NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND
ORGANIZATION
The
accompanying unaudited consolidated condensed financial statements
have been prepared by GrowLife, Inc. (“us,”
“we,” or “our”) in accordance with U.S.
generally accepted accounting principles (“GAAP”) for
interim financial reporting and rules and regulations of the
Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or
omitted. In the opinion of our management, all adjustments,
consisting of only normal recurring accruals, necessary for a fair
presentation of the financial position, results of operations, and
cash flows for the fiscal periods presented have been
included.
These
financial statements should be read in conjunction with the audited
financial statements and related notes included in our Annual
Report filed on Form 10-K for the year ended December 31, 2018. The
results of operations for the six months ended June 30, 2019 are
not necessarily indicative of the results expected for the full
fiscal year, or for any other fiscal period.
GrowLife,
Inc. (“GrowLife” or the “Company”) is
incorporated under the laws of the State of Delaware and is
headquartered in Kirkland, Washington. The Company was founded in
2012 with the Closing of the Agreement and Plan of Merger with SGT
Merger Corporation
.
The
Company’s goal of becoming the nation’s largest
cultivation facility service provider for the production of
organics, herbs and greens and plant-based medicines has not
changed. The Company’s mission is to best serve more
cultivators in the design, build-out, expansion and maintenance of
their facilities with products of high quality, exceptional value
and competitive price. Through a nationwide network of
knowledgeable representatives, regional centers and its e-commerce
website, GrowLife provides essential and hard-to-find goods
including media (i.e., farming soil), industry-leading hydroponics
equipment, organic plant nutrients, and thousands more products to
specialty grow operations across the United States.
The
Company primarily sells through its wholly owned subsidiary,
GrowLife Hydroponics, Inc. GrowLife companies distribute and sell
over 15,000 products through its e-commerce distribution channel,
GrowLifeEco.com, and through our regional retail storefronts.
GrowLife and its business units are organized and directed to
operate strictly in accordance with all applicable state and
federal laws.
On June
7, 2013, GrowLife Hydroponics completed the purchase of Rocky
Mountain Hydroponics, LLC, a Colorado limited liability company
(“RMC”), and Evergreen Garden Center, LLC, a Maine
limited liability company (“EGC”). The effective date
of the purchase was June 7, 2013.
On October 3, 2017, the Company closed the acquisition of 51% of
the Purchased Assets from David Reichwein, a Pennsylvania resident,
GIP International Ltd, a Hong Kong corporation and DPR
International LLC, a Pennsylvania limited liability corporation.
The Purchased Assets include intellectual property, copy rights and
trademarks related to reflective tiles and flooring.
The Company did not acquire business, customer lists or
employees.
The Company acquired its 51% interest in
the Purchased
Assets for $400,000. The Company
funded equipment
and rent of an office
lease.
On February 16,
2018, the Company purchased the remaining 49% of the Purchased
Assets in exchange for a one-time payment of $250,000.
As of December 31, 2018, the Company had recorded
investment in purchased assets of $552,689.
On
August 17, 2018, the Company entered into an Asset Purchase
Agreement with Go Green Hydroponics, Inc., a California corporation
and TCA – Go Green SPV, LLC, a Florida limited liability
pursuant to which the Company acquired the intellectual property
and assumed the lease for the property located at 15721 Ventura
Blvd., Encino, CA 91436. The Company intends to operate a retail
store, sale over the internet and sell on a direct basis at this
location.
Concurrently,
the Company and Seller entered into a Security Agreement for
securing the assets of Company as collateral for the obligations of
Company as set forth in the Security Agreement. In consideration
for the sale and assignment of the Purchased Assets, the Company
agreed to pay the Seller: (i) the proceeds generated from the sale
of the closing inventory until all closing inventory has been sold,
and (ii) to pay the Seller 5% of all gross revenue of Company
earned or in any way related to the Purchased Assets generated
between October 1, 2018 and December 31, 2019, up to a maximum of
$200,000.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-CLONE Enterprises, Inc., a California
corporation. EZ-CLONE is
the manufacturer of multiple
award-winning products specifically designed for the commercial
cloning and propagation stage of indoor plant cultivation including
cannabis, food, and other hydroponic farming. The Company
acquired 51% of EZ-CLONE for $2,040,000, payable as follows: (i) a
cash payment of $645,000; and (ii) the issuance of 107,307,692
restricted shares of the Company’s common stock at a price of
$0.013 per share or $1,395,000.
The
Company has the obligation to acquire the remaining 49% of EZ-CLONE
within one year for
$1,960,000,
payable as follows: (i) a cash payment of $855,000; and (ii) the
issuance of 85,000,000 shares of the Company’s common stock
at a price of $0.013 per share or $1,105,000.
On October 17, 2017, the Company
was informed by Alpine Securities Corporation
(“Alpine”) that Alpine has demonstrated compliance with
the Financial Industry Regulatory Authority (“FINRA”)
Rule 6432 and Rule 15c2-11 under the Securities Exchange Act of
1934. We filed an amended application with the OTC Markets to list
the Company’s common stock on the OTCQB and begin to trade on
this market as of March 20, 2018.
As
of March 4, 2019, the Company began to trade on
the
Pink
Sheet stocks system.
The
Company’s bid price had closed below $0.01 for more than 30
consecutive calendar days.
NOTE 2
– GOING
CONCERN
The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company incurred net losses of
$4,029,266, $11,444,782, and $5,320,974 for the six months ended
June 30, 2019 and the years ended December 31, 2018 and 2017
respectively. Our net cash used in operating activities was
$2,097,363, $3,854,506, and $2,082,493 for the six months ended
June 30, 2019 and the years ended December 31, 2018 and 2017
respectively.
The Company anticipates that it will record losses from operations
for the foreseeable future. As of June 30, 2019, the accumulated
deficit was $145,198,634.
The Company has
experienced recurring operating losses and negative operating cash
flows since inception and has financed its working capital
requirements during this period primarily through the recurring
issuance of convertible notes payable and advances from a related
party.
The audit opinion prepared by
our independent registered public accounting firm relating to our
financial statements for the year ended December 31, 2018 and 2017
filed with the SEC on March 8, 2019 includes an explanatory
paragraph expressing the substantial doubt about our ability to
continue as a going concern.
Continuation of the Company as a going concern is dependent upon
obtaining additional working capital. The financial
statements do not include any adjustments that might be necessary
if we are unable to continue as a going concern.
NOTE 3 –
SIGNIFICANT ACCOUNTING
POLICIES: ADOPTION OF ACCOUNTING STANDARDS
Basis of Presentation -
The accompanying consolidated
financial statements include the accounts of the Company.
Intercompany accounts and transactions have been eliminated. The
preparation of these consolidated financial statements in
conformity with U.S. generally accepted accounting principles
(“GAAP”).
Principles of Consolidation
-
The consolidated financial statements include the accounts of the
Company and its wholly owned and majority-owned subsidiaries.
Inter-Company items and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
- The
Company classifies highly liquid temporary investments with an
original maturity of nine months or less when purchased as cash
equivalents. The Company maintains cash balances at various
financial institutions. Balances at US banks are insured by the
Federal Deposit Insurance Corporation up to $250,000. The Company
has not experienced any losses in such accounts and believes it is
not exposed to any significant risk for cash on
deposit. At June 30, 2019, the Company had uninsured
deposits in the amount of $0.
Accounts Receivable and Revenue -
Revenue is recognized at
the time the Company sells merchandise to the customer in store.
eCommerce sales include shipping revenue and are recorded upon
shipment to the customer. This is when the risk of loss transfers
to our customers, the fee is fixed and determinable, and collection
of the sale is reasonably assured. A product is not shipped without
an order from the customer and the completion of credit acceptance
procedures. The majority of our sales are cash or credit card;
however, we occasionally extend terms to our customers. Accounts
receivable are reviewed periodically for
collectability.
Inventories -
Inventories are recorded on a first in first
out basis. Inventory consists of raw materials, purchased finished
goods and components held for resale. Inventory is valued at the
lower of cost or market. The reserve for inventory was $30,000 and
$120,000 as of June
30, 2019 and
December 31,
2018, respectively.
Equipment
– Equipment
consists of machinery, equipment, tooling, computer equipment and
leasehold improvements, which are stated at cost less accumulated
depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives or lease
period of the relevant asset, generally 3-10 years, except for
leasehold improvements which are depreciated over the lesser of the
life of the lease or 10 years.
Long Lived Assets
– The
Company reviews its long-lived assets for impairment annually or
when changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Long-lived assets under certain
circumstances are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide
any future service potential to the Company are recorded at the
lower of carrying amount or fair value (less the projected cost
associated with selling the asset). To the extent carrying values
exceed fair values, an impairment loss is recognized in operating
results.
Intangible Assets
– Intangible assets are capitalized
and amortized on a straight-line basis over their estimated useful
life, if the life is determinable. If the life is not determinable,
amortization is not recorded. We regularly perform reviews to
determine if facts and circumstances exist which indicate that the
useful lives of our intangible assets are shorter than originally
estimated or the carrying amount of these assets may not be
recoverable. When an indication exists that the carrying amount of
intangible assets may not be recoverable, we assess the
recoverability of our assets by comparing the projected
undiscounted net cash flows associated with the related asset or
group of assets over their remaining lives against their respective
carrying amounts. Such impairment test is based on the lowest level
for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. Impairment,
if any, is based on the excess of the carrying amount over the
estimated fair value of those assets.
Fair Value Measurements and Financial Instruments -
ASC
Topic 820 defines fair value, establishes a framework for measuring
fair value, establishes a three-level valuation hierarchy for
disclosure of fair value measurement and enhances disclosure
requirements for fair value measurements. The valuation hierarchy
is based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The three levels are
defined as follows:
Level 1
- Inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
Level 2
- Inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial
instrument.
Level 3
- Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
The
carrying value of cash, accounts receivable, investment in a
related party, accounts payables, accrued expenses, due to related
party, notes payable, and convertible notes approximates their fair
values due to their short-term maturities.
Derivative financial instruments -
The Company evaluates all
of its financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative
financial instruments, the Company uses a weighted average
Black-Scholes-Merton option pricing model to value the derivative
instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement
of the 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
primarilyon actual historical return rates. We record estimated
sales returns as reductions to sales, cost of goods sold, and
accounts receivable and an increase to inventory. Returned products
which are recorded as inventory are valued based upon the amount we
expect to realize upon its subsequent disposition. As of June 30,
2019, and December 31, 2018, there was a reserve for sales returns
of $0, respectively, which is minimal based upon our historical
experience.
Stock Based Compensation
- The
Company has share-based compensation plans under which employees,
consultants, suppliers and directors may be granted restricted
stock, as well as options and warrants to purchase shares of
Company common stock at the fair market value at the time of grant.
Stock-based compensation cost to employees is measured by the
Company at the grant date, based on the fair value of the award,
over the requisite service period under ASC 718. For options issued
to employees, the Company recognizes stock compensation costs
utilizing the fair value methodology over the related period of
benefit. Grants of stock to non-employees and other
parties are accounted for in 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
June 30, 2019, there are also (i) stock option grants outstanding
for the purchase of
82.5
million common shares at a $0.010 average exercise price; (ii)
warrants for the purchase of
362.8
million common shares at a $0.023
average exercise price; and (iii)
116.5
million
shares related to convertible debt that can be
converted at $0.0025 per share. In addition, we have an unknown
number of common shares to be issued under the Chicago Venture,
Iliad and St. George financing agreements because the number of
shares ultimately issued to Chicago Venture depends on the price at
which Chicago Venture converts its debt to shares and exercises its
warrants. The lower the conversion or exercise prices, the more
shares that will be issued to Chicago Venture upon the conversion
of debt to shares. We won’t know the exact number of shares
of stock issued to Chicago Venture until the debt is actually
converted to equity.
As of
June 30, 2018
, there are also
(i) stock option grants outstanding for the purchase of 63 million
common shares at a $0.009 average exercise price; (ii) warrants for
the purchase of 595 million common shares at a $0.031 average
exercise price; and (iii) 109 million
shares related to convertible debt that can be
converted at $0.0025 per share. In addition, we have an unknown
number of common shares to be issued under the
Chicago
Venture Partners, L.P.
financing
agreements.
Dividend Policy
- The Company
has never paid any cash dividends and intends, for the foreseeable
future, to retain any future earnings for the development of our
business. Our future dividend policy will be determined by the
board of directors on the basis of various factors, including our
results of operations, financial condition, capital requirements
and investment opportunities.
Use of Estimates -
In preparing these unaudited interim
consolidated financial statements in conformity with GAAP,
management is required to make estimates and assumptions that may
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of
the consolidated financial statements and the reported amount of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Significant estimates and
assumptions included in our consolidated financial statements
relate to the valuation of long-lived assets, estimates of sales
returns, inventory reserves and accruals for potential liabilities,
and valuation assumptions related to derivative liability, equity
instruments and share based compensation.
Recent Accounting Pronouncements
A variety of proposed or otherwise potential accounting standards
are currently under study by standard setting organizations and
various regulatory agencies. Due to the tentative and preliminary
nature of those proposed standards, management has not determined
whether implementation of such proposed standards would be material
to the Company’s consolidated financial
statements.
In
February 2016, the FASB issued Accounting Standards Update No.
2016-02, Leases (Topic 842) (ASU 2016-02), as amended,
which generally requires lessees to recognize operating and
financing lease liabilities and corresponding right-of-use assets
on the balance sheet and to provide enhanced disclosures
surrounding the amount, timing and uncertainty of cash flows
arising from leasing arrangements. The Company adopted the new
standard effective January 1, 2019 on a modified retrospective
basis and did not restate comparative periods. The Company elected
the package of practical expedients permitted under the transition
guidance, which allows the Company to carryforward our historical
lease classification, our assessment on whether a contract is or
contains a lease, and the Company’s initial direct costs for
any leases that exist prior to adoption of the new standard. The
Company also elected to combine lease and non-lease components and
to keep leases with an initial term of twelve months or less off
the balance sheet and recognize the associated lease payments in
the consolidated statements of operations on a straight-line basis
over the lease term.
The
Company determines if an arrangement is a lease at inception.
Operating and finance leases are included in Right of Use ("ROU")
assets, and lease liability obligations in the Company’s
consolidated balance sheets. ROU assets represent our right to use
an underlying asset for the lease term and lease liability
obligations represent the Company’s obligation to make lease
payments arising from the lease. ROU assets and liabilities are
recognized at commencement date based on the present value of lease
payments over the lease term. The Company accounts for lease
agreements with lease and non-lease components and account for such
components as a single lease component. As most of the
Company’s leases do not provide an implicit rate, we
estimated our incremental borrowing rate based on the information
available at commencement date in determining the present value of
lease payments. The Company uses the implicit rate when readily
determinable. The ROU asset also includes any lease payments made
and excludes lease incentives and lease direct costs. The
Company’s lease terms may include options to extend or
terminate the lease when it is reasonably certain that we will
exercise that option. Lease expense is recognized on a
straight-line basis over the lease term. Please refer to Note 8 for
additional information.
NOTE 4 – TRANSACTIONS
Acquisition of 51% of EZ-CLONE Enterprises, Inc.
On October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-CLONE Enterprises, Inc., a California corporation
that was founded in January 2000. EZ-CLONE is
the manufacturer of multiple
award-winning products specifically designed for the commercial
cloning and propagation stage of indoor plant cultivation including
cannabis, food, and other hydroponic farming.
The Company
has proprietary products and services such as the Commercial Pro
System, Hobbyist Cloning Systems, Cloning Tents, Coco Collars, Coco
Seed Starters, Rooting Gel, and Clear Rez. Technical Support,
know-how and overall knowledge is also considered proprietary. The
Company trademarks are EZ-CLONE and EZ-CLONE
CRIB.
This acquisition is expected to accelerate the Company’s
revenue growth, increase the Company gross margins and add
additional manufacturing and research and development
personnel.
The Company
acquired 51% of EZ-CLONE for $2,040,000, payable
as follows: (i) a cash payment of $645,000; and (ii) the issuance
of 107,307,692 restricted shares of the Company’s common
stock at a price of $0.013 per share or $1,395,000. The Company has
the obligation to acquire the remaining 49% of EZ-CLONE within one
year for
$1,960,000, payable as
follows: (i) a cash payment of $855,000; and (ii) the issuance of
85,000,000 shares of the Company’s common stock at a price of
$0.013 per share or $1,105,000.
The cost to acquire these assets has been preliminarily allocated
to the assets acquired according to estimated fair values and is
subject to adjustment when additional information concerning asset
valuations is finalized, but no later than October 15, 2019. The
preliminary allocation is as follows:
|
Purchase
Price Allocation
|
$
|
|
Common
Stock
|
$
1,395,000
|
|
Cash
|
645,000
|
|
Assets
acquired
|
(911,294
)
|
|
Liabilities
acquired
|
939,375
|
|
Non-controlling
interest
|
1,960,000
|
|
EZ-CLONE
equity
|
(605,000
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
purchase price
|
$
3,423,081
|
The results of operations of EZ-CLONE were included in the
Consolidated Statements of Operations for the period October 15,
2018 to December 31, 2018.
The unaudited pro-forma financial data for the acquisition for the
year ended December 31, 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
$
4,573,461
|
$
1,551,503
|
$
6,124,964
|
|
Net
loss
|
(11,473,137
)
|
(111,671
)
|
(11,584,808
)
|
|
Net
loss per share
|
$
(0.00
)
|
|
$
(0.00
)
|
The unaudited pro-forma financial data for the acquisition for the
year ended December 31, 2017, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
$
2,452,104
|
$
2,648,873
|
$
5,100,977
|
|
Net
loss
|
(5,320,974
)
|
(126,962
)
|
(5,447,936
)
|
|
Net
loss per share
|
$
(0.00
)
|
|
$
(0.00
)
|
There was no material, nonrecurring items included in the reported
the pro-forma results.
Termination of Agreements with CANX, LLC
On
February 15, 2019, the Company entered into a Termination of
Existing Agreements and Release with CANX USA, LLC, a Nevada
limited liability company. Pursuant to the Agreement, the Parties
agreed to
terminate, release and
discharge all existing and further rights and obligations between
the Parties under, arising out of, or in any way related to
that certain
Waiver and Modification
Agreement and Amended and Restated Joint Venture Agreement made as
of July 10, 2014, and any ancillary agreements or instruments
thereto, including, but not limited to, the Warrants issued to CANX
entitling CANX to purchase 540,000,000 shares of the
Company’s common stock at an exercise price of
$0.033.
In exchange for the Agreement and cancellation of the CANX
Agreements and Warrants, the Company agreed to issue $1,000,000 of
restricted common stock priced at the February 7, 2019 closing
price of $0.008, or 125,000,000 restricted common stock
shares.
NOTE 5 – INVENTORY
Inventory
as of June 30, 2019 and December 31, 2018 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
$
479,305
|
$
417,570
|
|
Work
in process
|
88,475
|
35,280
|
|
Finished
goods
|
404,914
|
459,814
|
|
Inventory
reserve
|
(30,000
)
|
(120,000
)
|
|
Total
|
$
942,694
|
$
792,664
|
Raw
materials consist of supplies for the flooring product line and
EZ-CLONE.
Finished
goods inventory relates to product at the Company’s retail
stores, which is product purchased from distributors, and in some
cases directly from the manufacturer, and resold at our stores and
EZ-CLONE.
The
Company reviews its inventory on a periodic basis to identify
products that are slow moving and/or obsolete, and if such products
are identified, the Company records the appropriate inventory
impairment charge at such time.
NOTE 6 – PROPERTY AND EQUIPMENT
Property
and equipment as of June 30, 2019 and December 31, 2018 consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery,
equipment and tooling
|
$
909,556
|
$
943,326
|
|
Computer
equipment
|
16,675
|
16,675
|
|
Leasehold
improvements
|
19,971
|
14,703
|
|
Total
property and equipment
|
946,203
|
974,704
|
|
Less
accumulated depreciation and amortization
|
(312,696
)
|
(261,839
)
|
|
Net
property and equipment
|
$
633,507
|
$
712,866
|
Fixed assets, net of accumulated depreciation, were $633,507 and
$712,866 as of June 30, 2019 and December 31, 2018, respectively.
Accumulated depreciation was $312,696 and $261,839 as of June 30,
2019 and December 31, 2018, respectively. Total depreciation
expense was $50,857 and $30,553 for the six months ended June 30,
2019 and December 31, 2018, respectively. All equipment is used for
manufacturing, selling, general and administrative purposes and
accordingly all depreciation is classified in cost of goods sold,
selling, general and administrative expenses.
On October 3, 2017, the Company closed the acquisition of 51% of
the Purchased Assets from David Reichwein, a Pennsylvania resident,
GIP International Ltd, a Hong Kong corporation and DPR
International LLC, a Pennsylvania limited liability corporation.
The Purchased Assets include intellectual property, copy rights and
trademarks related to reflective tiles and flooring.
The Company did not acquire business, customer list or
employees.
The Company acquired its 51% interest in
the Purchased
Assets for $400,000. The Company
funded equipment
and rent of an office
lease.
On February 16,
2018, the Company purchased the remaining 49% of the Purchased
Assets in exchange for a one-time payment of $250,000.
As of December 31, 2018, the Company had recorded
investment in purchased assets of $552,689.
On October 15, 2018, the Company acquired 51% of
EZ-CLONE
Enterprises, Inc. and acquired $244,203 of net property and
equipment.
During
the year ended December 31, 2018, the Company retired fully
depreciated assets of $358,156.
NOTE 7 –
INTANGIBLE
ASSETS
Intangible assets as of June 30, 2019 and December 31, 2018
consisted of the following:
|
|
Estimated
|
|
|
|
|
Useful Lives
|
|
|
|
|
|
|
|
|
Customer
lists
|
3
years
|
$
1,604,341
|
$
1,604,341
|
|
Patents
|
3
years
|
1,818,740
|
1,818,740
|
|
Less:
accumulated amortization
|
|
(713,142
)
|
(142,628
)
|
|
Intangible
assets, net
|
|
$
2,709,939
|
$
3,280,453
|
Total amortization expense was $570,513 and $0 for the six months
ended June 30, 2019 and 2018, respectively.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-CLONE Enterprises, Inc., a California corporation
that was founded in January 2000.
The Company
acquired 51% of
EZ-CLONE for $2,040,000, payable as follows: (i) a cash payment of
$645,000; and (ii) the issuance of 107,307,692 restricted shares of
the Company’s common stock at a price of $0.013 per share or
$1,395,000. The Company has the obligation to acquire the remaining
49% of EZ-CLONE within one year for
$1,960,000, payable as follows: (i) a cash payment
of $855,000; and (ii) the issuance of 85,000,000 shares of the
Company’s common stock at a price of $0.013 per share or
$1,105,000.
The fair value of the intellectual property associated with the
assets acquired was $3,423,081 estimated by using a discounted cash
flow approach based on future economic benefits. In summary, the
estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results.
NOTE 8- LEASES
The
Company has entered into operating leases for retail and corporate
facilities. These leases have terms which range from two to five
years, and often include options to renew. These operating leases
are listed as separate line items on the Company's June 30, 2019
Consolidated Balance Sheet, and represent the Company’s right
to use the underlying asset for the lease term. The Company’s
obligation to make lease payments are also listed as separate line
items on the Company's June 30, 2019 Consolidated Balance Sheet.
Based on the present value of the lease payments for the remaining
lease term of the Company's existing leases, the Company recognized
right-of-use assets and lease liabilities for operating leases of
approximately $1,253,000 on January 1, 2019. Operating lease
right-of-use assets and liabilities commencing after January 1,
2019 are recognized at commencement date based on the present value
of lease payments over the lease term. As of June 30, 2019, total
right-of-use assets and operating lease liabilities were
approximately $1,085,000 and $1,089,000, respectively. In the six
months ended June 30, 2019, the Company recognized approximately
$399,000 in total lease costs.
Because
the rate implicit in each lease is not readily determinable, the
Company uses its incremental borrowing rate to determine the
present value of the lease payments.
Information
related to the Company's operating right-of-use assets and related
lease liabilities as of and for the six months ended June 30, 2019
were as follows:
|
Cash
paid for operating lease liabilities
|
$
227,000
|
|
Weighted-average
remaining lease term
|
3.2
years
|
|
Weighted-average
discount rate
|
10
%
|
|
Minimum
future lease payments
|
-
|
Minimum
future lease payments as of June 30, 2019 are as
follows:
|
Year
|
$
|
|
2019
|
$
227,149
|
|
2020
|
461,360
|
|
2021
|
464,150
|
|
2022
|
303,687
|
|
2023
|
236,352
|
|
Total
lease liability
|
1,692,699
|
|
Less
imputed interest
|
(603,410
)
|
|
Net
lease liability
|
$
1,089,289
|
NOTE 9- ACCOUNTS PAYABLE
Accounts payable were $1,430,201 and $1,054,371 as of June 30,
2019 and December 31, 2018, respectively. Such liabilities
consisted of amounts due to vendors for inventory purchases, audit,
legal and other expenses incurred by the Company. The increase
relates to inventory purchased at EZ-CLONE for production for sales
during the three months ended September 30, 2019.
NOTE 10- ACCRUED EXPENSES
Accrued expenses were $285,884 and $261,954 as of June 30,
2019 and December 31, 2018, respectively. Such liabilities
consisted of amounts due to
Go Green Hydroponics, Inc. and
TCA – Go Green SPV, LLC and
sales tax and payroll
liabilities.
On
August 17, 2018, the Company entered into an Asset Purchase
Agreement with Go Green Hydroponics, Inc. and TCA – Go Green
SPV, LLC. The Company acquired the inventory of Go Green but agreed
to pay the Seller 100% of the proceeds generated from the sale of
the closing inventory until all closing inventory has been sold.
The Company recorded accrued expenses $134,497 as of September 30,
2018 related to the sale of inventory. Also, the Company agreed to
pay 5% of all gross revenue of Company earned or in any way related
to the Purchased Assets generated between October 1, 2018 and
December 31, 2019, up to a maximum of $200,000. The Company
estimated gross revenue for that period to be approximately
$1,200,000 and recorded a $60,000 liability. The Company recorded
an impairment of acquired assets in the amount of $60,000 as of
December 31, 2018.
NOTE 11– CONVERTIBLE NOTES PAYABLE, NET
Convertible
notes payable as of
June 30,
2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$
2,156,669
|
$
232,997
|
$
-
|
$
2,389,666
|
|
7%
Convertible note ($850,000)
|
270,787
|
24,669
|
-
|
295,456
|
|
|
$
2,427,456
|
$
257,666
|
$
-
|
$
2,685,122
|
Convertible
notes payable as of
December
31,
2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$
2,982,299
|
$
135,780
|
$
-
|
$
3,118,079
|
|
7%
Convertible note ($850,000)
|
270,787
|
15,267
|
-
|
286,054
|
|
|
$
3,253,086
|
$
151,047
|
$
-
|
$
3,404,133
|
7% Convertible Notes Payable
On
March 12, 2018, the Company entered into a Second Amendment to the
Note. Pursuant to the Amendment, the Note’s maturity date has
been extended to December 31, 2019, and interest accrues at 7% per
annum, compounding on the maturity date. Additionally, after review
of the Note and accrued interest, the Parties agreed that as of
March 12, 2018, the outstanding balance on the Note was
$270,787.
As of
June 30, 2019
, the outstanding
principal on this 7% convertible note was $270,787 and accrued
interest was $24,669, which results in a total liability of
$295,456.
10% Convertible Promissory Notes
Funding from Chicago Venture Partners, L.P. (“Chicago
Venture”) and
Iliad Research and Trading, L.P.
(“Iliad”)
As
of December 31, 2018
, the
outstanding principal balance due to Chicago Venture and Iliad was
$2,982,299 and accrued interest was $135,780, which results in a
total amount of $3,118,079.
During
the year ended December 31, 2018, Chicago Venture and Iliad
converted principal and interest of $3,104,181 into 525,587,387
shares of our common stock at a per share conversion price of
$0.0059 with a fair value of $7,756,330. The Company recognized
$6,565,415 loss on debt conversions during the year ended December
31, 2018.
During
the year ended December 31, 2018, the Company recorded an OID debt
discount expense of $660,472 to interest expense related to the
Chicago Venture and Iliad financing.
As
of June 30, 2019
, the
outstanding principal balance due to Chicago Venture and Iliad was
$2,156,669 and accrued interest was $232,997, which results in a
total amount of $2,389,666.
During
the six months ended June 30, 2019, Chicago Venture and Iliad
converted principal and accrued interest of $745,000 into
171,017,865 shares of our common stock at a per share conversion
price of $.0044 with a fair value of $1,293,341. The Company
recognized $1,574,609 loss on debt conversions during the six
months ended June 30, 2019.
NOTE 12 – DERIVATIVE LIABILITY
In
April 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.
There
was a derivative liability of $1,286,743 as of June 30,
2019
.
For the six months ended
June 30, 2019, the Company recorded non-cash income of $508,730
related to the “change in fair value of derivative”
expense related to the Chicago Venture and Iliad financing. During
the six months ended June 30, 2019, Chicago Venture and Iliad
converted principal and accrued interest of $745,000 into
171,017,865 shares of our common stock at a per share conversion
price of $.0044 with a fair value of $1,293,341. The Company
recognized $1,574,609 loss on debt conversions during the six
months ended June 30, 2019.
Derivative
liability as of
June 30, 2019
was as follows:
|
|
|
|
|
|
|
|
Fair Value Measurements Using Inputs
|
|
|
Financial
Instruments
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative
Instruments
|
$
-
|
$
1,286,743
|
$
-
|
$
1,286,743
|
|
|
|
|
|
|
|
Total
|
$
-
|
$
1,286,743
|
$
-
|
$
1,286,743
|
NOTE 13 –
RELATED PARTY
TRANSACTIONS AND CERTAIN RELATIONSHIPS
Related Party Transactions
Transactions with Katherine McLain
Ms.
Katherine McLain was appointed as a director on February 14, 2017.
On February 22, 2019, the Company issued 8,108,108 shares of our
common stock to Katherine McLain valued at $0.0074 per share or
$60,000.
Transaction with Thom Kozik
Mr.
Kozik was appointed as a director on October 5, 2017. On February
22, 2019, the Company issued 8,108,108 shares of our common stock
to Mr. Kozik valued at $0.0074 per share or $60,000.
NOTE 14 – EQUITY
Authorized Capital Stock
The
Company has authorized 6,010,000,000 shares of capital stock, of
which 6,000,000,000 are shares of voting common stock, par value
$0.0001 per share, and 10,000,000 are shares of preferred stock,
par value $0.0001 per share.
On
October 24, 2017 the Company filed a Certificate of Amendment of
Certificate of Incorporation with the Secretary of State of the
State of Delaware to increase the authorized shares of common stock
from 3,000,000,000 to 6,000,000,000 shares.
Non-Voting Preferred Stock
Under
the terms of our articles of incorporation, the Company’s
board of directors is authorized to issue shares of non-voting
preferred stock in one or more series without stockholder approval.
The Company’s board of directors has the discretion to
determine the rights, preferences, privileges and restrictions,
dividend rights, conversion rights, redemption privileges and
liquidation preferences, of each series of non-voting preferred
stock.
The
purpose of authorizing the Company’s board of directors to
issue non-voting preferred stock and determine the Company’s
rights and preferences is to eliminate delays associated with a
stockholder vote on specific issuances. The issuance of non-voting
preferred stock, while providing flexibility in connection with
possible acquisitions, future financings and other corporate
purposes, could have the effect of making it more difficult for a
third party to acquire, or could discourage a third party from
seeking to acquire, a majority of our outstanding voting stock.
Other than the Series B and C Preferred Stock discussed below,
there are no shares of non-voting preferred stock presently
outstanding and we have no present plans to issue any shares of
preferred stock.
Common Stock
Unless otherwise indicated, all of the following sales or issuances
of Company securities were conducted under the exemption from
registration as provided under Section 4(2) of the Securities Act
of 1933 (and also qualified for exemption under 4(5), formerly 4(6)
of the Securities Act of 1933, except as noted below). All of the
shares issued were issued in transactions not involving a public
offering, are considered to be restricted stock as defined in Rule
144 promulgated under the Securities Act of 1933 and stock
certificates issued with respect thereto bear legends to that
effect.
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 six months ended June 30, 2019, the Company had the
following sales of unregistered equity securities to accredited
investors unless otherwise indicated:
During
the six months ended June 30, 2019, the Company issued 22,183,471
shares to suppliers for services provided. The Company valued the
shares at $174,435 per share or $0.0079.
During
the six months ended June 30, 2019, Chicago Venture and Iliad
converted principal and accrued interest of $745,000 into
171,017,865 shares of our common stock at a per share conversion
price of $.0044 with a fair value of $1,293,341. The Company
recognized $582,246 loss on debt conversions during the six months
ended June 30, 2019.
On
February 15, 2019, the Company entered into a Termination of
Existing Agreements and Release with CANX USA, LLC, a Nevada
limited liability company. Pursuant to the Agreement, the Parties
agreed to terminate, release and discharge all existing and further
rights and obligations between the Parties under, arising out of,
or in any way related to that certain Waiver and Modification
Agreement and Amended and Restated Joint Venture Agreement made as
of July 10, 2014, and any ancillary agreements or instruments
thereto, including, but not limited to, the Warrants issued to CANX
entitling CANX to purchase 540,000,000 shares of the
Company’s common stock at an exercise price of
$0.033.
In exchange for the Agreement and cancellation of the CANX
Agreements and Warrants, the Company agreed to issue $1,000,000 of
restricted common stock priced at the February 7, 2019 closing
price of $0.008, or 125,000,000 restricted common stock shares The
Company recorded a loss on settlement of
$986,363.
On May
2, 2019, the Company issued 3,916,667 shares valued at $0.006 to a
former employee related to a cashless stock option exercise. We
cancelled a stock option grant for 15,083,333 shares issued at
$0.006.
Warrants
The
Company had the following warrant activity during the six months
ended June 30, 2019
:
On
February 15, 2019, the Company entered into a Termination of
Existing Agreements and Release with CANX USA, LLC, a Nevada
limited liability company. Pursuant to the Agreement, the Parties
agreed to
terminate, release and
discharge all existing and further rights and obligations between
the Parties under, arising out of, or in any way related to
that certain
Waiver and Modification
Agreement and Amended and Restated Joint Venture Agreement made as
of July 10, 2014, and any ancillary agreements or instruments
thereto, including, but not limited to, the Warrants issued to CANX
entitling CANX to purchase 540,000,000 shares of the
Company’s common stock at an exercise price of
$0.033.
In exchange for the Agreement and cancellation of the CANX
Agreements and Warrants, the Company agreed to issue $1,000,000 of
restricted common stock priced at the February 7, 2019 closing
price of $0.008, or 125,000,000 restricted common stock
shares.
A
summary of the warrants issued as of June 30, 2019 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
902,825,146
|
$
0.029
|
|
Issued
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
(540,000,000
)
|
(0.033
)
|
|
Expired
|
-
|
-
|
|
Outstanding
at end of period
|
362,825,146
|
$
0.023
|
|
Exerciseable
at end of period
|
362,825,146
|
|
A
summary of the status of the warrants outstanding as of June 30,
2019 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
-
|
$
-
|
-
|
$
-
|
|
55,000,000
|
7.16
|
0.010
|
55,000,000
|
0.010
|
|
48,000,000
|
5.25
|
0.012
|
16,000,000
|
0.012
|
|
48,687,862
|
3.58
|
0.050
|
48,687,862
|
0.050
|
|
211,137,284
|
2.32
|
0.021
|
211,137,284
|
0.021
|
|
362,825,146
|
3.30
|
$
0.023
|
330,825,146
|
$
0.023
|
Warrants
had no intrinsic value as of June 30, 2019.
The
warrants were valued using the following assumptions:
|
0%
|
|
1-5 Years
|
|
70-200%
|
|
0.78-2.6%
|
NOTE 15– STOCK OPTIONS
Description of Stock Option Plan
On
December 6, 2018, the Company’s shareholders voted to approve
the First Amended and Restated 2017 Stock Incentive Plan to
increase the shares issuable under the plan from 100 million to 200
million. The Company has 100,000,000 shares available for issuance.
The Company has outstanding unexercised stock option grants
totaling 100,000,000 shares at an average exercise price of $0.010
per share as of December 31, 2018. The Company filed registration
statements on Form S-8 to register 200,000,000 shares of the
Company’s common stock related to the 2017 Stock Incentive
Plan and First Amended and Restated 2017 Stock Incentive
Plan.
Determining Fair Value under ASC 505
The Company records compensation expense associated with stock
options and other equity-based compensation using the
Black-Scholes-Merton option valuation model for estimating fair
value of stock options granted under our plan. The Company
amortizes the fair value of stock options on a ratable basis over
the requisite service periods, which are generally the vesting
periods. The expected life of awards granted represents the period
of time that they are expected to be outstanding. The
Company estimates the volatility of our common stock based on the
historical volatility of its own common stock over the most recent
period corresponding with the estimated expected life of the award.
The Company bases the risk-free interest rate used in the Black
Scholes-Merton option valuation model on the implied yield
currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term equal to the expected life of the award.
The Company has not paid any cash dividends on our common stock and
does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield
of zero in the Black-Scholes-Merton option valuation model and
adjusts share-based compensation for changes to the estimate of
expected equity award forfeitures based on actual forfeiture
experience. The effect of adjusting the forfeiture rate is
recognized in the period the forfeiture estimate is
changed.
Stock Option Activity
During the six months ended June 30, 2019, the Company had the
following stock option activity:
On February 6, 2019, the Company issued a stock option grant to an
advisory board member for 500,000 shares of common stock
at
an exercise price of $0.008 per share. The stock option grant vests
quarterly over three years and is exercisable for 3 years. The
stock option grant was valued at $1,000.
On April 26, 2019, the Company issued stock option grants to two
employees for 3,000,000 shares of common stock
at an
exercise price of $0.010 per share. The stock option grant vests
quarterly over three years and is exercisable for 3 years. The
stock option grants were valued at $3,000.
On
April 2, 2019, the Company amended the exercise price on stock
option grants for five million shares and changed the exercise
price from $0.020 to $0.010 per share.
On May
2, 2019, the Company issued 3,916,667 shares valued at $0.006 to a
former employee related to a cashless stock option exercise. We
cancelled a stock option grant for 15,083,333 shares issued at
$0.006.
During the three months ended June 30, 2019, a stock option grant
for 2,000,000 shares of common stock
at an exercise price of
$0.02 per share
expired.
As of June 30, 2019, there are 82,500,000 options to purchase
common stock at an average exercise price of $0.0099 per share
outstanding under the 2017 Amended and Restated Stock Incentive
Plan. The Company recorded $32,247 and $16,129 of compensation
expense, net of related tax effects, relative to stock options for
the six months ended June 30, 2019 and 2018 in accordance with ASC
505. Net loss per share (basic and diluted) associated with this
expense was approximately ($0.00). As of June 30, 2019, there is
$112,624 of total unrecognized costs related to employee granted
stock options that are not vested. These costs are expected to be
recognized over a period of approximately 3.87 years.
Stock option activity for the period ended June 30, 2019 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
December 31, 2018
|
100,000,000
|
$
0.0094
|
$
940,000
|
|
Granted
|
3,500,000
|
0.0080
|
34,000
|
|
Exercised
|
(3,916,667
)
|
(0.0060
)
|
(23,500
)
|
|
Forfeitures
|
(17,083,333
)
|
(0.0076
)
|
(130,500
)
|
|
Outstanding as of
June 30, 2019
|
82,500,000
|
$
0.0099
|
$
820,000
|
The following table summarizes information about stock options
outstanding and exercisable at June
30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.006
|
12,000,000
|
3.36
|
$
0.006
|
6,000,000
|
$
0.006
|
|
0.007
|
10,000,000
|
3.50
|
0.007
|
5,000,000
|
0.007
|
|
.008-.009
|
2,500,000
|
1.55
|
.008-.009
|
1,375,000
|
0.008
|
|
0.010
|
20,000,000
|
3.36
|
0.010
|
14,916,667
|
0.010
|
|
0.012
|
38,000,000
|
4.00
|
0.012
|
9,500,000
|
0.012
|
|
|
82,500,000
|
3.87
|
$
0.010
|
36,791,667
|
$
0.009
|
Stock
option grants totaling 82,500,000 shares of common stock no
intrinsic value as of June 30, 2019.
The
stock option grants were valued using the following
assumptions:
|
0%
|
|
1-5 Years
|
|
70-200%
|
|
0.78-2.6%
|
NOTE 16 –
COMMITMENTS,
CONTINGENCIES AND LEGAL PROCEEDINGS
Legal Proceedings
From time to time, the Company may become subject to various legal
proceedings that are incidental to the ordinary conduct of its
business. Although we cannot accurately predict the amount of any
liability that may ultimately arise with respect to any of these
matters, it makes provision for potential liabilities when it deems
them probable and reasonably estimable. These provisions are based
on current information and may be adjusted from time to time
according to developments.
Other than those certain legal proceedings as reported in the
Company’s annual report on Form 10-K filed with the SEC on
March 8, 2019, the Company’s know of no material, existing or
pending legal proceedings against our Company, nor is the Company
involved as a plaintiff in any material proceeding or pending
litigation. There are no proceedings in which any director, officer
or any affiliates, or any registered or beneficial shareholder, is
an adverse party or has a material interest adverse to the
Company’s interest.
Operating Leases
On May
31, 2019, the Company rented space at
5400 Carillon Point, Kirkland, Washington 98033
for $623 per month
for the Company’s corporate office
and use of space in the Regus network, including California. The
Company’s agreement expires May 31, 2020.
On October 1, 2017, GrowLife Hydroponics, Inc. entered into a lease
in Calgary, Canada. The monthly lease is approximately $3,246. The
lease expires September 30, 2022.
On December 19, 2017, GrowLife Innovations, Inc. entered into a
lease in
Grand Prairie, Texas dated
October 9, 2017, for 5,000 square feet
for
the manufacturing and distribution of its flooring products.
The monthly lease payment is $15,000.
The lease expires December 1, 2022 and can be
renewed.
On July 2, 2018, GrowLife Hydroponics, Inc. entered into a store
lease for 1,950 square feet in Portland, Maine. The monthly lease
is approximately $2,113, with 3% increases in year two and three.
The lease expires July 2, 2021 and can be extended.
On August 31, 2018, GrowLife, Inc. entered into the Fourth
Amendment to the Lease Agreement for the store in Encino,
California. The monthly lease is approximately $6,720, with a 3%
increase on March 1, 2019. The lease expires September 1, 2019 and
the Company is required to provide six months’ notice to
terminate the lease.
On December 14, 2018, GrowLife, Inc. entered into a lease agreement
with Pensco Trust Company for a 28,000 square feet industrial space
at 10170 Croydon Way, Sacramento, California 95827 used for the
assembly and sales of plastic parts by EZ-CLONE. The monthly lease
payment is $17,000 and increased approximately 3% per year. The
lease expires on December 31, 2023.
The aggregate future minimum lease payments under operating leases,
to the extent the leases have early cancellation options and
excluding escalation charges, are as follows:
|
Years Ended June
30,
|
|
|
2020
|
$
537,910
|
|
2021
|
925,511
|
|
2022
|
549,776
|
|
2023
|
-
|
|
2024
|
-
|
|
Beyond
|
-
|
|
Total
|
$
2,013,196
|
NOTE 17 – SUBSEQUENT EVENTS
The Company evaluates subsequent events, for the purpose of
adjustment or disclosure, up through the date the financial
statements are available.
The Company had the following material events subsequent to
June 30, 2019:
On July
23, 2019, the Company closed the transactions described below with
Odyssey Research and Trading, LLC, a Utah limited liability company
(“Odyssey”).
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement
On July
23, 2019, the Company executed the following agreements with
Odyssey: (i) Securities Purchase Agreement; (ii) Secured Promissory
Notes; and (iii) Security Agreement (collectively the
“Odyssey Agreements”). The Company entered into the
Odyssey Agreements with the intent to acquire working capital to
grow the Company’s businesses.
The
total amount of funding under the Odyssey Agreements is $1,105,000.
The Convertible Promissory Note carries an original issue discount
of $100,000 and a transaction expense amount of $5,000, for total
debt of $1,105,000. The Company agreed to reserve three times the
number of shares based on the redemption value with a minimum of
500 million shares of its common stock for issuance upon conversion
of the Debt, if that occurs in the future. If not converted sooner,
the Debt is due on or before July 22, 2020. The Debt carries an
interest rate of ten percent (10%). The Debt is convertible, at
Odyssey’s option, into the Company’s common stock at
$0.010 per share subject to adjustment as provided for in the
Secured Promissory Notes.
The
Company’s obligation to pay the Debt, or any portion thereof,
is secured by all of the Company’s assets.