement with CANX modified the
Joint Venture Agreement dated November 19, 2013 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 loan requiring approval in advance by CANX; (iii)
confirmed that the five year warrants, subject to adjustment, 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 adjustment, 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; and (vi) a four year
term, subject to adjustment.
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 required
approval in advance by Logic Works, provided 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 nine (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.
As of
December 31, 2017, the outstanding balance on the Convertible Note
was $41,225.
OGI was
incorporated on January 7, 2014 in the State of Nevada and had no
business activities as of December 31, 2017.
NOTE 5 – INVENTORY
Inventory
as of December 31, 2017 and 2016 consisted of the
following:
|
|
|
|
|
|
Raw
materials
|
$
110,000
|
$
-
|
Finished
goods
|
375,678
|
438,453
|
Inventory
reserve
|
(20,000
)
|
(20,000
)
|
Total
|
$
465,678
|
$
418,453
|
Raw
materials consist of supplies for the flooring product
line.
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.
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 December 31, 2017 and 2016 consists of the
following:
|
|
|
|
|
|
Machines
and equipment
|
$
365,861
|
$
63,172
|
Furniture
and fixtures
|
49,787
|
49,787
|
Computer
equipment
|
52,304
|
52,304
|
Leasehold
improvements
|
56,965
|
56,965
|
Total
property and equipment
|
524,917
|
222,228
|
Less
accumulated depreciation and amortization
|
(222,228
)
|
(220,338
)
|
Net
property and equipment
|
$
302,689
|
$
1,890
|
Fixed assets, net of accumulated depreciation, were $302,689 and
$1,890 as of December 31, 2017 and 2016, respectively. Accumulated
depreciation was $222,228 and $220,338 as of December 31, 2017 and
2016, respectively. Total depreciation expense was $1,890 and
$8,437 for the years ended December 31, 2017 and 2016,
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 will begin depreciation on
the purchased machine January 1, 2018 when significant operations
begin.
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, 2017, the Company had recorded
investment in purchased assets of $302,689.
NOTE 7 – CONVERTIBLE NOTES PAYABLE, NET
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 Note with Chicago Venture Partners, L.P.
|
2,980,199
|
120,492
|
(698,547
)
|
2,402,144
|
|
$
3,269,450
|
$
444,118
|
$
(698,547
)
|
$
3,015,021
|
Convertible
notes payable as of
December
31,
2016 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6%
Secured convertible note (2014)
|
$
330,295
|
$
3,692
|
$
-
|
$
333,987
|
7%
Convertible note ($850,000)
|
250,000
|
164,137
|
-
|
414,137
|
Replacement
debenture with TCA ($2,830,210)
|
1,468,009
|
18,350
|
-
|
1,486,359
|
10% OID Convertible
Promissory Note with Chicago Venture Partners, L.P.
|
683,042
|
2,670
|
(121,395
)
|
564,317
|
|
$
2,731,346
|
$
188,849
|
$
(121,395
)
|
$
2,798,800
|
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 stock and intends to resolve these outstanding issues
as soon as practicable.
As a result, the Company accrued
interest on these notes at the default rates. Furthermore, as a
result of being in default on these notes, the Holders could, at
their sole discretion, have called these notes. Although no such
action has been taken by the Holders, the Company classified these
notes as a current liability as of December 31, 2017 and
2016.
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. Logic Works funded
$350,000. The funding provided for interest at 6% with a default
interest of 24% per annum and required repayment by June 26, 2016.
The Note is convertible into common stock of the Company at the
lesser of $0.007 or (B) twenty percent (20%) of the average of the
nine (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. On February 28, 2017, Logic Works converted principal and
interest of $297,939 into 82,640,392 shares of our common stock at
a per share conversion price of $0.004. As of December 31, 2017,
the outstanding principal on this 6% convertible note was $39,251
and accrued interest was $1,974, which results in a total liability
of $41,225. On February 28, 2017, Logic Works converted principal
and interest of $291,044 into 82,640,392 shares of the
Company’s common stock at a per share conversion price of
$0.004.
During
the year ended D
ecember 31,
2016, the Company recorded interest expense of $20,837 and $83,924
of non-cash interest expense related to the amortization of the
debt discount associated with this 6% convertible note,
respectively. Logic Works converted interest of $47,386 into shares
of the Company’s common stock at a per share conversion price
of $0.0036.
As of
December 31,
2016, the Company
has borrowed $330,295 under the Secured Convertible Note and
Secured Credit Facility, accrued interest was $3,692 and the
unamortized debt discount was $0, which results in a net amount of
$333,987.
As of
December 31, 2016
, the
outstanding principal on these 7% convertible notes was $250,000,
accrued interest was $164,137, and unamortized debt discount was
$0, which results in a net amount of $414,137. Logic Works
converted principal of $250,000 and interest of $75,149 and
interest of into shares of the Company’s common stock at a
per share conversion price of $0.004 to $0.007.
7% Convertible Notes Payable
On
October 11, 2013, the Company issued 7% Convertible Notes in the
aggregate amount of $850,000 to investors, including $250,000 to
Forglen LLC. The Note was due September 30, 2015. All other Notes
were converted in 2014. 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 rate of interest was increased to 24% per annum. On
October 1, 2015, the rate of interest increased to 24% compounded.
The conversion price was $0.007 per share, subject to adjustment as
provided in the Note. As of
December
31, 2017
, the outstanding principal on this 7% convertible
note was $250,000 and accrued interest was $321,652, which results
in a total liability of $571,652. Since the note is in default and
the terms of settlement are no longer acceptable to the holder the
Company has recognized the loss of $571,652 and reclassified the
derivative liability related to the beneficial conversion to
equity.
As of
December 31, 2016
, the
outstanding principal on these 7% convertible notes was $250,000,
accrued interest was $164,137, and unamortized debt discount was
$0, which results in a net amount of $414,137.
Funding from TCA Global Credit Master Fund, LP
(“TCA”)
As of
December 31,
2016, the Company
was indebted to TCA under the First and Second Replacement
Debentures in the amount of $1,468,009, accrued interest was
$18,350 and the unamortized debt discount was $0, which results in
a net amount of $1,486,359.
During
the year ended December 31, 2016, Old Main LLC converted TCA
principal and accrued interest of $757,208 into 144,650,951 shares
of our common stock at a per share conversion price of
$0.0052.
During
the year ended December 31, 2016, the Company recorded the
unamortized debt discount reversal of $750,339 related to the TCA
financing as a reduction in additional paid in capital because TCA
did not convert its debt but assigned its debentures to
others.
The Company has recorded a loss on these transactions in the amount
of $2,889,540 during the year ended December 31, 2016.
The
loss on debt conversions related to the conversion of our notes
payable at prices below the market price.
On January 10, 2017, Chicago Venture, at the Company’s
instruction, remitted funds of $1,495,901 to TCA in order to
satisfy all debts to TCA. On or around January 11, 2017, the
Company was notified by TCA that $13,540 were due to TCA in order
for TCA to release its security interest in the Company’s
assets. On February 1, 2017, TCA notified the Company that all
funds were received and TCA would release its security interest in
Company’s assets. TCA has confirmed that it is paid in full
and the Company is not aware of any other obligations that the
Company has as to TCA. The funds received under the Chicago Venture
Agreements and previous Chicago Venture Agreements were used to
pay-off TCA.
Funding from Chicago Venture Partners, L.P. (“Chicago
Venture”)
The Company has the following funding transactions with Chicago
Venture:
Securities Purchase Agreement with Chicago Venture Partners,
L.P.
As of April 4, 2016, the Company entered into a
Securities Purchase Agreement and Convertible Promissory Note (the
“Chicago Venture Note”) with Chicago Venture, whereby
we agreed to sell, and Chicago Venture agreed to purchase an
unsecured convertible promissory note in the original principal
amount of $2,755,000. In connection with the transaction, the
Company received $350,000 in cash as well as a series of twelve
Secured Investor Notes for a total Purchase Price of $2,500,000.
The Note carries an Original Issue Discount (“OID”) of
$250,000 and we agreed to pay $5,000 to cover Purchaser’s
legal fees, accounting costs and other transaction
expenses.
Debt Purchase Agreement and First Amendment to Debt Purchase
Agreement and Note Assignment Agreement.
On August 24, 2016, the Company closed a Debt
Purchase Agreement and a First Amendment to Debt Purchase Agreement
and related agreements with Chicago Venture and
TCA.
On August 24, 2016, TCA closed an Assignment of Note Agreement and
related agreements with Chicago Venture. The referenced agreements
relate to the assignment of Company debt, in the form of
debentures, by TCA to Chicago Venture. The Company was a party to
the agreements between TCA and Chicago Venture because the Company
is the “borrower” under the TCA held
debentures.
Exchange Agreement, Convertible Promissory Note and related
Agreements with Chicago Venture.
On August 17, 2016, the Company closed an Exchange
Agreement and a Convertible Promissory Note and related agreements
with Chicago Venture whereby the Company agreed to the assignment
of debentures representing debt between the Company, on the one
hand, and with
TCA, on the other hand. Specifically, the
Company agreed that TCA could assign a portion of the
Company’s debt held by TCA to Chicago Venture.
On January 10, 2017, Chicago Venture, at the Company’s
instruction, remitted funds of $1,495,901 to TCA in order to
satisfy all debts to TCA. On or around January 11, 2017, the
Company was notified by TCA that $13,540 were due to TCA in order
for TCA to release its security interest in the Company’s
assets. On February 1, 2017, TCA notified the Company that all
funds were received and TCA would release its security interest in
Company’s assets. TCA has confirmed that it is paid in full
and the Company is not aware of any other obligations that the
Company has as to TCA. The funds received under the Chicago Venture
Agreements and previous Chicago Venture Agreements were used to
pay-off TCA.
Debt Purchase Agreement and First Amendment to Debt Purchase
Agreement and Note Assignment Agreement.
On August 24, 2016, the Company closed a Debt
Purchase Agreement and a First Amendment to Debt Purchase Agreement
and related agreements with Chicago Venture and
TCA.
On February 1, 2017, the Company closed the transactions described
below with Chicago Venture:
Securities Purchase Agreement, Secured Promissory Notes, Membership
Interest Pledge Agreement and Security Agreement
On January 9, 2017, the Company executed the following agreements
with Chicago Venture: (i) Securities Purchase Agreement; (ii)
Secured Promissory Notes; (iii) Membership Interest Pledge
Agreement; and (iv) Security Agreement (collectively the
“Chicago Venture Agreements”). The Company entered into
the Chicago Venture Agreements with the intent of paying its debt,
in full, to TCA Global Credit Master Fund, LP
(“TCA”).
The total amount of funding under the Chicago Venture Agreements is
$1,105,000. Each 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
500,000,000 of its shares of 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 January 9, 2018. The
Debt carries an interest rate of 10%. The Debt is convertible, at
Chicago Venture’s option, into the Company’s common
stock at $0.009 per share subject to adjustment as provided for in
the Secured Promissory Notes attached hereto and incorporated
herein by this reference.
Chicago Venture’s obligation to fund the Debt was secured by
Chicago Venture’s 60% interest in Typenex Medical, LLC, an
Illinois corporation, as provided for in the Membership Pledge
Agreement.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement
On August 11, 2017, the Company executed the following agreements
with Chicago Venture: (i) Securities Purchase Agreement; (ii)
Secured Promissory Notes; and (iii) Security Agreement
(collectively the “Chicago Venture Agreements”). The
Company entered into the Chicago Venture Agreements with the intent
to acquire working capital to grow the Company’s
business.
The total amount of funding under the Chicago Venture Agreements is
$1,105,000.00 (the “Debt”). Each 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.
We agreed to reserve 200,000,000 of its shares of 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 11,
2018. The Debt carries an interest rate of ten percent (10%). The
Debt is convertible, at Chicago Venture’s option, into our
common stock at $0.009 per share subject to adjustment as provided
for in the Secured Promissory Notes attached hereto and
incorporated herein by this reference.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement
On December 22, 2017, the Company executed the following agreements
with Chicago Venture: (i) Securities Purchase Agreement; (ii)
Secured Promissory Notes; and (iii) Security Agreement
(collectively the “Chicago Venture Agreements”). The
Company entered into the Chicago Venture Agreements with the intent
to acquire working capital to grow the Company’s
businesses.
The total amount of funding under the Chicago Venture Agreements is
$1,105,000. Each 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 50 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 December 21, 2018.
The Debt carries an interest rate of ten percent (10%). The Debt is
convertible, at Chicago Venture’s option, into the
Company’s 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 the Company’s
assets
As
of December 31, 2017
, the
outstanding principal balance due to Chicago Venture is $2,980,199,
accrued interest was $120,492, net of the OID of $698,547, which
results in a total amount of $2,402,144. The OID has been recorded
as a discount to debt and $419,666 was amortized to interest
expense during the nine months ended September 30,
2017.
During
the year ended December 31, 2017, Chicago Venture converted
principal and accrued interest of $2,688,000 into 554,044,030
shares of the Company’s common stock at a per share
conversion price of $0.0049. During the year ended December 31,
2016, Chicago Venture converted principal and accrued interest of
$1,403,599 into 264,672,323 shares of our common stock at a per
share conversion price of $0.0053.
The
Company recognized $2,384,678 and $0 of loss on debt conversions
during the years ended December 31, 2017 and 2016, respectively.
During the year ended December 31, 2016, Chicago Venture converted
principal and accrued interest of $1,403,599 into 264,672,323
shares of our common stock at a per share conversion price of
$0.0053.
NOTE 8 – 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.
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 convertible debt is recorded net of the discount
related to the BCF and 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 periodic revaluations.
Derivative
liability as of
December 31,
2017
is as follows:
|
|
|
|
|
|
Fair Value Measurements Using Inputs
|
|
Financial Instruments
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Instruments
|
$
-
|
$
2,660,167
|
$
-
|
$
2,660,167
|
|
|
|
|
|
Total
|
$
-
|
$
2,660,167
|
$
-
|
$
2,660,167
|
For the
year ended December 31, 2017, the Company recorded non-cash income
of $496,036 related to the “change in fair value of
derivative” expense related to its 6%, 7% and 10% convertible
notes.
Derivative
liability as of
December 31,
2016
is as follows:
|
|
|
|
|
|
Fair Value Measurements Using Inputs
|
|
Financial Instruments
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Instruments
|
$
-
|
$
2,701,559
|
$
-
|
$
2,701,559
|
|
|
|
|
|
Total
|
$
-
|
$
2,701,559
|
$
-
|
$
2,701,559
|
For the
year ended December 31, 2016, the Company recorded non-cash income
of $1,324,384 related to the “change in fair value of
derivative” expense related to its 6%, 7% and 18% convertible
notes.
7% Convertible Notes
As of
December 31, 2016, the Company had outstanding 7% convertible notes
with a remaining balance of $250,000 that the Company determined
had an embedded derivative liability due to the “reset”
clause associated with the note’s conversion price. The
Company valued the derivative liability of these notes at
$1,495,495.
6% Convertible Notes
As of
December 31, 2016, the Company had outstanding unsecured 6%
convertible notes for $330,295 that the Company determined had an
embedded derivative liability due to the “reset” clause
associated with the note’s conversion price. The Company
valued the derivative liability of these notes at
$1,206,064.
Funding from TCA Global Credit Master Fund, LP
(“TCA”).
The First TCA SPA
. On July 9, 2015, the Company closed a
Securities Purchase Agreement and related agreements with TCA
Global Credit Master Fund LP (“TCA”), 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
(the “First TCA SPA”) occurred on July 9, 2015.
Effective as of May 4, 2016, the Company and TCA entered into a
First Amendment to the First TCA SPA whereby the parties agreed to
amend the terms of the First TCA SPA in exchange for TCA’s
forbearance of existing defaults by the Company.
The Second TCA SPA
. On August 6, 2015, the Company closed a
second Securities Purchase Agreement and related agreements with
TCA 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 stock pursuant to a committed equity
facility. The closing of the transaction (the “Second TCA
SPA”) occurred on August 6, 2015. On April 11, 2016, the
Company agreed with TCA to mutually terminate the Second TCA
SPA.
Amendment to the First TCA SPA
. On October 27, 2015, the
Company entered into an Amended and Restated Securities Purchase
Agreement and related agreements with TCA whereby the Company
agreed to sell, and TCA agreed to purchase $350,000 of senior
secured convertible, redeemable debentures. This was an amendment
to the First TCA SPA (the “Amendment to the First TCA
SPA”.) As of October 27, 2015, the Company sold $1,050,000 in
Debentures to TCA and up to $1,950,000 in Debentures remain for
sale by the Company. The closing of the Amendment to the First TCA
SPA occurred on October 27, 2015. In addition, TCA advanced the
Company an additional $100,000 for a total of
$1,150.000.
Issuance of Preferred Stock to TCA
. Also, on October 21,
2015 the Company issued 150,000 Series B Preferred Stock at a
stated value equal to $10.00 per share to TCA. The Series B
Preferred Stock was 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. On October 21,
2015, the Company also issued 51 shares of Series C Preferred Stock
at $0.0001 par value per share to TCA. The Series C Preferred Stock
was not convertible into common stock. In the event of a default
under the Amended and Restated TCA Transaction Documents, TCA could
exercise voting control over our common stock with their Series C
Preferred Stock voting rights.
TCA’s Forbearance
. Due to the Company’s default
on its repayment obligations under the TCA SPA’s and related
documents, the parties agreed to restructure the SPA’s
whereby TCA agreed to forbear from enforcement of our defaults and
to restructure a payment schedule for repayment of debt under the
SPAs. The Company defaulted because operating results were not as
expected and the Company was unable to generate sufficient revenue
through its business operations to serve the TCA debt.
In
furtherance of TCA’s forbearance, effective as of May 4,
2016, the Company issued Second Replacement Debenture A in the
principal amount of $150,000 and Second Replacement Debenture B in
the principal amount of $2,681,210 (collectively, the “Second
Replacement Debentures”).
Per the
First Amendment to Amended and Restated Securities Purchase
Agreement, the Second Replacement Debentures were combined, and
apportioned into two separate replacement debentures. The Second
Replacement Debentures were intended to act in substitution for and
to supersede the debentures in their entirety. It was the intent of
the Company and TCA that while the Second Replacement Debentures
replace and supersede the debentures, in their entirety, they were
not in payment or satisfaction of the debentures, but rather were
the substitute of one evidence of debt for another without any
intent to extinguish the old debt. As of September 30, 2016, the
maximum number of shares subject to conversion under the Second
Replacement Debentures was 19,401,389. This is an approximation.
The estimation of the maximum number of shares issuable upon the
conversion of the Second Replacement Debentures was calculated
using an estimated average price of $.0036 per share.
The
Second Replacement Debentures contemplate TCA entering into debt
purchase agreement(s) with third parties whereby TCA may, at its
election, sever, split, divide or apportion the Second Replacement
Debentures to accomplish the repayment of the balance owed to TCA
by Company. The Second Replacement Debentures are convertible at
85% of the lowest daily volume weighted average price
(“VWAP”) of the Company’s common stock during the
five (5) business days immediately prior to a conversion
date.
In
connection with the above agreements, the parties acknowledged and
agreed that certain advisory fees previously paid to TCA as
provided in the SPAs in the amount of $1,500,000 were added and
included within the principal balance of the Second Replacement
Debentures. The advisory fees related to financial, merger and
acquisition and regulatory services provided to the Company. The
conversion price discount on the Second Replacement Debentures did
not apply to the advisory fees added to the Second Replacement
Debentures. TCA also agreed to surrender its Series B Preferred
Stock in exchange for the $1,500,000 being added to the Second
Replacement Debenture.
As more
particularly described below, the Company remained in debt to TCA
for the principal amount of $1,500,000. The remaining $1,400,000 of
principal debt was assigned to Old Main Capital, LLC The Company
intends to use the funds generated from the Chicago Venture
transaction to fuel its business operations and business plans
which, in turn, will presumably generate revenues sufficient to
avoid another default in the remaining TCA obligations. If the
Company is unable to raise sufficient funds through the Chicago
Venture transaction and/or generate sales sufficient to service the
remaining TCA debt then the Company will be unable to avoid another
default. Failure to operate in accordance with the various
agreements with TCA could result in the cancellation of these
agreements, result in foreclosure on the Company’s assets in
an event of default which would have a material adverse effect on
our business, results of operations or financial
condition.
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.
At the
inception of the Replacement Debentures, the embedded derivative
liability was remeasured at fair value and the Company recorded a
net gain of $420,822.
At
inception, the Company valued the conversion feature of the
Replacement Debentures as a derivative liability in the amount of
$979,716 The amount was recorded as a discount to debt and will be
amortized over the life of the debentures.
As of
December 31, 2016, the Company remaining debt was below $1,500,000
and does not include a derivative liability.
NOTE 9 –
RELATED PARTY
TRANSACTIONS AND CERTAIN RELATIONSHIPS
Since
January 1, 2016, 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 in Note 4, and
Chicago Venture Partners, L.P. discussed in Note 7, 8, 10 and
14.
Transactions with an Entity Controlled by Marco Hegyi
On
April 15, 2016, the Company issued 1,000,000 shares of its common
stock to an entity affiliated with Marco Hegyi, our Chief Executive
Officer, pursuant to a conversion of debt for $20,000. The shares
were valued at the fair market price of $0.02 per
share.
On
October 12, 2016, the Company issued 4,000,000 shares of its common
stock to an entity affiliated with Marco Hegyi, our Chief Executive
Officer, pursuant to a conversion of debt for $40,000. The shares
were valued at the fair market price of $0.01 per
share.
On
October 21, 2016, we entered into Agreement with Marco Hegyi
pursuant to which the Company engaged Mr. Hegyi as its Chief
Executive Officer through October 20, 2018. Mr. Hegyi’s
previous Employment Agreement was dated December 4, 2013 and which
is set to expire on December 4, 2016. Mr. Hegyi received a Warrant
to purchase up to 10,000,000 shares of our common stock at an
exercise price of $0.01 per share. In addition, Mr. Hegyi received
Warrants to purchase up to 10,000,000 shares of our common stock at
an exercise price of $0.01 per share which vest on October 21, 2017
and 2018. The Warrants are exercisable for 5 years.
Transactions with an Entity Controlled by Mark E.
Scott
An
entity controlled by Mr. Scott received an option to purchase
sixteen million shares of our common stock at an exercise price of
$0.07 per share was
reduced to $0.01
per share on December 18, 2015.
Two million shares vested on
August 17, 2015 with the Company’s resolution of the class
action lawsuits. An additional two million share stock option vest
on April 18, 2016 upon the Company securing a market maker with an
approved 15c2-11 resulting in the Company’s relisting on
OTCBB.
On
January 4, 2016, we issued 3,000,000 shares of its common stock to
an entity affiliated with Mark E. Scott, 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
October 21, 2016, Mr. Scott cancelled stock option grants totaling
12,000,000 shares of our common stock at $0.01 per share. Mr. Scott
has 4,000,000 share stock option grants which are fully
vested.
On
October 21, 2016, Mr. Scott converted $40,000 in deferred
compensation into 4,000,000 shares of our common stock at $0.01 per
share. The price per share was based on the thirty-day trailing
average.
On
October 21, 2016, Mr. Scott was granted 6,000,000 shares of our
common stock at $0.01 per share. The price per share was based on
the thirty-day trailing average.
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.
Transactions with Michael E. Fasci
On
January 27, 2016, we issued 1,500,000 shares of its common stock to
Michael Fasci, a member of the Board of Directors, for director
services. The shares were valued at the fair market price of $0.01
per share. On May 25, 2016, we issued 2,500,000 shares of its
common stock to Michael Fasci, a member of the Board of Directors,
for director services. The shares were valued at the fair market
price of $0.02 per share. On October 21, 2016, we entered into a
Consulting Agreement with an entity controlled by Michael E. Fasci,
a Director. Mr. Fasci is to provide services related to lender
management, financing and acquisitions. Mr. Fasci’s
compensation is 2,000,000 shares of our common stock valued at
$0.01 per share and to be issued on April 21, 2017 and October 21,
2017.
On
February 4, 2017, we issued 1,000,000 shares of our common stock to
Michael E. Fasci pursuant to a service award for $15,000. The
shares were valued at the fair market price of $0.015 per share. On
April 27, 2017, we issued 1,000,000 shares of our common stock to
Michael E. Fasci pursuant to a service award for $9,000. The shares
were valued at the fair market price of $0.009 per share. On April
27, 2017, we issued 2,000,000 shares of our common stock to Michael
E. Fasci pursuant to a consulting agreement for $18,000. The shares
were valued at the fair market price of $0.009 per share. On
November 2, 2017, we issued 2,000,000 shares of our common stock to
Michael E. Fasci pursuant to a consulting agreement for $10,000.
The shares were valued at the fair market price of $0.005 per
share.
Transactions with Katherine McLain
Ms.
Katherine McLain was appointed as a director on February 14, 2017.
On June 28, 2017, we issued 1,000,000 shares of our common stock to
Ms. McLain pursuant to a service award for $9,000. The shares were
valued at the fair market price of $0.009 per share. On October 23,
2017, we issued 1,000,000 shares of our common stock to Ms. McLain
pursuant to a service award for $5,000. The shares were valued at
the fair market price of $0.005 per share.
Transaction with Thom Kozik
Mr.
Kozik was appointed as a director on October 5, 2017. On October
23, 2017, we issued 2,000,000 shares of our common stock to Mr.
Kozik pursuant to a service award for $10,000. The shares were
valued at the fair market price of $0.005 per share.
Transaction with Joseph Barnes
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.
NOTE 10 – 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.
Certificate of Elimination for Series B and C Preferred
Stock
On October 24, 2017, the Company filed a Certificate of Elimination
with the Secretary of State of the State of Delaware to eliminate
the Series B Convertible Preferred Stock and Series C Preferred
Stock of the Company. None of the authorized shares of either the
Series B or Series C Preferred Stock were outstanding.
The Certificate of Elimination, effective upon filing, had the
effect of eliminating from the Company's Certificate of
Incorporation, as amended, all matters set forth in the Certificate
of Designations of the Series B Convertible Preferred Stock and
Series C Preferred Stock with respect to each respective series,
which were both previously filed by the Company with the Secretary
of State on October 22, 2015. Accordingly, the 150,000 shares
of Series B Preferred Stock and 51 shares of Series C Preferred
Stock previously reserved for issuance under their respective
Certificates of Designation resumed their status as authorized but
unissued shares of undesignated preferred stock of the Company upon
filing of the Certificate of Elimination.
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, 2017, the Company had had the
following sales of unregistered of equity securities to accredited
investors unless otherwise indicated:
On
February 28, 2017, Logic Works converted principal and interest of
$291,044 into 82,640,392 shares of the Company’s common stock
at a per share conversion price of $0.004.
During the year ended December 31, 2017,
five vendors
converted debt of $559,408 into 64,869,517 shares of the
Company’s common stock at the fair market price of $0.0086
per share.
During the year ended December 31, 2017,
four directors were
issued 10,000,000 shares of the Company’s 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
principal and accrued interest of $2,688,000 into 554,044,030
shares of the Company’s common stock at a per share
conversion price of $0.0049.
During the year ended December 31, 2016, the Company had had the
following sales of unregistered of equity securities to accredited
investors unless otherwise indicated:
On
January 4, 2016, the Company 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 accrued consulting
fees and expenses for $30,000. The shares were valued at the fair
market price of $0.01 per share. On October 21, 2016, an entity
affiliated with Mr. Scott converted $40,000 in accrued consulting
fees and expenses into 4,000,000 shares of the Company’s
common stock at $0.01 per share. The price per share was based on
the thirty-day trailing average. On October 21, 2016, an entity
affiliated with Mr. Scott was granted 6,000,000 shares of the
Company’s common stock at $0.01 per share. The price per
share was based on the thirty-day trailing average. On October 21,
2016, an entity affiliated with Mr. Scott cancelled stock option
grants totaling 12,000,000 shares of the Company’s common
stock at $0.01 per share.
On
January 27, 2016, the Company 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. On May 25, 2016, the Company issued 2,500,000
shares of its common stock to Michael E. Fasci pursuant to a
service award for $50,000. The shares were valued at the fair
market price of $0.02 per share.
In consideration for advisory services provided by TCA to the
Company, the Company issued 15,000,000 shares of Common Stock
during the year ending December 31, 2015.
As the common
stock was conditionally redeemable, the Company recorded the common
stock as mezzanine equity in the accompanying consolidated balance
sheet as of December 31, 2015.
As of
September 30, 2016, the shares are no longer conditionally
redeemable and were recorded as issued and outstanding common
stock.
The Company issued $2 million in common stock or 115,141,048 shares
of our common stock on April 6, 2016 pursuant to the settlement of
the Consolidated Class Action 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 loss on
class action lawsuits and contingent liabilities during the year
ending December 31, 2015.
On
April 15, 2016, the Company issued 1,000,000 shares of its common
stock to an entity affiliated with Marco Hegyi, our Chief Executive
Officer, pursuant to a conversion of debt for $20,000. The shares
were valued at the fair market price of $0.02 per share. On October
12, 2016, the Company issued 4,000,000 shares of its common stock
to an entity affiliated with Marco Hegyi, pursuant to a conversion
of debt for $40,000. The shares were valued at the fair market
price of $0.01 per share.
On July
13, 2016, the Company issued 6,000,000 shares of common stock
pursuant to
Settlement Agreement and
Release
with Mr. Robert Hunt, a former executive, which were
valued at the fair market price of $0.010 per share.
On
October 21, 2016, the Company issued 5,020,000 shares to two former
directors and a supplier (unaccredited) for services provided. The
Company valued the 5,020,000 shares at $0.01 per share or
$50,200.
During
the year ended December 31. 2016, the Company issued 6,400,000
shares of its common stock to two service providers (one
unaccredited) pursuant to conversions of debt totaling $64,000. The
shares were valued at the fair market price of $0.010 per
share.
During
the year ended December 31. 2016, Holders of the Company’s
Convertible Notes Payables, converted principal and accrued
interest of $1,080,247 into 186,119,285 shares of the
Company’s common stock at a per share conversion price of
$0.006.
During
the year ended December 31. 2016, Old Main converted principal and
accrued interest of $757,208 into 144,650,951 shares of our common
stock at a per share conversion price of $0.0052.
During
the year ended December 31. 2016, Chicago Venture converted
principal and accrued interest of $1,403,599 into 264,672,323
shares of our common stock at a per share conversion price of
$0.0053.
Warrants
The
Company did not issue any warrants during the year ended December
31, 2017.
The
Company issued the following warrants during the year ended
December 31, 2016.
On
October 21, 2016, Mr. Hegyi received a Warrant to purchase up to
10,000,000 shares of common stock of the Company at an exercise
price of $0.01 per share. In addition, Mr. Hegyi received Warrants
to purchase up to 10,000,000 shares of common stock of the Company
at an exercise price of $0.01 per share which vest on October 21,
2017 and 2018. The Warrants are exercisable for 5 years. The
warrants were valued at $390,000 and the Company recorded $23,958
of compensation expense for the warrants that had vested at
December 31, 2016.
A
summary of the warrants issued as of
December 31, 2017
is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
595,000,000
|
$
0.031
|
Issued
|
-
|
-
|
Exercised
|
-
|
-
|
Forfeited
|
-
|
-
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
595,000,000
|
$
0.031
|
Exerciseable
at end of period
|
595,000,000
|
|
A
summary of the status of the warrants outstanding as of
December 31, 2017
is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
540,000,000
|
1.28
|
$
0.033
|
540,000,000
|
$
0.033
|
55,000,000
|
2.55
|
0.010
|
45,000,000
|
0.010
|
|
|
|
|
|
|
|
|
|
|
|
1.32
|
$
0.031
|
585,000,000
|
$
0.031
|
Warrants
totaling 45,000,000 shares of common stock had an intrinsic value
of $1,030,500 as of
December 31,
2017
.
NOTE 11– STOCK OPTIONS
Description of Stock Option Plan
On
October 23, 2017, the Company’s Shareholders authorized a
Stock Incentive Plan whereby a maximum of 100,000,000 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. The Company has outstanding unexercised
stock option grants totaling 56,000,000 shares as of December 31,
2017. The Company filed a registration statement on Form S-8 to
register 100,000,000 shares of Company’s common stock related
to the 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, 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.
During the year ended December 31, 2016, the Company had the
following stock option activity:
An
entity controlled by Mr. Scott had a two million share stock option
that was previously issued vest on April 18, 2016 upon the Company
securing a market maker with an approved 15c2-11 resulting in the
Company’s relisting on OTCBB.
An
employee resigned January 13, 2016 and an option to purchase five
million shares of the Company’s common stock under the
Company’s 2011 Stock Incentive Plan expired on April 13,
2016.
An
employee forfeited a stock grant for 10,000 shares of the
Company’s common stock during the nine months ended September
30, 2016.
On
October 12, 2016, the Company amended the exercise price of the
stock option grants for Mr. Barnes to $0.010 per
share.
On
October 21, 2016, Mr. Scott cancelled stock option grants totaling
12,000,000 shares of the Company’s common stock at $0.01 per
share. Mr. Scott has an additional 2,000,000 share stock option
grant which continues to vest monthly over 36 months and a
2,000,000 share stock option grant which vests upon the achievement
of certain performance goals related to acquisitions.
As of December 31, 2017, there are 56,000,000 options to purchase
common stock at an average exercise price of $0.007 per share
outstanding under the 2017 Stock Incentive Plan. The Company
recorded $29,250 and $121,770 of compensation expense, net of
related tax effects, relative to stock options for the years ended
December 31, 2017 and 2016 in accordance with ASC 505. Net loss per
share (basic and diluted) associated with this expense was
approximately ($0.00). As of December 31, 2017, there is $64,151 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 4.06 years.
Stock option activity for the years ended December 31, 2017 and
2016 is as follows:
|
|
|
|
|
|
|
|
Outstanding as of
December 31, 2015
|
29,020,000
|
$
0.03
|
$
811,000
|
Granted
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
(17,010,000
)
|
(0.041
)
|
(690,500
)
|
Outstanding as of
December 31, 2016
|
12,010,000
|
0.01
|
120,500
|
Granted
|
44,000,000
|
0.006
|
280,000
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
(10,000
)
|
-
|
(500
)
|
Outstanding as of
December 31, 2017
|
56,000,000
|
$
0.007
|
$
400,000
|
The following table summarizes information about stock options
outstanding and exercisable at
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.006
|
32,000,000
|
4.75
|
$
0.006
|
12,500,000
|
$
0.006
|
0.007
|
10,000,000
|
4.75
|
0.007
|
1,391,666
|
0.007
|
0.009
|
2,000,000
|
2.50
|
0.009
|
333,333
|
0.009
|
0.010
|
12,000,000
|
1.88
|
0.010
|
12,000,000
|
0.010
|
|
56,000,000
|
4.06
|
$
0.007
|
26,225,000
|
$
0.008
|
Stock
option grants totaling 26,225,000 shares of common stock have an
intrinsic value of $655,061 as of December 31, 2017.
NOTE 12 –
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 the Company 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.
Sales, Payroll and Other Tax Liabilities
As of December 31, 2017, we owe approximately $119,000 in sales
tax.
Other Legal Proceedings
We may be sued for non-payment of lease payments at closed stores.
We are subject to legal actions with various vendors.
Operating Leases
On
October 21, 2013, the Company entered into a lease agreement for
retail space for its hydroponics store in Avon (Vail), Colorado.
The lease expires on September 30, 2018. Monthly rent for year one
of the lease is $2,792 and increased 3.5% per year thereafter
through the end of the lease. We terminated this lease agreement as
of August 31, 2917.
On
December 7, 2016, the Company entered into entered into a Consent
to Judgement and Settlement Agreement related to its retail
hydroponics store located in Portland, Maine. This Agreement
provides for a monthly lease payment of $5,373 through May 1, 2020.
We also agreed to a repayment schedule for past due rent and owes
$45,175 as of December 31, 2017. We are past due on the repayment
schedule by $45,175 as of December 31, 2017. We do not have an
option to extend the lease after May 1, 2020.
On May
31, 2017, the Company rented space at
5400 Carillon Point, Kirkland, Washington 98033
for $623 per month
for our corporate office and use of space
in the Regus network, including California. Our agreement expires
May 31, 2018 and is expected to be renewed.
On October 1, 2017, GrowLife Hydroponics, Inc. entered into a lease
in Calgary, Canada. The monthly lease is approximately $1,997. 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 the manufacturing and
distribution of its flooring products.
The monthly lease is approximately $15,000. The
lease expires December 15, 2018 and can be
renewed.
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,
|
|
2018
|
$
319,962
|
2019
|
174,615
|
2020
|
61,668
|
2021
|
-
|
2022
|
-
|
Beyond
|
-
|
Total
|
$
556,245
|
Employment and Consulting Agreements
Employment Agreement with Marco Hegyi
On
October 21, 2016, the Company entered into Agreement with Marco
Hegyi pursuant to which the Company engaged Mr. Hegyi as its Chief
Executive Officer through October 20, 2018. Mr. Hegyi’s
previous Employment Agreement was dated December 4, 2013 and was
set to expire on December 4, 2016.
Mr.
Hegyi’s annual compensation is $250,000. 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 following the end of each calendar
year.
Mr.
Hegyi received a Warrant to purchase up to 10,000,000 shares of
common stock of the Company at an exercise price of $0.01 per
share. In addition, Mr. Hegyi received Warrants to purchase up to
10,000,000 shares of common stock of the Company at an exercise
price of $0.01 per share which vest on October 21, 2017 and 2018.
The Warrants are exercisable for 5 years.
Mr.
Hegyi is entitled to participate in all group employment benefits
that are offered by the Company to its 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 agreed to 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.
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 we (or its successor
or the surviving entity) terminate 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.
Chief Financial Officer Agreement with an Entity Controlled by Mark
E. Scott
On July
31, 2014, 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.
Mr. Scott became a full time employee on November 1,
2017.
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 our Common Stock under our
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, we reduced the exercise
price to $0.01 per share.
The shares vested 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, 2016);
|
|
|
|
|
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.
|
On
October 21, 2016, Mr. Scott cancelled stock option grants totaling
12,000,000 shares of our common stock at $0.01 per share. Mr. Scott
has an additional 2,000,000 share stock option grant which
continues to vest monthly over 36 months and a 2,000,000 share
stock option grant which vests upon the achievement of certain
performance goals related to acquisitions (earned as of October 3,
2017).
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 option grant vests on a quarterly basis
quarterly over three years.
All
options have a five-year life and allow for a cashless exercise.
The stock option grant is subject to the terms and conditions of
our Stock Incentive Plan, including vesting requirements. In
the event that Mr. Scott’s continuous status as consultant to
the Company is terminated by us without Cause or Mr. Scott
terminates his employment with us 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 our Stock Incentive Plan except
for CANX USA, LLC, then 100% of the total number of shares shall
immediately become vested.
Mr.
Scott is entitled to participate in all group employment benefits
that are offered by us to our 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 has certain insurance and travel employment
benefits.
If,
prior to the expiration of the Term, the Company terminates Mr.
Scott’s employment for Cause, 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 our 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 our obligation under a termination by the
Company without Cause or Mr. Scott terminates his employment for
Good Reason are discussed above.
Promotion Letter with Joseph Barnes
On
October 10, 2014, the Company entered into a Promotion Letter 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. On
August 16, 2917, Mr. Joseph Barnes, Senior Vice-President of
Business Development GrowLife Hydroponics, Inc, was promoted to
President of GrowLife Hydroponics, Inc.
Per the
terms of the Barnes Agreement, Mr. Barnes’s compensation is
$90,000 on an annual basis. On January 1, 2016, Mr. Barnes salary
was increased to $120,000 per year. On August 16, 2017, Mr. Barnes
was increased to $150,000 per year. Mr. Barnes received a bonus of
$6,500 and is also entitled to receive a quarterly bonus based on
growth of our growth margin dollars. No quarterly bonuses were
earned under this Promotion Letter. Mr. Barnes was granted an
option to purchase eight million shares of our common stock under
our 2011 Stock Incentive Plan at $0.050 per share. The shares 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.
|
On
October 12, 2016, we amended the exercise price of the stock option
grants for Mr. Barnes to $0.010 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 option grant vests on a
quarterly basis over three years.
All
options have a five-year life and allow for a cashless exercise.
The stock option grant is subject to the terms and conditions of
our Stock Incentive Plan, including vesting requirements. In
the event that Mr. Barnes’s continuous status as employee to
us is terminated by us without Cause or Mr. Barnes terminates his
employment with us 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 our Stock Incentive, then 100% of
the total number of shares shall immediately become
vested.
Mr.
Barnes is to participate in all group employment benefits that are
offered by us to our 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.
Barnes is entitled to fifteen days of vacation annually and has
certain insurance and travel employment benefits.
Mr.
Barnes may receive severance benefits and our obligation under a
termination by the Company without Cause or Mr. Barnes terminates
his employment for Good Reason are discussed above.
Offer Letter with David Reichwein
On
October 1, 2017, the Company entered into an Offer Letter with
David Reichwein pursuant to which the Company engaged Mr. Reichwein
as its Vice-President of Research and Development on an at will
basis.
Per the
terms of the Reichwein Agreement, Mr. Reichwein’s
compensation is $150,000 on an annual basis. Starting on the first
quarter 2018, Mr. Reichwein is eligible to earn a quarterly
commission based on 10% of tile gross margin dollars.
Mr.
Reichwein was granted an option to purchase twenty million 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.
|
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 our Stock Incentive Plan, including vesting
requirements. In the event that Mr. Reichwein’s
continuous status as employee to the Company is terminated by us
without Cause or Mr. Reichwein terminates his employment with us
for Good Reason as defined in the Reichwein Agreement, in either
case upon or within twelve months after a Change in Control as
defined in our Stock Incentive, then 100% of the total number of
shares shall immediately become vested.
Mr.
Reichwein is to participate in all group employment benefits that
are offered by the Company to its 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. Reichwein is entitled to fifteen days of vacation
annually and has certain insurance and travel employment
benefits.
Mr.
Reichwein may receive severance benefits and our obligation under a
termination by the Company without Cause or Mr. Reichwein
terminates his employment for Good Reason are discussed
above.
Consulting Agreement with an Entity Controlled by Michael E.
Fasci
On
October 21, 2016, the Company entered into a Consulting Agreement
with an entity controlled by Michael E. Fasci. Mr. Fasci agreed to
provide services related to lender management, financing and
acquisitions. Mr. Fasci’s compensation is 2,000,000 shares of
our common stock valued at $0.01 per share and to be issued on
April 21, 2017 and October 21, 2017. The Agreement expired October
20, 2017.
NOTE 13 – 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 approximately
$5,300,000 and $7,700,000 and for the years ended December 31, 2017
and 2016, respectively.
The
Company has net operating loss carryforwards of approximately
$18,000,000, which expire in 2021-2031. 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 $7,100,000 was established as
of December 31, 2017. 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.
For the year ended December 31, 2017, the Company’s effective
tax rate differs from the federal statutory rate principally due to
net operating losses, warrants issued for services, change in fair
value of derivative and debt discount.
The principal components of the Company’s deferred tax assets
at December 31, 2017 and 2016 are as follows:
|
|
|
U.S. operations
loss carry forward and state at statutory rate of 40%
|
$
7,154,699
|
$
6,704,362
|
Less valuation
allowance
|
7,154,699
|
(6,704,362
)
|
Net deferred tax
assets
|
-
|
-
|
Change in valuation
allowance
|
$
7,154,699
|
$
(6,704,362
)
|
A reconciliation of the United States Federal Statutory rate to the
Company’s effective tax rate for the years ended December 31,
2017 and 2016 is as follows:
|
|
|
Federal statutory
rate
|
-34.0
%
|
-34.0
%
|
State income tax
rate
|
-6.0
%
|
-6.0
%
|
Change
in valuation allowance
|
40.0
%
|
40.0
%
|
Effective tax
rate
|
0.0
%
|
0.0
%
|
The
Company’s tax returns for 2012 to 2017 are open to review by
the Internal Revenue Service.
NOTE 14 – SUBSEQUENT EVENTS
The Company evaluates subsequent events, for the purpose of
adjustment or disclosure, up through the date the financial
statements are available.
Subsequent to
December 31, 2017
, the following material transactions
occurred:
Equity Issuances
On
February 7, 2018, the Company issued 7,660,274 shares to three
directors. The shares were valued at the fair market price of
$0.020 per share or $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 $321,945.00 owed
under that certain 7% Convertible Note as amended June 19, 2014
into 127,000,000 shares of our 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 three months ended March 31, 2018, Chicago Venture converted
principal and interest of $1,877,668 into 333,821,634 shares of our
common stock at a per share conversion price of $0.0055 with a fair
value of $5,040,707.
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
(“St. George”): (i) Securities Purchase Agreement; and
(ii) Warrant to Purchase 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 Company; 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 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.
Pursuant
to the St. George Agreements, the Company sold and agreed to issue
to St. George 6,410, 256 shares of newly issued restricted Common
Stock of the Company at a purchase price of $0.0156 per share. The
Purchase Price was paid at Closing and the Shares shall be issued
upon the satisfaction of the Share Delivery Conditions as set forth
in the Agreement. The Shares purchased represents less than 0.3% of
the Company’s current issued and outstanding common
stock.
First Addendum to Agreements with David Reichwein
On
February 16, 2018, the Company entered into an Addendum to amend
the terms between the Company and David Reichwein.
Pursuant to the First Addendum, the Company
purchased the remaining 49% of the Purchased Assets in exchange for
a one-time payment of $250,000 and the cancellation of
Reichwein’s right to receive a 10% commission on certain
sales of Free Fit products as was set forth in Reichwein’s
employment agreement. In exchange for the cancellation of the
commission in the employment agreement, Reichwein was granted the
opportunity to earn up to two $100,000 cash bonuses and an
aggregate common stock bonus of up to 7,500,000 shares if certain
revenue and gross margin goals are met in 2018.
Amendment 2 to Note with Forglen LLC
On
February 23, 2018, the Company, submitted a Notice of Prepayment to
Forglen LLC to prepay the balance owed under that certain 7%
Convertible Note as amended June 19, 2014 (the “Convertible
Note”). In response to the Prepay Notice, Forglen submitted a
Notice of Conversion on March 8, 2018 to convert the entire balance
of the Note and all accrued interest. Upon negotiations between
Forglen and the Company, the parties entered into a Second
Amendment to the Note, dated March 12, 2018.
Pursuant
to the Amendment, the Note’s maturity date has been extended
to December 31, 2019, and interest on the Note shall accrue at 7%
per annum, compounding on the maturity date. As consideration for
the Amendment, the Company rescinded its Prepay Notice and Forglen
rescinded its Conversion Notice. 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.
Installment Agreement with the City of Boulder,
Colorado
On March 12, 2017, the Company entered into an Installment
Agreement with the City of Boulder, Colorado. This Agreement
requires the Company to pay $5,000 per month over the next twenty
four months or $119,217 for unpaid sales taxes.