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, 2017. The
results of operations for the three months ended March 31, 2018 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 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 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. As a result, Alpine may initiate
an unpriced quotation for the Company’s common stock. The
Company filed an application with the OTC Markets to list the
Company’s common stock on the OTCQB. On March 20, 2018 the
Company’s Common Stock began trading on the
OTCQB.
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
$4,241,875, $7,694,684 and $5,688,845 for the three months ended
March 31, 2018 and the years ended December 31, 2017 and 2016,
respectively. Our net cash used in operating activities was
$835,480, $2,082,493 and $1,212,192 for the three months ended
March 31, 2018 and 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 March 31, 2018, the accumulated
deficit was $133,973,180.
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, 2017 and 2016
filed with the SEC on March 31, 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. At March 31,
2018, the Company has cash in excess of FDIC in the amount of
$395,000. 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 March 31, 2018 and Decem
ber
31,
2017, respectively.
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 March 31, 2018 and December 31, 2017,
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
March 31, 2018
, there are also
(i) stock option grants outstanding for the purchase of 59 million
common shares at a $0.008 average exercise price; (ii) warrants for
the purchase of 595 million common shares at a $0.031 average
exercise price; and (iii) 107 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
March 31,
2017
, 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) 130,106,389
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
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.
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
March 31, 2018, the outstanding balance on the Convertible Note was
$0.
OGI was
incorporated on January 7, 2014 in the State of Nevada and had no
business activities as of March 31, 2018.
NOTE 5 – INVENTORY
Inventory
as of March 31, 2018 and December 31, 2017 consists of the
following:
|
|
|
|
|
|
|
|
|
Raw
materials
|
$
178,311
|
$
110,000
|
Finished
goods
|
375,679
|
375,678
|
Inventory
reserve
|
(20,000
)
|
(20,000
)
|
Total
|
$
533,990
|
$
465,678
|
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 March 31, 2018 and December 31, 2017 consists
of the following:
|
|
|
|
|
|
|
|
|
Machines
and equipment
|
$
552,689
|
$
365,861
|
Furniture
and fixtures
|
-
|
49,787
|
Computer
equipment
|
-
|
52,304
|
Leasehold
improvements
|
-
|
56,965
|
Total
property and equipment
|
552,689
|
524,917
|
Less
accumulated depreciation and amortization
|
(10,814
)
|
(222,228
)
|
Net
property and equipment
|
$
541,875
|
$
302,689
|
Fixed assets, net of accumulated depreciation, were $541,875 and
$302,689 as of March 31, 2018 and December 31, 2017, respectively.
Accumulated depreciation was $10,814 and $222,228 as of March 31,
2018 and December 31, 2017, respectively. Total depreciation
expense was $10,814 and $1,890 for the three months ended March 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 March 31, 2018, the Company had recorded
investment in purchased assets of $552,689.
During
the three months ended March 31, 2018, the Company retired fully
depreciated assets of $222,228.
NOTE 7– CONVERTIBLE NOTES PAYABLE, NET
Convertible
notes payable as of
March 31,
2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% OID Convertible
Promissory Note with Chicago Venture Partners, L.P.
|
$
1,748,023
|
$
115,059
|
$
(546,734
)
|
$
1,316,348
|
7%
Convertible note ($850,000)
|
270,787
|
987
|
-
|
271,774
|
|
$
2,018,810
|
$
116,046
|
$
(546,734
)
|
$
1,588,122
|
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
|
6% Secured Convertible Note and Secured Credit Facility
(2014)
On
March 13, 2018, the Company, received a Notice of Conversion from
Logic Works LLC converting principal and interest of $41,690 owed
under that a 6% Convertible Note into 16,445,609 shares of our
common stock with a fair value of $248,329. As of March 13, 2018,
the outstanding balance on the Convertible Note was
$0.
7% Convertible Notes Payable
As of
December 31, 2017
, the
outstanding principal on this 7% convertible note was $250,000 and
accrued interest was $321,652, which results in a total liability
of $571,652.
On
February 12, 2018, the Company received a Notice of Conversion from
Forglen LLC converting principal and interest of $321,945 owed
under that certain 7% Convertible Note as amended June 19, 2014
into 127,000,000 shares of the Company’s common stock with a
fair value of $2,235,200.
On
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. 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.
As of
March 31, 2018
, the outstanding
principal on this 7% convertible note was $270,787 and accrued
interest was $987, which results in a total liability of
$271,774.
Funding from Chicago Venture Partners, L.P. (“Chicago
Venture”)
As
of December 31, 2017
, the
outstanding principal balance due to Chicago Venture was
$2,980,199, accrued interest was $120,492, net of the discount of
$698,547, which results in a total amount of
$2,402,144.
As
of March 31, 2018
, the
outstanding principal balance due to Chicago Venture is $1,748,023,
accrued interest was $115,059, net of the discount of $546,734,
which results in a total amount of $1,316,348.
During
the three months ended March 31, 2018, Chicago Venture converted
principal and interest of $1,877,668 into 338,821,634 shares of our
common stock at a per share conversion price of $0.0055 with a fair
value of $5,073,390. The Company recognized $3,195,722 of loss on
debt conversions during the three months ended March 31, 2018. The
Company has $400,000 in available under this debt
financing.
During
the three months ended March 31, 2018, the Company recorded an OID
debt discount expense of $249,329 to interest expense related to
the Chicago Venture financing.
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.
There
was a derivative liability of $294,475 as of March 31,
2018
.
For the three months
ended March 31, 2018, the Company recorded non-cash income of
$2,358,444 related to the “change in fair value of
derivative” expense related to the Chicago Venture financing.
The income related to a decline in the share price and Chicago
Venture converted principal and interest of $1,877,668 into
338,821,634 shares of our common stock during the three months
ended March 31, 2018.
Derivative
liability as of
March 31, 2018
was as follows:
|
|
|
|
|
|
Fair Value Measurements Using Inputs
|
|
Financial
Instruments
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Instruments
|
$
-
|
$
294,475
|
$
-
|
$
294,475
|
|
|
|
|
|
Total
|
$
-
|
$
294,475
|
$
-
|
$
294,475
|
NOTE 9 –
RELATED PARTY
TRANSACTIONS AND CERTAIN RELATIONSHIPS
Related Party Transactions
Since
January 1, 2018, 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.
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.
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 and
10.
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.
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.
Equity Issuances
During the three months ended March 31, 2018, the Company had had
the following sales of unregistered of equity securities to
accredited investors unless otherwise indicated:
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 owed
under that certain 7% Convertible Note as amended June 19, 2014
into 127,000,000 shares of the Company’s common stock with a
fair value of $2,235,200.
On
February 16, 2018, the Company issued 900,000 shares of its common
stock to a service provider pursuant to a conversion of debt
totaling $18,000. The shares were valued at the fair market price
of $0.020 per share.
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 338,821,634 shares of our
common stock at a per share conversion price of $0.0055 with a fair
value of $5,073,390.
Securities Purchase Agreements with St. George Investments,
LLC
On February 9, 2018, the Company executed the following agreements
with St. George Investments LLC, a Utah limited liability company:
(i) Securities Purchase Agreement; and (ii) Warrant to 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.
The Company has $500,000 available from St. George.
Warrants
The
Company did not issue any warrants during the three months ended
March 31, 2018
.
A
summary of the warrants issued as of March 31, 2018 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 March 31,
2018 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
540,000,000
|
1.00
|
$
0.033
|
540,000,000
|
$
0.033
|
55,000,000
|
2.30
|
0.010
|
45,000,000
|
0.010
|
|
|
|
|
|
|
|
|
|
|
595,000,000
|
1.04
|
$
0.031
|
585,000,000
|
$
0.031
|
Warrants
totaling 55 million shares of common stock had an intrinsic value
of $301,500 as of March 31, 2018.
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 three months ended March 31, 2018, the Company had the
following stock option activity:
On February 23, 2018, an employee was granted an option to purchase
2,000,000 shares of common stock
at an exercise price of
$0.020 per share. The stock option grant vests quarterly over two
years and is exercisable for 5 years. The stock option grant was
valued at $40,000.
On February 23, 2018, an employee was granted an option to purchase
1,000,000 shares of common stock
at an exercise price of
$0.020 per share. The stock option grant vests quarterly over one
year and is exercisable for 5 years. The stock option grant was
valued at $20,000.
As of December 31, 2017, there are 59,000,000 options to purchase
common stock at an average exercise price of $0.008 per share
outstanding under the 2017 Stock Incentive Plan. The Company
recorded $5,898 and $7,541 of compensation expense, net of related
tax effects, relative to stock options for the three months ended
March 31, 2018 and 2017 in accordance with ASC 505. Net loss per
share (basic and diluted) associated with this expense was
approximately ($0.00). As of March 31, 2018, there is $77,755 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 three months ended
March 31,
2018
and 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
)
|
(0.050
)
|
(500
)
|
Outstanding as of
December 31, 2017
|
56,000,000
|
0.007
|
400,000
|
Granted
|
3,000,000
|
0.020
|
60,000
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
-
|
-
|
-
|
Outstanding as of
March 31, 2018
|
59,000,000
|
$
0.008
|
$
460,000
|
The following table summarizes information about stock options
outstanding and exercisable as of
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.006
|
32,000,000
|
4.50
|
$
0.006
|
13,666,667
|
$
0.006
|
0.007
|
10,000,000
|
4.50
|
0.007
|
1,666,666
|
0.007
|
0.009
|
2,000,000
|
2.25
|
0.009
|
500,000
|
0.009
|
0.010
|
12,000,000
|
1.63
|
0.010
|
12,000,000
|
0.010
|
0.020
|
3,000,000
|
5.00
|
0.020
|
-
|
|
|
59,000,000
|
3.87
|
$
0.008
|
27,833,333
|
$
0.008
|
Stock
option grants totaling 56,000,000 shares of common stock had an
intrinsic value of $246,650 as of March 31, 2018.
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
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. As of March 31,
2018, we owe $114,217 in sales tax to the City of Boulder,
CO.
Other Legal Proceedings
We may be sued for non-payment of lease payments at closed stores.
We may be subject to legal actions with various
vendors.
Operating Leases
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 owe
$54,010 as of December 31, 2017. We are past due on the repayment
schedule by $54,010 as of March 31, 2018. 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 March
31,
|
|
2019
|
$
278,683
|
2020
|
169,242
|
2021
|
58,422
|
2022
|
-
|
2023
|
-
|
Beyond
|
-
|
Total
|
$
506,347
|
Employment and Consulting Agreements
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.
Consulting Agreement with an Entity Controlled by Michael E.
Fasci
On
March 20, 2018, the Company terminated a Consulting Agreement dated
October 21, 2016 with an entity controlled by Michael E. Fasci. Mr.
Fasci agreed to provide services related to lender management,
financing and acquisitions.
NOTE 13 – SUBSEQUENT EVENTS
The Company evaluates subsequent events, for the purpose of
adjustment or disclosure, up through the date the financial
statements are available.
There are no material events subsequent to
March 31,
2018.