PART I
ITEM 1. DESCRIPTION OF
BUSINESS
THE COMPANY AND OUR BUSINESS
GrowLife,
Inc. (“GrowLife” or the “Company”) is
incorporated under the laws of the State of Delaware and is
headquartered in Kirkland, Washington. We were founded in 2012 with
the Closing of the Agreement and Plan of Merger with SGT Merger
Corporation.
GrowLife’s goal is to become the nation’s largest
cultivation facility service provider
for
the production of organics, herbs and greens and plant-based
medicines.
Over
the last year we have been discussing how we can meet our goal and
help our customers significantly lower their production costs. We
have continued to distribute thousands of third-party products to
growers through retail, e-commerce and direct sales channels, sold
to both commercial and consumer cultivators, and began developing
our own products in our Innovations division. As we pursued our
goal of “
measuring our
success by our customer’s success”
we discovered
that we needed to acquire a critical technology for
cloning.
As we
illustrated in last quarter’s Management Discussion section,
the bell curve we mapped out from our ‘Cube’ proof of
concept tests showed that the Commercial Cultivation Stage is where
most of the money is spent for production. However, the Cloning
Stage is where the greatest yield to impact occurs (dashed line).
While we could have simply partnered with EZ-Clone, the 20-year
leader in cloning, to use their products to help increase the yield
of Cube, there were far greater strategic and economic benefits to
both companies if GrowLife pursued an acquisition.
On
October 15, 2018, GrowLife acquired 51% of EZ-Clone and intends to
acquire the remaining 49% in 2019. The addition of EZ-Clone was the
missing piece for many reasons. Like a jigsaw puzzle, the pattern
became apparent of how we needed to proceed, or
pivot the GrowLife business for
growth
.
The
Company will continue to provide the best products that drive down
our customer’s production cost while increasing our gross
margin. Initially we can purchase and resell third-party products
as we have done in the past. However, over time we will develop our
own technologies and, in some cases, acquire them to accelerate
bringing them to market. Acquiring companies is not difficult but
integrating talent and the best of their culture can be
challenging. As a result, we have organized to integrate such
acquisitions.
At the
end of 2018, GrowLife decided to shift its operating organization
from divisions to a functional structure with a deep leadership
team to provide greater coverage for further geographical and
acquisition expansion. Each leader has extensive experience in
their roles. With a functional organization we maintain clear lines
of daily communication across the company and deep into our
operations. A newly acquired company can be quickly integrated into
our three groups while maintaining continuity of leadership and
knowledge transfer. EZ-Clone integrated into GrowLife in six
months, less than half the time of FreeFit. Such best practices are
conveyed with Standard Operating Procedures and absorbed with a
receptive culture.
Where
we once saw divisions to serve different market segments, we
elected to align our resources behind three functional groups
serving commercial customers at different stages. Where we were
racing to the bottom
by
distributing other people’s
commodity
products that are perceived
as too expensive for our customers and generating only 8-10% gross
margins, we now focus on our own GrowLife/EZ-Clone products that
generate 40-55% gross
margins
at reasonable prices to our customers. Additionally,
our retail stores in Canada, Los Angeles and Maine serve as
regional fulfillment and e-Commerce centers for our commercial
customers. And, this is just the start. Given the 87%
year-over-year revenue growth, GrowLife will continue to provide
essential and hard-to-find goods including growing media,
industry-leading hydroponics equipment, organic plant nutrients,
and thousands more products on demand to our customers across the
United States and Canada. However, as our revenue mix transitions
to proprietary products we expect to see our gross margins grow up
to approximately 300%.
Vision
The GrowLife mission is to measure its success by its
customer’s success;
serving
cultivators of all sizes as a reliable business partner and its
shareholders with value and trust.
Our
vision continues to revolve around the key words in our mission
statement, “
value and
trust”,
with our employees, our customers and our
shareholders. Value is more than economic benefit; it must not mean
compromise or that the relationship ends with the transaction;
rather, quite the opposite. We have been exploring revenue models
that may work the way our commercial customers need help such as
dealing with the IRS 280e challenge. Employees and shareholders
also expect value but benefits and dilution is challenging so we
look to ways that solve problems. For competitive reasons we do not
go into details but will disclose as we launch such programs. Thus,
we seek
value
.
Trust
is earned through consistency of
practice. Our operations have demonstrated such practice. We are
cautiously transparent where we do not promise what we may not
deliver therefore we do not give revenue guidance and, for
competitive reasons, avoid too many details, but we share as much
as we can to keep our customers and shareholders always
informed.
We will
continue to provide our customers the over 15,000 products that
they demand, however, those third-party manufacturers are not
rushing to lower their prices to help our customers lower their
production costs. It is understandable because they make more in
the short term without concern of the macro-market impact. GrowLife
is a nationwide company and is concerned about the
macro-economics.
One of
the many things that attracted the Company to EZ-Clone was its
principal, Billy Blackburn. Billy was working on the
EZ-Clone Pro
project that the Company
saw in 2017. A cloning system for almost 500 clones at one time; a
system that could easily cannibalize his smaller core cloning
business. We discussed the trade-offs and he told me
“that’s where the market is going and what
customer’s need. EZ-Clone needs to adjust, not our
customers.” I am so glad that he is on our team and heading
up R&D and manufacturing.
We see
outdoor farming as a wasteful, destructive and an inefficient use
of precious resources. Current water, land and harvest cycles are
limited and, if left unchecked, will fail to support the
world’s population growth. However, indoor cultivation allows
our customers to replicate nature in a controllable manner that
uses a fraction of water and land while providing 2–5 times
the crop cycles of outdoor. The challenge is in getting the
economics right. Subsidies are not the answer. Even many
large-scale indoor grow operations with large capital investments
have had a difficult time staying in business because the poor
economic models fail to deliver a profit. Fruits and vegetables
have limited revenue benefit due to their low prices and saturated
supply from international and domestic growers.
Cannabis
on the other hand currently has an attractive revenue model and
valuation multiple but modest demand of about 5% of the population
due to shadows cast by interstate commerce restrictions, banking
issues and threatening federal laws. However, Cannabis laws are not
the only expected changes. We must prepare for significantly lower
prices if Cannabis is to become a mainstream alternative to beer,
wine and other alcohol in the future. Expecting a $12 Cannabis
cigarette to drop to $1 over the next couple of years is not
unreasonable.
Therefore,
GrowLife’s vision of indoor cultivation is that it is
inevitable, not another gardening alternative. For the Cannabis
market, as well as all indoor cultivators of fruits and vegetables,
to serve their markets and customers they must significantly
increase operations at scale, remove inefficiencies and lower their
production costs with local, safer, healthier and affordable crops.
We see lowering the cost of
production as the game changer.
This means increasing
efficiencies, scaling up production volumes and driving down indoor
operating costs. Given this vision of the future, lowering our
customer’s production costs serves as our compass to mergers,
acquisitions and partnerships.
GrowLife’s
commercial customers are at different stages of commercial
operations across all States and Provenances. Along with our
business-to-business focus we have looked at the
business-to-consumer sought to offer the GrowLife Consumer Cube
products. We recognize demand is increasing from small, aspiring
cultivation consumers across the country seeking to learn and use a
complete indoor growing solution. At this time, however, we
recognize that we cannot serve both the consumer and commercial
markets so we have decided to concentrate our efforts on commercial
customers.
To grow
our commercial programs GrowLife is investing in two areas, Sales
with Marketing support and Research and Development or innovation.
The funding for these efforts started with $1 million in equity
financing in February 2018 from Chicago Venture Partners and then
with $2.5 million from our shareholders in our Rights Offering.
These funds allowed us to begin our expansion and innovation
projects, thus our greater than normal G&A expenses and
EZ-Clone acquisition.
Demand: Market Size and Growth
GrowLife
Inc. is engaged in the business of offering general hydroponic
growing equipment including complete indoor lighting
systems, growing mediums, soils, tools for cutting and
propagation, hydroponics systems, growing accessories, bulbs,
ballasts, reflectors, meters and timers and climate control
equipment for the indoor plant cultivation and cannabis
industries.
Additionally,
GrowLife, through its recent asset acquisition, has begun servicing
the Luxury Vinyl Tile market segment of the Floor Covering
industry, which it will use in its GrowLife clean grow room
initiative.
Hydroponic Growing Equipment (US)
Industry
Definition:
The
Hydroponic Growing Equipment industry is primarily engaged in
selling hydroponic horticulture equipment. Hydroponics is a method
of growing plants using mineral nutrient solutions in water without
the use of soil.
2017
Key Industry Statistics:
-
In 2017, the
Hydroponic Growing Equipment Stores industry generated $689.7
million in gross revenue with total profits of $26.9
million.
-
The industry grew
4.4% from 2012 to 2017 and is expected to continuing growing at a
rate of 1.7% through 2022.
-
As of 2017, there
are approximately 1,948 businesses engaged in the industry, which
contribute $210 million in wages and salaries to the nation’s
economy.
-
No companies have
been identified as “major players”.
-
Household consumers
comprise the largest market segment for the industry, accounting
for 48.1% of the market in 2017, with farms and agriculture
representing 37.2% of the market and 14.7% represented by other
types including: retail establishments, equipment wholesalers,
repair shops, industrial companies, and government
bodies.
-
The
industry’s average profit margin, defined as earnings before
interest and taxes, has increased since 2012; profit margins are
expected to have expanded from 1.8% of industry revenue in 2012 to
3.9% in 2017.
Product and Service Segmentation:
Of
total product sales in 2017, 35.8% of products sold were nutrients,
solution chemicals and other treatments, 30.4% were hydroponic
systems and equipment, 20% were other accessories, additions,
supplies and merchandise, and 13.8% were hardware, tools, plumping
and electrical supplies.
Key
Industry Drivers:
-
Much of the
industry’s sudden popularity is the result of heightened
consumer interest in locally grown and organic produce; many
producers of hydroponic fruits and vegetables strive to use
sustainable business practices and natural nutrients and
pesticides
-
Consumer interest
in organic foods and hydroponic growing has also increased as
disposable income continues to rise.
-
Given the
discretionary nature of the industry’s products, demand is
heavily influenced by fluctuations in the overall level of consumer
disposable income and consumer confidence in the economy. Over the
five years to 2017, per capita disposable income is anticipated to
grow an annualized 1.4%. Rising disposable income increases
consumers’ willingness to purchase luxuries such as
high-priced hydroponic growing equipment and organic
foods.
-
Impact of the
Cannabis Industry
o
According to data
released by
Forbes
, the
medical marijuana market is expected to generate $6.7 billion in
2017 alone. Given the size of the medical marijuana market, a
rising number of entrepreneurs have invested in hydroponic growing
equipment to be part of the medical marijuana gold rush. This
investment has been one of the primary drivers of the aggressive
growth that this industry has experienced over the past five
years.
o
In certain states,
patients with medical marijuana cards are also allowed to grow
limited quantities of marijuana for personal use. This has
encouraged patients to purchase hydroponic growing equipment and
pursue small-scale marijuana cultivation.
Competitive
advantages:
-
Most hydroponic
growing equipment stores are small business operations that serve
their immediate geographic areas. GrowLife serves a nationwide
audience with expansion into Canada.
Growth
Outlook:
“The
industry is growing faster than overall GDP”
IBIS World
expects the Cannabis industry revenue to grow an
annualized 1.7% to $750.2 million over the five years to
2022.
Factors:
-
Increasing consumer
focus on healthy eating habits will likely spur demand as more
consumers seek out organic and pesticide-free produce and opt to
grow their own or purchase locally produced organic foods made with
hydroponic growing equipment.
-
Medical and
recreational marijuana is expected to be approved in an increasing
number of US states over the next five years, which will lead more
patients and entrepreneurs to buy marijuana and hydroponic growing
equipment to fulfill demand for this growing market.
-
This industry will
also continue to benefit from risk-averse local farmers wishing to
break their reliance on weather conditions that may be increasingly
volatile.
-
IBIS World
estimates that per capita
disposable income will rise at an annualized rate of 2.7% over the
five years to 2022.
-
The US Department
of Agriculture reported in 2016 that the number of certified
organic food operators increased nearly 12.0% from 2015, and this
growth is expected to remain high over the next five
years.
-
IBIS World
expects profitability to
fall somewhat over the next five years as price-based competition
accelerates.
Competitive Advantages
-
IBIS World
anticipates that the number
of industry establishments will increase at an annualized rate of
5.1% to 3,123 over the five years to 2022 earning it the rating of
“Highly competitive”
-
Market share
concentration is low with only one company representing over 1% of
market share.
-
Barriers to Entry
in this industry are Low
Medical
and Recreational Marijuana Growing Industry
Industry
Definition:
This
emerging industry pertains to those engaged in the practice of
cultivating and producing legal marijuana plants for the medical
and recreational consumer markets.
US 2016
Key Industry Statistics:
-
In 2016, the
Medical and Recreational Marijuana Growing industry generated $3.5
billion in gross revenue with total profits of $233.4
million.
-
The industry grew
28.3% from 2011 to 2016 and is expected to continuing growing at a
rate of 33.5% through 2021.
-
As of 2016, there
are approximately 148,294 businesses engaged in the industry, which
contribute $957.6 million in wages and salaries to the
nation’s economy.
-
No companies have
been identified as “major players”.
-
Medical Marijuana
patients with severe pain comprise the largest market segment for
the industry, accounting for 64.6% of the market in 2016, with
recreational consumers accounting for 14.1% of the market. The
remaining market share is shared by consumers purchasing products
for treatment of other various medical conditions.
-
The
industry’s average profit margin, defined as earnings before
interest and taxes, varies greatly across the industry because of
the myriad of laws governing medical and recreational marijuana
from state to state. Industry-wide margins have grown on account of
the legalization of recreational marijuana in Colorado and
Washington and are expected to grow as more legalization takes
effect including California.
Key
Industry Drivers:
-
Medical marijuana
growers continue to benefit from the steadily aging population.
Chronic illnesses have become more prevalent as the population
continues to age, driving demand for medical
marijuana.
-
An estimated 2.6
million people use marijuana for medicinal purposes, and this
segment of the US population is anticipated to increase drastically
over the next five years.
-
More than
two-thirds of Americans now live in jurisdictions that have
legalized either the medical or adult use of
marijuana.
Growth
Outlook:
“The
industry is growing at a faster rate than the US
economy”
-
Industry revenue is
estimated to increase at an annualized rate of 33.5% to $15.0
billion over the five years to 2021.
Factors:
-
Continued
legalization on the state level will increase accessibility to
medical and recreational marijuana, increasing nationwide
demand.
-
Growing acceptance
of the marijuana products will increase demand. According to a poll
conducted by Gallup, 36.0% of Americans between the ages of 18 to
29 have tried marijuana in 2013, compared with just 8.0% in
1969.
-
The level of
household income determines consumers’ ability to purchase
medical marijuana products. While prescription products can be
essential for health and therefore less susceptible to changes in
consumer expenditure, the unconventional nature of the
industry’s products make it subject to changes in disposable
income. As a result, an increase in disposable income will boost
demand for medical marijuana growers.
Floor Covering Industry: Segment Luxury Vinyl Tile (LVT)
(US)
Industry
Definition:
The
Floor Covering industry is segmented by product type including
wood, rugs, resilient (which includes the Luxury Vinyl Tile or
“LVT” segment), carpet, tile, laminate and rubber
subcategories. GrowLife is engaged in luxury vinyl tile
manufacturing and is participating in this market by selling
through business-to-business and business-to-consumer
channels.
2016
Key Industry Statistics:
-
I
n 2016, the U.S. flooring market grew
an estimated 5.1%, according to Market Insights, with total
revenues of $21.174 billion.
-
North America flooring market will witness gains over 5% up to 2024
according to Global Market Insights.
Luxury
Vinyl Tile
-
LVT
now accounts for 16.5% of the total
flooring market in dollars and 18.8% in volume after a 6.5% rise in
units to 3.537 billion square feet. In 2015, resilient held a 13.3%
market share in terms of dollars, which was up from 12.2% in 2014,
11.9% in 2013 and 11.2% in 2012 respectively.
-
Sales have gone from nearly $750 million in 2012 to $948 million in
2013, $1.142 billion in 2014, $1.651 billion in 2015 and $2.161 in
2016. That represents respective gains of 26.4%, 20.5%, 27.1% and
30.9% respectively.
-
LVT sales have more than doubled in three years.
-
LVT increased significantly in both residential and commercial
markets—dollars and square feet—in 2016. Residential
LVT saw a 68.3% increase in square footage from 760 million in 2015
to 1.04 billion (including WPC), making up 76.1% of the LVT market.
This number was 71% a year ago and 55% two years ago.
-
The commercial market rose from 297.2 million square feet to 326.3
million square feet, a 9.8% increase. While residential brought in
more dollars—$1.512 billion—last year, commercial LVT
still performed well, posting a 12.5% increase, rising from $576.4
million in 2015 to $648.6 million in 2016.
https://www.rocsearch.com/samples/PDFs/Market%20Landscape-Global-Commercial-Vinyl-Flooring-Market-Landscape.pdf
Competitive
advantages:
-
GrowLife’s
LVT product FreeFit® features significant competitive
advantages including:
o
20k+ HD imaging,
“Real Touch” texture technology, fully customizable
platform, “Seriously Easy to Install” design, made in
the US, waterproof, lifespan 3x longer than traditional vinyl, 4mmm
thickness and 22mil wear layer and wear and stain
resistance.
-
Direct to consumer
sales model that major competitors cannot execute on due to resale
agreements.
Growth
Outlook:
The
global vinyl flooring market is expected to reach an estimated
$16.2 billion by 2023, and it is forecast to grow at a CAGR of 4.4%
from 2018 to 2023.
Employees
As of
December 31, 2018
, we had 32
full-time and part-time employees. Marco Hegyi, our Chief Executive
Officer, is based in Kirkland, Washington. Mark E. Scott, our Chief
Financial Officer, is based primarily in Seattle, Washington. In
addition, we have approximately 25 full and part time employees
located throughout the United States and Canada who operate our
businesses. We employ 7 full-time and part-time employees at
EZ-Clone in Sacramento, CA. None of our employees are subject to a
collective bargaining agreement or represented by a trade or labor
union. We believe that we have a good relationship with our
employees.
Key Partners
Our key
customers vary by state and are expected to be more defined as the
company moves from its retail walk-in purchasing sales strategy to
serving cultivation facilities directly and under predictable
purchasing contracts.
Our key
suppliers include distributors such as HydroFarm, Urban
Horticultural Supply and Hawthorne to product-specific suppliers.
All the products purchased and resold are applicable to indoor
growing for organics, greens, and plant-based
medicines.
Competition
Covering
two countries across all cultivator segments creates competitors
that also serve as partners. Large commercial cultivators have
found themselves willing to assume their own equipment support by
buying large volume purchased directly from certain suppliers and
distributors such as Hawthorne and HydroFarm. Other key competitors
on the retail side consist of local and regional hydroponic
resellers of indoor growing equipment. On the e-commerce business,
GrowersHouse.com, Hydrobuilder.com and smaller online resellers
using Amazon and eBay e-commerce market systems.
Intellectual Property and Proprietary Rights
Our
intellectual property consists of brands and their related
trademarks and websites, customer lists and affiliations, product
know-how and technology, and marketing intangibles.
Our
other intellectual property is primarily in the form of trademarks
and domain names. We also hold rights to several website addresses
related to our business including websites that are actively used
in our day-to-day business such as
www.shopgrowlife.com
,
www.freefit.com
,
www.growlifeinc.com
,
www.growlifeeco.com
and
www.greners.com
.
We have applied for two patents related to the vertical room
product previously discussed.
We have
a policy of entering into confidentiality and non-disclosure
agreements with our employees, some of our vendors and customers as
necessary.
Closed Transactions Expected to Grow the Company
On October 3, 2017, we 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.
On
February 16, 2018, we entered into an Addendum (the “First
Addendum”) to amend the terms between the Company and David
Reichwein.
Pursuant to the First
Addendum, we purchased the remaining 49% of the Purchased Assets in
exchange for a one-time payment of $250,000 and the cancellation of
Mr. Reichwein’s right to receive a 10% commission on certain
sales of Free Fit products as was set forth in Mr.
Reichwein’s employment agreement. In exchange for the
cancellation of the commission in the employment agreement, Mr.
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.
On
August 17, 2018, we 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. We intend to operate a retail store, internet sales and
direct sales from this location.
Concurrently,
the Company and Seller entered into a Security Agreement for
securing our assets 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, we 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 our 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, we 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.
We
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 our common stock at a price of
$0.013 per share or $1,395,000.
We have
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.
Government Regulation
Currently,
there are thirty three states plus the District of Columbia that
have laws and/or regulation that recognize in one form or another
legitimate medical uses for cannabis and consumer use of cannabis
in connection with medical treatment. There are currently ten
states and the District of Columbia that allow recreational use of
cannabis. As of March 8, 2019, the policy and regulations of the
Federal government and its agencies is that cannabis has no medical
benefit and a range of activities including cultivation and use of
cannabis for personal use is prohibited on the basis of federal law
and may or may not be permitted on the basis of state law. Active
enforcement of the current federal regulatory position on cannabis
on a regional or national basis may directly and adversely affect
the willingness of customers of GrowLife to invest in or buy
products from GrowLife. Active enforcement of the current federal
regulatory position on cannabis may thus indirectly and adversely
affect revenues and profits of the GrowLife companies.
All
this being said, many reports show that the majority of the
American public is in favor of making medical cannabis available as
a controlled substance to those patients who need it. The need and
consumption will then require cultivators to continue to provide
safe and compliant crops to consumers. The cultivators will then
need to build facilities and use consumable products, which
GrowLife provides.
Demand: Market Size and Growth
GrowLife
Inc. is engaged in the business of offering general hydroponic
growing equipment including complete indoor lighting
systems, growing mediums, soils, tools for cutting and
propagation, hydroponics systems, growing accessories, bulbs,
ballasts, reflectors, meters and timers and climate control
equipment for the indoor plant cultivation and cannabis
industries.
Additionally,
through two recent asset acquisitions, GrowLife has begun selling
company manufactured products including:
-
Luxury Vinyl Tile
for residential, commercial, and temporary surface consumers of the
Floor Covering industry.
-
Plant cloning and
propagation equipment which service the plant cultivation market
with consumers in both commercial and non-commercial areas of plant
growing
Hydroponic Growing Equipment
Industry Definition:
The
Hydroponic Growing Equipment industry is primarily engaged in
selling hydroponic horticulture equipment. Hydroponics is a method
of growing plants using mineral nutrient solutions in water without
the use of soil.
Key Industry Statistics:
-
In 2018, the
Hydroponic Growing Equipment Stores industry generated $842 million
in gross revenue in the United States. (
source
).
-
The industry grew
4.6% from 2013 to 2018 and is expected to continuing growing at a
rate of 1.4% through 2019. (
source
|
source
)
-
As of 2019, there
are approximately 2,546 businesses engaged in the industry who
employ around 9,982. (
source
|
source
)
-
No companies have
been identified as “major players”.
-
According to the
market research report by Transparency Market Research, the global
hydroponics market is anticipated to reach a value of US$12.1
bn from US$6.9 bn by the end of 2025. The market is
likely to register a promising 6.50% CAGR between 2017 and 2025.
(
source
)
Product and Service Segmentation:
Of
total product sales in 2017, 35.8% of products sold were nutrients,
solution chemicals and other treatments, 30.4% were hydroponic
systems and equipment, 20% were other accessories, additions,
supplies and merchandise, and 13.8% were hardware, tools, plumping
and electrical supplies.
Key Industry Drivers:
-
Much of the
industry’s sudden popularity is the result of heightened
consumer interest in locally grown and organic produce; many
producers of hydroponic fruits and vegetables strive to use
sustainable business practices and natural nutrients and
pesticides, in addition to the increasing size of the legalized
cannabis market.
-
The increasing
awareness among consumers regarding the consumption of greens is
predicted to encourage the growth of the global hydroponics market
in the coming years. (
source
)
-
Vertical
cultivation to act as a major opportunity for the market players,
which is likely to accelerate market growth in the near future.
(
source
)
-
Consumer interest
in organic foods and hydroponic growing has also increased as
disposable income continues to rise.
-
According to the
World Bank, there is a deduction of 3% land in the past 54 years
which may lead to more urbanization and adoption of hydroponics in
the years to come. (
source
)
-
Given the
discretionary nature of the industry’s products, demand is
heavily influenced by fluctuations in the overall level of consumer
disposable income and consumer confidence in the economy. Over the
five years to 2017, per capita disposable income is anticipated to
grow an annualized 1.4%. Rising disposable income increases
consumers’ willingness to purchase luxuries such as
high-priced hydroponic growing equipment and organic
foods.
-
Impact of the
Cannabis Industry
o
The legalized
cannabis industry is growing exponentially. Hydroponics is the
preferred method of cultivation of cannabis products, which will in
turn increase demand for hydroponics equipment.
o
In certain states
and throughout Canada, individuals above 21 years of age and
patients with medical marijuana cards are also allowed to grow
limited quantities of marijuana for personal use. This has
encouraged patients to purchase hydroponic growing equipment and
pursue small-scale marijuana cultivation.
Competitive advantages:
-
Most hydroponic
growing equipment stores are small business operations that serve
their immediate geographic areas. GrowLife serves all of North
America.
Growth Outlook of Hydroponics Industry:
“The
industry is growing faster than overall GDP”
Factors:
-
Increasing consumer
focus on healthy eating habits will likely spur demand as more
consumers seek out organic and pesticide-free produce and opt to
grow their own or purchase locally produced organic foods made with
hydroponic growing equipment.
-
Medical and
recreational cannabis has been legalized in multiple states and the
country of Canada and is expected to be approved in a number of US
states over the next five years, which will lead more patients and
cultivators to buy cannabis products and hydroponic growing
equipment to fulfill demand for this growing market.
-
This hydroponics
industry will also continue to benefit from risk-averse local
farmers wishing to break their reliance on weather conditions that
may be increasingly volatile.
-
IBIS World
estimates that per capita
disposable income will rise at an annualized rate of 2.7% over the
five years to 2022.
-
The US Department
of Agriculture reported in 2016 that the number of certified
organic food operators increased nearly 12.0% from 2015, and this
growth is expected to remain high over the next five
years.
Medical and Recreational Marijuana Growing Industry
Industry Definition:
This
emerging industry pertains to those engaged in the practice of
cultivating and producing legal marijuana plants for the medical
and recreational consumer markets.
Key Industry Statistics:
-
In 2018, the
Medical and Recreational Marijuana Growing industry in the United
States generated $6 billion and is expected to grow to $8.2 billion
in 2019. (
source
)
-
According to data
released by Forbes, i
n 2017 the worldwide legal marijuana trade grew by
37% and was worth $9.5 billion. At $8.5 billion, the U.S. accounted
for 90% of it. At $0.6 billion Canada’s 2017 share was 6%.
The rest of the world combined made up the remaining 4%.
(
sou
rce
)
-
Ten states and the
District of Columbia have legalized the drug for recreational
purposes, according to the National Conference of State
Legislatures. More than half the states (33) – plus the
District of Columbia, Guam and Puerto Rico – have legalized
it for medical purposes. (
sour
ce
)
-
As of 2018, there
are approximately 223,123 businesses engaged in the industry,
employing roughly 763,189 people.
-
No companies have
been identified as “major players”.
-
Over the past five
years, the number of growers has grown by 14.6% and the number of
employees has grown by 16.5%.
-
Medical Marijuana
patients with severe pain comprise the largest market segment for
the industry, accounting for 64.6% of the market in 2016, with
recreational consumers accounting for 14.1% of the market. The
remaining market share is shared by consumers purchasing products
for treatment of other various medical conditions.
Key
Industry Drivers:
-
Medical marijuana
growers continue to benefit from the steadily aging population.
Chronic illnesses have become more prevalent as the population
continues to age, driving demand for medical
marijuana.
-
An estimated 2.6
million people use marijuana for medicinal purposes, and this
segment of the US population is anticipated to increase drastically
over the next five years.
-
More than
two-thirds of Americans now live in jurisdictions that have
legalized either the medical or adult use of
marijuana.
-
The industry has
been significantly restricted by an increasing amount of proposed
regulations. In particular, medical marijuana remains a Schedule I
controlled substance under federal law, despite state-level
legalization. Following legalization in many states during the 2016
election cycle, and expected legalization in the upcoming 2018
cycle, beneficial regulation is expected to create an opportunity
for the industry. (
source
)
-
Growth Outlook of the Medical and Recreational Marijuana Growing
Industry:
“The
industry is growing at a faster rate than the US
economy”
-
The industry has
experienced an annual growth rate of 28.3% from 2013-2018 and is
expected to grow 27.4% in 2019 over the previous year.
(
source
)
-
Forbes
expects that by 2022, legal
cannabis revenue in the U.S. market is projected to hit $23.4
billion (73% of the world market market). During the same period,
Canada is projected to reach $5.5 billion (17%) and at $3.1
billion, the rest of the world will represent almost 10% of the
legal cannabis market (
source
)
Factors:
-
Continued
legalization on the state level will increase accessibility to
medical and recreational marijuana, increasing nationwide
demand.
-
Growing acceptance
of the marijuana products will increase demand. According to a poll
conducted by the Pew Research Center, 62% of Americans say the use
of marijuana should be legalized in 2018, compared with just 31% in
2000.
-
The level of
household income determines consumers’ ability to purchase
medical marijuana products. While prescription products can be
essential for health and therefore less susceptible to changes in
consumer expenditure, the unconventional nature of the
industry’s products make it subject to changes in disposable
income. As a result, an increase in disposable income will boost
demand for medical marijuana growers.
Competitive advantages:
-
GrowLife has
branded itself among cannabis cultivators as experts in the space.
The company is associated with cannabis growing and is known as one
of the first companies in the space
-
GrowLife offers
consultancy services on commercial cultivation set
ups.
-
GrowLife offers
educational resources on proper growing procedures for home growing
consumers.
Floor Covering Industry: Segment Luxury Vinyl Tile (LVT)
(US)
Industry Definition:
The
Floor Covering industry is segmented by product type including
wood, rugs, resilient (which includes the Luxury Vinyl Tile or
“LVT” segment), carpet, tile, laminate and rubber
subcategories. GrowLife is engaged in luxury vinyl tile
manufacturing and is participating in this market by selling
through business-to-business and business-to-consumer
channels.
2016 Key Industry Statistics:
-
I
n 2016, the U.S. flooring market grew
an estimated 5.1%, according to Market Insights, with total
revenues of $21.174 billion.
-
North America flooring market will witness gains over 5% up to 2024
according to Global Market Insights.
Key Industry Drivers:
-
LVT
now accounts for 16.5% of the total
flooring market in dollars and 18.8% in volume after a 6.5% rise in
units to 3.537 billion square feet. In 2015, resilient held a 13.3%
market share in terms of dollars, which was up from 12.2% in 2014,
11.9% in 2013 and 11.2% in 2012 respectively.
-
Sales have gone from nearly $750 million in 2012 to $948 million in
2013, $1.142 billion in 2014, $1.651 billion in 2015 and $2.161 in
2016. That represents respective gains of 26.4%, 20.5%, 27.1% and
30.9% respectively.
-
LVT sales have more than doubled in three years.
-
LVT increased significantly in both residential and commercial
markets—dollars and square feet—in 2016. Residential
LVT saw a 68.3% increase in square footage from 760 million in 2015
to 1.04 billion (including WPC), making up 76.1% of the LVT market.
This number was 71% a year ago and 55% two years ago.
-
The commercial market rose from 297.2 million square feet to 326.3
million square feet, a 9.8% increase. While residential brought in
more dollars—$1.512 billion—last year, commercial LVT
still performed well, posting a 12.5% increase, rising from $576.4
million in 2015 to $648.6 million in 2016.
Competitive
advantages:
-
GrowLife’s
LVT product features significant competitive advantages
including:
o
Custom imaging,
“Real Touch” texture technology, fully customizable
platform, “Seriously Easy to Install” design, made in
the US, waterproof, lifespan 3x longer than traditional vinyl, 4mmm
thickness and 22mil wear layer and wear and stain
resistance.
-
Direct to consumer
sales model that major competitors cannot execute on due to resale
agreements.
Growth Outlook:
The
global vinyl flooring market is expected to reach an estimated
$16.2 billion by 2023, and it is forecast to grow at a CAGR of 4.4%
from 2018 to 2023.
OUR COMMON STOCK
On October 17, 2017, we were 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, we began to trade
on
the
Pink Sheet stocks
system.
Our bid price had
closed below $0.01 for more than 30 consecutive calendar
days.
PRIMARY RISKS AND UNCERTAINTIES
We are
exposed to various risks related to legal proceedings, our need for
additional financing, the sale of significant numbers of our
shares, the potential adjustment in the exercise price of our
convertible debentures and a volatile market price for our common
stock. These risks and uncertainties are discussed in more detail
below in Part I, Item 1A.
WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION
REPORTS
We file annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC").
You may read and copy any document we file at the SEC's Public
Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the
public reference room. The SEC maintains a website at
http://www.sec.gov that contains reports, proxy and information
statements and other information concerning filers. We also
maintain a web site at http://www.growlifeinc.com that provides
additional information about our Company and links to documents we
file with the SEC. The Company's charters for the Audit Committee,
the Compensation Committee, and the Nominating Committee; and the
Code of Conduct & Ethics are also available on our website. The
information on our website is not part of this Form
10-K.
ITEM 1A. RISK FACTORS
There are certain inherent risks which will have an effect on our
development in the future and
the most significant risks and
uncertainties known and identified by our management are described
below.
Risks Related to Our Business
There are certain inherent risks which will have an effect on the
Company’s development in the future and
the most
significant risks and uncertainties known and identified by our
management are described below.
Risks Associated with Securities Purchase Agreement with Chicago
Venture
The
Securities Purchase Agreement with Chicago Venture will terminate
if we file protection from its creditors, a Registration Statement
on Form S-1 is not effective, and our market capitalization or the
trading volume of our common stock does not reach certain levels.
If terminated, we will be unable to draw down all or substantially
all of our Chicago Venture Notes.
Our
ability to require Chicago Venture to fund the Chicago Venture Note
is at our discretion, subject to certain limitations. Chicago
Venture is obligated to fund if each of the following conditions
are met; (i) the average and median daily dollar volumes of our
common stock for the twenty (20) and sixty (60) trading days
immediately preceding the funding date are greater than $100,000;
(ii) our market capitalization on the funding date is greater than
$17,000,000; (iii) we are not in default with respect to share
delivery obligations under the note as of the funding date; and
(iv) we are current in our reporting obligations.
There
is no guarantee that we will be able to meet the foregoing
conditions or any other conditions under the Securities Purchase
Agreement and/or Chicago Venture Note or that we will be able to
draw down any portion of the amounts available under the Securities
Purchase Agreement and/or Chicago Venture Note.
If we
not able to draw down all due under the Securities Purchase
Agreement or if the Securities Purchase Agreement is terminated, we
may be forced to curtail the scope of our operations or alter our
business plan if other financing is not available to
us.
Our common stock.
On
October 17, 2017, we were 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, we began to trade on
the
Pink Sheet stocks
system.
Our bid price had
closed below $0.01 for more than 30 consecutive calendar
days.
This
action had a material adverse effect on our business, financial
condition and results of operations. If we are unable to obtain
additional financing when it is needed, we will need to restructure
our operations, and divest all or a portion of our
business.
We have been involved in Legal Proceedings.
We have
been involved in certain disputes and legal proceedings as
discussed in the section title “Legal Proceedings”
within our Form 10-K for year ended December 31, 2018. In addition,
as a public company, we are also potentially susceptible to
litigation, such as claims asserting violations of securities laws.
Any such claims, with or without merit, if not resolved, could be
time-consuming and result in costly litigation. There can be no
assurance that an adverse result in any future proceeding would not
have a potentially material adverse on our business, results of
operations or financial condition.
We may engage in acquisitions, mergers, strategic alliances, joint
ventures and divestures that could result in final results that are
different than expected.
In the normal course of business, we engage in discussions relating
to possible acquisitions, equity investments, mergers, strategic
alliances, joint ventures and divestitures. Such transactions are
accompanied by a number of risks, including the use of significant
amounts of cash, potentially dilutive issuances of equity
securities,
incurrence of
debt on potentially unfavorable terms as well as impairment
expenses related to goodwill and amortization expenses related to
other intangible assets, the possibility that we may pay too much
cash or issue too many of our shares as the purchase price for an
acquisition relative to the economic benefits that we ultimately
derive from such acquisition, and various potential difficulties
involved in integrating acquired businesses into our
operations.
From time to time, we have also engaged in discussions with
candidates regarding the potential acquisitions of our product
lines, technologies and businesses. If a divestiture such as this
does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and
adversely affected. A successful divestiture depends on various
factors, including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
Our proposed business is dependent on laws pertaining to the
marijuana industry.
Continued
development of the marijuana industry is dependent upon continued
legislative authorization of the use and cultivation of marijuana
at the state level. Any number of factors could slow or
halt progress in this area. Further, progress, while
encouraging, is not assured. While there may be ample
public support for legislative action, numerous factors impact
the legislative process. Any one of these factors could
slow or halt use of marijuana, which would negatively impact our
proposed business.
Currently,
thirty three states and the District of Columbia allow its citizens
to use medical cannabis. Additionally, ten states and
the District of Columbia have legalized cannabis for adult
use. The state laws are in conflict with the federal
Controlled Substances Act, which makes marijuana use and possession
illegal on a national level. The Obama administration previously
effectively stated that it is not an efficient use of resources to
direct law federal law enforcement agencies to prosecute those
lawfully abiding by state-designated laws allowing the use and
distribution of medical marijuana. The Trump
administration position is unknown. However, there is no
guarantee that the Trump administration will not change current
policy regarding the low-priority enforcement of federal
laws. Additionally, any new administration that follows
could change this policy and decide to enforce the federal laws
strongly. Any such change in the federal
government’s enforcement of current federal laws could cause
significant financial damage to us and its
shareholders.
Further,
while we do not harvest, distribute or sell marijuana, by supplying
products to growers of marijuana, we could be deemed to be
participating in marijuana cultivation, which remains illegal under
federal law, and exposes us to potential criminal liability, with
the additional risk that our business could be subject to civil
forfeiture proceedings.
The marijuana industry faces strong opposition.
It is
believed by many that large, well-funded businesses may have a
strong economic opposition to the marijuana industry. We
believe that the pharmaceutical industry clearly does not want to
cede control of any product that could generate significant
revenue. For example, medical marijuana will likely
adversely impact the existing market for the current
“marijuana pill” sold by mainstream pharmaceutical
companies. Further, the medical marijuana industry could
face a material threat from the pharmaceutical industry, should
marijuana displace other drugs or encroach upon the pharmaceutical
industry’s products. The pharmaceutical industry
is well funded with a strong and experienced lobby that eclipses
the funding of the medical marijuana movement. Any
inroads the pharmaceutical industry could make in halting or
impeding the marijuana industry harm our business, prospects,
results of operation and financial condition.
Marijuana remains illegal under Federal
law.
Marijuana
is a Schedule-I controlled substance and is illegal under federal
law. Even in those states in which the use of marijuana
has been legalized, its use remains a violation of federal
law. Since federal law criminalizing the use of
marijuana preempts state laws that legalize its use, strict
enforcement of federal law regarding marijuana would harm our
business, prospects, results of operation and financial
condition.
Raising additional capital to implement our business plan and pay
our debts will cause dilution to our existing stockholders, require
us to restructure our operations, and divest all or a portion of
our business.
We need
additional financing to implement our business plan and to service
our ongoing operations and pay our current debts. There can be no
assurance that we will be able to secure any needed funding, or
that if such funding is available, the terms or conditions would be
acceptable to us.
If we
raise additional capital through borrowing or other debt financing,
we may incur substantial interest expense. Sales of additional
equity securities will dilute on a pro rata basis the percentage
ownership of all holders of common stock. When we raise more equity
capital in the future, it will result in substantial dilution to
our current stockholders.
If we
are unable to obtain additional financing when it is needed, we
will need to restructure our operations, and divest all or a
portion of our business.
Closing of bank and merchant processing accounts could have a
material adverse effect on our business, financial condition and/or
results of operations.
As a
result of the regulatory environment, we have experienced the
closing of several of our bank and merchant processing accounts
since March 2014. We have been able to open other bank accounts.
However, we may have other banking accounts closed. These factors
impact management and could have a material adverse effect on our
business, financial condition and/or results of
operations.
Federal regulation and enforcement may adversely affect the
implementation of medical marijuana laws and regulations may
negatively impact our revenues and profits.
Currently,
there are thirty three states plus the District of Columbia that
have laws and/or regulation that recognize in one form or another
legitimate medical uses for cannabis and consumer use of cannabis
in connection with medical treatment. Many other states are
considering legislation to similar effect. As of the date of this
writing, the policy and regulations of the Federal government and
its agencies is that cannabis has no medical benefit and a range of
activities including cultivation and use of cannabis for personal
use is prohibited on the basis of federal law and may or may not be
permitted on the basis of state law. Active enforcement of the
current federal regulatory position on cannabis on a regional or
national basis may directly and adversely affect the willingness of
customers of GrowLife to invest in or buy products from GrowLife
that may be used in connection with cannabis. Active enforcement of
the current federal regulatory position on cannabis may thus
indirectly and adversely affect revenues and profits of the
GrowLife companies.
Our history of net losses has raised substantial doubt regarding
our ability to continue as a going concern. If we do not continue
as a going concern, investors could lose their entire
investment.
Our
history of net losses has raised substantial doubt about our
ability to continue as a going concern, and as a result, our
independent registered public accounting firm included an
explanatory paragraph in its report on our financial statements as
of and for the years ended December 31, 2018 and 2017 with
respect to this uncertainty. Accordingly, our ability to continue
as a going concern will require us to seek alternative financing to
fund our operations. This going concern opinion could materially
limit our ability to raise additional funds through the issuance of
new debt or equity securities or otherwise. Future reports on our
financial statements may include an explanatory paragraph with
respect to our ability to continue as a going concern.
We have a history of operating losses and there can be no assurance
that we can again achieve or maintain profitability.
We have
experienced net losses since inception. As of December 31, 2018, we
had an accumulated deficit of $
141.2
million. There can be no assurance
that we will achieve or maintain profitability.
We are subject to corporate governance and internal control
reporting requirements, and our costs related to compliance with,
or our failure to comply with existing and future requirements,
could adversely affect our business.
We must
comply with corporate governance requirements under the
Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street
Reform and Consumer Protection Act of 2010, as well as additional
rules and regulations currently in place and that may be
subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules, and regulations continue to
evolve and may become increasingly stringent in the future. We are
required to include management’s report on internal controls
as part of our annual report pursuant to Section 404 of the
Sarbanes-Oxley Act. We strive to continuously evaluate and improve
our control structure to help ensure that we comply with Section
404 of the Sarbanes-Oxley Act. The financial cost of compliance
with these laws, rules, and regulations is expected to remain
substantial.
We
cannot assure you that we will be able to fully comply with these
laws, rules, and regulations that address corporate governance,
internal control reporting, and similar matters. Failure to comply
with these laws, rules and regulations could materially adversely
affect our reputation, financial condition, and the value of our
securities.
Our inability or failure to effectively manage our growth could
harm our business and materially and adversely affect our operating
results and financial condition.
Our
strategy envisions growing our business. We plan to expand our
product, sales, administrative and marketing organizations. Any
growth in or expansion of our business is likely to continue to
place a strain on our management and administrative resources,
infrastructure and systems. As with other growing businesses, we
expect that we will need to further refine and expand our business
development capabilities, our systems and processes and our access
to financing sources. We also will need to hire, train, supervise
and manage new and retain contributing employees. These processes
are time consuming and expensive, will increase management
responsibilities and will divert management attention. We cannot
assure you that we will be able to:
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expand
our products effectively or efficiently or in a timely
manner;
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allocate
our human resources optimally;
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meet
our capital needs;
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identify
and hire qualified employees or retain valued employees;
or
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incorporate
effectively the components of any business or product line that we
may acquire in our effort to achieve growth.
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Our
operating results may fluctuate significantly based on customer
acceptance of our products. As a result, period-to-period
comparisons of our results of operations are unlikely to provide a
good indication of our future performance. Management expects that
we will experience substantial variations in our net sales and
operating results from quarter to quarter due to customer
acceptance of our products. If customers don’t accept our
products, our sales and revenues will decline, resulting in a
reduction in our operating income.
Customer
interest for our products could also be impacted by the timing of
our introduction of new products. If our competitors introduce new
products around the same time that we issue new products, and if
such competing products are superior to our own, customers’
desire for our products could decrease, resulting in a decrease in
our sales and revenues. To the extent that we introduce new
products and customers decide not to migrate to our new products
from our older products, our revenues could be negatively impacted
due to the loss of revenue from those customers. In the event that
our newer products do not sell as well as our older products, we
could also experience a reduction in our revenues and operating
income.
If we do not successfully generate additional products and
services, or if such products and services are developed but not
successfully commercialized, we could lose revenue
opportunities.
Our
future success depends, in part, on our ability to expand our
product and service offerings. To that end we have engaged in the
process of identifying new product opportunities to provide
additional products and related services to our customers. The
process of identifying and commercializing new products is complex
and uncertain, and if we fail to accurately predict
customers’ changing needs and emerging technological trends
our business could be harmed. We may have to commit significant
resources to commercializing new products before knowing whether
our investments will result in products the market will accept.
Furthermore, we may not execute successfully on commercializing
those products because of errors in product planning or timing,
technical hurdles that we fail to overcome in a timely fashion, or
a lack of appropriate resources. This could result in competitors
providing those solutions before we do and a reduction in net sales
and earnings.
The
success of new products depends on several factors, including
proper new product definition, timely completion and introduction
of these products, differentiation of new products from those of
our competitors, and market acceptance of these products. There can
be no assurance that we will successfully identify new product
opportunities, develop and bring new products to market in a timely
manner, or achieve market acceptance of our products or that
products and technologies developed by others will not render our
products or technologies obsolete or noncompetitive.
Our future success depends on our ability to grow and expand our
customer base. Our failure to achieve such growth or
expansion could materially harm our business.
To
date, our revenue growth has been derived primarily from the sale
of our products and through the purchase of existing businesses.
Our success and the planned growth and expansion of our business
depend on us achieving greater and broader acceptance of our
products and expanding our customer base. There can be no assurance
that customers will purchase our products or that we will continue
to expand our customer base. If we are unable to effectively market
or expand our product offerings, we will be unable to grow and
expand our business or implement our business strategy. This could
materially impair our ability to increase sales and revenue and
materially and adversely affect our margins, which could harm our
business and cause our stock price to decline.
If we
incur substantial liability from litigation, complaints, or
enforcement actions resulting from misconduct by our distributors,
our financial condition could suffer. We will require that our
distributors comply with applicable law and with our policies and
procedures. Although we will use various means to address
misconduct by our distributors, including maintaining these
policies and procedures to govern the conduct of our distributors
and conducting training seminars, it will still be difficult to
detect and correct all instances of misconduct. Violations of
applicable law or our policies and procedures by our distributors
could lead to litigation, formal or informal complaints,
enforcement actions, and inquiries by various federal, state, or
foreign regulatory authorities against us and/or our distributors.
and could consume considerable amounts of financial and other
corporate resources, which could have a negative impact on our
sales, revenue, profitability and growth prospects. As we are
currently in the process of implementing our direct sales
distributor program, we have not been, and are not currently,
subject to any material litigation, complaint or enforcement action
regarding distributor misconduct by any federal, state or foreign
regulatory authority.
Our
future manufacturers could fail to fulfill our orders for products,
which would disrupt our business, increase our costs, harm our
reputation and potentially cause us to lose our
market.
We may
depend on contract manufacturers in the future to produce our
products. These manufacturers could fail to produce products to our
specifications or in a workmanlike manner and may not deliver the
units on a timely basis. Our manufacturers may also have to obtain
inventories of the necessary parts and tools for production. Any
change in manufacturers to resolve production issues could disrupt
our ability to fulfill orders. Any change in manufacturers to
resolve production issues could also disrupt our business due to
delays in finding new manufacturers, providing specifications and
testing initial production. Such disruptions in our business and/or
delays in fulfilling orders would harm our reputation and would
potentially cause us to lose our market.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We may
be unable to obtain intellectual property rights to effectively
protect our business. Our ability to compete effectively may be
affected by the nature and breadth of our intellectual property
rights. While we intend to defend against any threats to our
intellectual property rights, there can be no assurance that any
such actions will adequately protect our interests. If we are
unable to secure intellectual property rights to effectively
protect our technology, our revenue and earnings, financial
condition, and/or results of operations would be adversely
affected.
We may
also rely on nondisclosure and non-competition agreements to
protect portions of our technology. There can be no assurance that
these agreements will not be breached, that we will have adequate
remedies for any breach, that third parties will not otherwise gain
access to our trade secrets or proprietary knowledge, or that third
parties will not independently develop the technology.
We do
not warrant any opinion as to non-infringement of any patent,
trademark, or copyright by us or any of our affiliates, providers,
or distributors. Nor do we warrant any opinion as to invalidity of
any third-party patent or unpatentability of any third-party
pending patent application.
Our industry is highly competitive and we have less capital and
resources than many of our competitors, which may give them an
advantage in developing and marketing products similar to ours or
make our products obsolete.
We are
involved in a highly competitive industry where we may compete with
numerous other companies who offer alternative methods or
approaches, may have far greater resources, more experience, and
personnel perhaps more qualified than we do. Such resources may
give our competitors an advantage in developing and marketing
products similar to ours or products that make our products
obsolete. There can be no assurance that we will be able to
successfully compete against these other entities.
Transfers of our securities may be restricted by virtue of state
securities “blue sky” laws, which prohibit trading
absent compliance with individual state laws. These restrictions
may make it difficult or impossible to sell shares in those
states.
Transfers
of our common stock may be restricted under the securities or
securities regulations laws promulgated by various states and
foreign jurisdictions, commonly referred to as "blue sky" laws.
Absent compliance with such individual state laws, our common stock
may not be traded in such jurisdictions. Because the securities
held by many of our stockholders have not been registered for
resale under the blue sky laws of any state, the holders of such
shares and persons who desire to purchase them should be aware that
there may be significant state blue sky law restrictions upon the
ability of investors to sell the securities and of purchasers to
purchase the securities. These restrictions may prohibit the
secondary trading of our common stock. Investors should consider
the secondary market for our securities to be a limited
one.
We are dependent on key personnel.
Our
success depends to a significant degree upon the continued
contributions of key management and other personnel, some of whom
could be difficult to replace. We do not maintain key man life
insurance covering our officers. Our success will depend on the
performance of our officers and key management and other personnel,
our ability to retain and motivate our officers, our ability to
integrate new officers and key management and other personnel into
our operations, and the ability of all personnel to work together
effectively as a team. Our failure to retain and recruit
officers and other key personnel could have a material adverse
effect on our business, financial condition and results of
operations.
We have limited insurance.
We have
limited directors’ and officers’ liability insurance
and limited commercial liability insurance policies. Any
significant claims would have a material adverse effect on our
business, financial condition and results of
operations.
Risks Related to our Common Stock
Chicago Venture could have significant influence over matters
submitted to stockholders for approval.
Chicago Venture, Iliad and St, George
As a
result of funding from Chicago Venture, Iliad and St. George as
previously detailed, they exercise significant control over
us.
If
these persons were to choose to act together, they would be able to
significantly influence all matters submitted to our stockholders
for approval, as well as our officers, directors, management and
affairs. For example, these persons, if they choose to act
together, could significantly influence the election of directors
and approval of any merger, consolidation or sale of all or
substantially all of our assets. This concentration of voting power
could delay or prevent an acquisition of us on terms that other
stockholders may desire.
Trading in our stock is limited by the SEC’s penny stock
regulations.
Our
stock is categorized as a penny stock The SEC has adopted Rule
15g-9 which generally defines "penny stock" to be any equity
security that has a market price (as defined) less than US$ 5.00
per share or an exercise price of less than US $5.00 per share,
subject to certain exclusions (e.g., net tangible assets in excess
of $2,000,000 or average revenue of at least $6,000,000 for the
last three years). The penny stock rules impose additional sales
practice requirements on broker-dealers who sell to persons other
than established customers and accredited investors. The penny
stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the
SEC, which provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer
also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly
account statements showing the market value of each penny stock
held in the customer's account. The bid and offer quotations, and
the broker-dealer and salesperson compensation information, must be
given to the customer orally or in writing prior to effecting the
transaction and must be given to the customer in writing before or
with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not
otherwise exempt from these rules, the broker-dealer must make a
special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written
agreement to the transaction. Finally, broker-dealers may not
handle penny stocks under $0.10 per share.
These
disclosure requirements reduce the level of trading activity in the
secondary market for the stock that is subject to these penny stock
rules. Consequently, these penny stock rules would affect the
ability of broker-dealers to trade our securities if we become
subject to them in the future. The penny stock rules also could
discourage investor interest in and limit the marketability of our
common stock to future investors, resulting in limited ability for
investors to sell their shares.
FINRA sales practice requirements may also limit a
shareholder’s ability to buy and sell our stock.
In
addition to the “penny stock” rules described above,
FINRA has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities
to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes
that there is a high probability that speculative low priced
securities will not be suitable for at least some customers. The
FINRA requirements make it more difficult for broker-dealers to
recommend that their customers buy our common stock, which may
limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares.
The market price of our common stock may be volatile.
The
market price of our common stock has been and is likely in the
future to be volatile. Our common stock price may fluctuate in
response to factors such as:
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Halting of trading by the SEC or FINRA.
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Announcements
by us regarding liquidity, legal proceedings, significant
acquisitions, equity investments and divestitures, strategic
relationships, addition or loss of significant customers and
contracts, capital expenditure commitments, loan, note payable and
agreement defaults, loss of our subsidiaries and impairment of
assets,
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Issuance
of convertible or equity securities for general or merger and
acquisition purposes,
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Issuance
or repayment of debt, accounts payable or convertible debt for
general or merger and acquisition purposes,
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Sale of
a significant number of shares of our common stock by
shareholders,
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General
market and economic conditions,
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Quarterly
variations in our operating results,
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Investor
relation activities,
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Announcements
of technological innovations,
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New
product introductions by us or our competitors,
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Competitive
activities, and
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Additions
or departures of key personnel.
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These
broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition, and/or results
of operations.
The sale of a significant number of our shares of common stock
could depress the price of our common stock.
Sales
or issuances of a large number of shares of common stock in the
public market or the perception that sales may occur could cause
the market price of our common stock to decline. As of December 31,
2018, there were approximately
3.44
billion shares of our common stock
issued and outstanding. In addition, as of December 31,
2018, there are also (i) stock option grants outstanding for the
purchase of
100
million common
shares at a $0.010 average exercise price; (ii) warrants for the
purchase of
902.8
million
common shares at a $0.029 average exercise price; and (iii)
112.8
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, 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.
If all stock option grant and warrant and contingent
shares are issued, approximately 4.553 billion of our currently
authorized 6 billion shares of common stock will be issued and
outstanding.
For purposes
of estimating the number of shares issuable upon the
exercise/conversion of all stock options, warrants and contingent
shares, we assumed the number of shares and average share prices
detailed above.
These
stock option grant, warrant and contingent shares could result in
further dilution to common stock holders and may affect the market
price of the common stock.
Significant
shares of common stock are held by our principal shareholders,
other Company insiders and other large shareholders. As affiliates
as defined under Rule 144 of the Securities Act or Rule 144 of the
Company, our principal shareholders, other Company insiders and
other large shareholders may only sell their shares of common stock
in the public market pursuant to an effective registration
statement or in compliance with Rule 144.
These
stock option grant, warrant and contingent shares could result in
further dilution to common stock holders and may affect the market
price of the common stock.
Some of our convertible debentures and warrants may require
adjustment in the conversion price.
Our
Convertible Notes Payable may require an adjustment in the current
conversion price of $0.002535 per share if we issue common stock,
warrants or equity below the price that is reflected in the
convertible notes payable. Our warrant with St. George may require
an adjustment in the exercise price. The conversion price of the
convertible notes and warrants will have an impact on the market
price of our common stock. Specifically, if under the terms of the
convertible notes the conversion price goes down, then the market
price, and ultimately the trading price, of our common stock will
go down. If under the terms of the convertible notes the conversion
price goes up, then the market price, and ultimately the trading
price, of our common stock will likely go up. In other words, as
the conversion price goes down, so does the market price of our
stock. As the conversion price goes up, so presumably does the
market price of our stock. The more the conversion price goes down,
the more shares are issued upon conversion of the debt which
ultimately means the more stock that might flood into the market,
potentially causing a further depression of our stock.
We do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.
We have
never declared or paid cash dividends on our capital stock. We
currently intend to retain all of our future earnings, if any, to
finance the growth and development of our business, and we do not
anticipate paying any cash dividends on our capital stock in the
foreseeable future. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result,
capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
Anti-takeover provisions may limit the ability of another party to
acquire our company, which could cause our stock price to
decline.
Our
certificate of incorporation, as amended, our bylaws and Delaware
law contain provisions that could discourage, delay or prevent a
third party from acquiring our company, even if doing so may be
beneficial to our stockholders. In addition, these provisions could
limit the price investors would be willing to pay in the future for
shares of our common stock.
We may issue preferred stock that could have rights that are
preferential to the rights of common stock that could discourage
potentially beneficially transactions to our common
shareholders.
An
issuance of additional shares of preferred stock could result in a
class of outstanding securities that would have preferences with
respect to voting rights and dividends and in liquidation over our
common stock and could, upon conversion or otherwise, have all of
the rights of our common stock. Our Board of Directors'
authority to issue preferred stock could discourage potential
takeover attempts or could delay or prevent a change in control
through merger, tender offer, proxy contest or otherwise by making
these attempts more difficult or costly to achieve. The
issuance of preferred stock could impair the voting, dividend and
liquidation rights of common stockholders without their
approval.
If the company were to dissolve or wind-up, holders of our common
stock may not receive a liquidation preference.
If we
were too wind-up or dissolve the Company and liquidate and
distribute our assets, our shareholders would share ratably in our
assets only after we satisfy any amounts we owe to our
creditors. If our liquidation or dissolution were
attributable to our inability to profitably operate our business,
then it is likely that we would have material liabilities at the
time of liquidation or dissolution. Accordingly, we
cannot give you any assurance that sufficient assets will remain
available after the payment of our creditors to enable you to
receive any liquidation distribution with respect to any shares you
may hold.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Operating Leases
On May
31, 2018, we 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. The Company’s agreement
expires May 31, 2019.
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
we are 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.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we 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 our
annual report on Form 10-K filed with the SEC on March 8, 2019, we
know of no material, existing or pending legal proceedings against
our Company, nor are we 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 our interest.
ITEM 4. MINE SAFETY
DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE (MARK)
Directors and Executive Officers
The
following table sets forth certain information about our current
directors and executive officers as of December 31,
2018:
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Management
Directors
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Marco
Hegyi
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61
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Director
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December
9, 2013
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Chairman
of the Board
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April
1, 2016- October 23, 2017 and December 6, 2018
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Chief
Executive Officer
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April
1, 2016
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President
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December
4, 2013
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Nominations
and Governance Committee Chairman
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June 3,
2014- October 23, 2017
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Interim
Audit Committee Chairman
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December
6, 2018
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Mark E.
Scott
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65
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Chief
Financial Officer
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July
31, 2014
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Secretary
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February
14, 2017
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Director
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February
14, 2017
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Independent
Directors
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Katherine
McLain
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53
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Director
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February
14, 2017
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Nominations
and Governance Committee Chairman
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October
23, 2017
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Compensation
Committee Chairman
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December
6, 2018
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Thom
Kozik
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58
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Director
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October
5, 2017
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Other
Named Executives
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Joseph
Barnes
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46
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President
of GrowLife Hydroponics, Inc.
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August
16, 2017
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Senior
Vice President of Business Development
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October
10, 2014
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All
directors hold office until their successors are duly appointed or
until their earlier resignation or removal.
Business Experience Descriptions
Set forth below is certain biographical information regarding each
of our executive officers and directors.
Marco Hegyi
–
Mr. Hegyi joined GrowLife as its President and a
Member of its Board of Directors on December 9, 2013 and was
appointed as Chairman of the Nominations and Governance Committee
and a member of the Compensation Committee on June 3, 2014. Mr.
Hegyi was appointed as CEO and Chairman of GrowLife effective on
April 1, 2016. On October 23, 2017, Mr. Hegyi was not appointed as
Chairman of GrowLife, Chairman of the Nominations and Governance
Committee or a member of the Compensation Committee. Effective
December 6, 2018, Mr. Hegyi serves as Chairman of the Board, a
Member of the Board of Directors, Chief Executive Officer,
President, Interim Audit Committee Chairman and as a Member of the
Compensation and Nominations and Governance
Committees.
Mr. Hegyi served as an independent director of Know Labs, Inc., fka
Visualant, Inc. from February 14, 2008 and as Chairman of the Board
from May 2011, and served at the Chairman of the Audit and
Compensation committees until his departure on February 2015.
Previously, Mr. Hegyi was a principal with the Chasm Group from
2006 to January 2014, where he has provided business consulting
services. As a management consultant, Mr. Hegyi applied his
extensive technology industry experience to help early-stage
companies and has been issued 10 US patents.
Prior to working as a consultant in 2006, Mr. Hegyi served as
Senior Director of Global Product Management at Yahoo! Prior to
Yahoo!, Mr. Hegyi was at Microsoft leading program management for
Microsoft Windows and Office beta releases aimed at software
developers from 2001 to 2006. While at Microsoft, he formed
new software-as-a-service concepts and created operating programs
to extend the depth and breadth of the company’s unparalleled
developer eco-system, including managing offshore, outsource teams
in China and India, and being the named inventor of a filed
Microsoft patent for a business process in service
delivery.
During Mr. Hegyi’s career, he has served as President and CEO
of private and public companies, Chairman and director of boards,
finance, compensation and audit committee chair, chief operating
officer, vice-president of sales and marketing, senior director of
product management, and he began his career as a systems software
engineer.
Mr. Hegyi earned a Bachelor of Science degree in Information and
Computer Sciences from the University of California, Irvine, and
has completed advanced studies in innovation marketing, advanced
management, and strategy at Harvard Business School, Stanford
University, UCLA Anderson Graduate School of Management, and MIT
Sloan School of Management.
Mr. Hegyi’s prior experience as Chairman and Chief Executive
Officer of public companies, combined with his advanced studies in
business management and strategy, were the primary factors in the
decision to add Mr. Hegyi to the Company’s Board of
Directors.
Mark E. Scott
– Mr. Mark
E. Scott was re-appointed to the Board of Directors and Secretary
of GrowLife, Inc. on February 14, 2017. Mr. Scott was previously a
member of the Board of Directors and Secretary of GrowLife, Inc.
from May 2014 until his resignation on October 18, 2015. Mr. Scott
was appointed our Consulting Chief Financial Officer on July 31,
2014 and Chief Financial Officer on November 1,
2017.
Mr. Scott served as Chief Financial Officer, Secretary and
Treasurer of Know Labs, Inc., from May 2010 to August 31, 2016. Mr.
Scott was Chief Financial Officer of U.S. Rare Earths, Inc., a
consulting position he held December 19, 2011 to April 30, 2014 and
Chief Financial Officer of Sonora Resources Corporation, a
consulting position he held from June 15, 2011 to August 31, 2014.
Also, Mr. Scott was Chief Financial Officer, Secretary and
Treasurer of WestMountain Gold from February 28, 2011 to December
31, 2013 and was a consultant from December 2010 to February 27,
2011. Mr. Scott provides consulting services to other entities from
time to time. Mr. Scott has significant financial, capital market
and relations experience in public and private microcap
companies. Mr. Scott is a certified public accountant
and received a Bachelor of Arts in Accounting from the University
of Washington.
Mr. Scott was appointed to the Board of Directors based on his
financial, SEC and governance skills.
Katherine McLain-
Katherine McLain, Esq.
joined GrowLife as a Member of its Board of
Directors on February 14, 2017 and was appointed Chairman of the
Nominations & Governance and Compensation Committees and serves
on the Audit Committee as of December 6, 2018.
Ms. McLain has served as Assistant General Counsel
for Intuit, Inc. (known for TurboTax & QuickBooks) since
November 2017. Previously, Ms. McLain was legal counsel for Stripe,
Inc., a financial payments company from 2015-2017. From 2010 to
2015, Ms. McLain was Senior Counsel of Silicon Valley Bank. Ms.
McLain has held legal and compliance roles ranging in both public
and private companies including Silicon Valley Bank, Wells Fargo
Bank, and Obopay. Ms. McLain has over 30 years of experience
as a revenue focused attorney and regulatory professional helping
grow new business lines as well as ground up start-up
ventures. She is a graduate of the University of California,
Berkeley and the Santa Clara University School of Law and lives in
Castro Valley, CA.
Ms. McLain was appointed to the Board of Directors based on her
legal and regulatory skills.
Thom Kozik
-
Thom Kozik
joined GrowLife as a Member of its Board of Directors on October 5,
2017 and was appointed a member of the Audit Committee on October
23, 2017. Mr. Kozik was appointed to the Nominations &
Governance and Compensation Committees and serves on the Audit
Committee as of December 6, 2018. From 2013 through 2014, Mr. Kozik
served as Chief Operating Office of Omnia Media in Los Angeles, a
leading YouTube Multichannel Network delivering over 1 billion
monthly video views, and almost 70 million global Millennial
subscribers. Thom assisted the company’s CEO/founder in
building the team, refining product strategy, and securing
additional funding. In December 2014, Mr. Kozik took on the role of
VP, Global Marketing/Loyalty for Marriott International, having
been recruited to fundamentally transform the hospitality
industry’s longest-running loyalty program. Thom also led the
merging of two of the industry’s most powerful programs with
Marriott’s acquisition of Starwood Hotels & Resorts in
2016. Since March 1, 2018, Mr. Kozik serves as Chief Commercial
Officer of Loyyal Corporation, a technology firm providing services
to enterprise clients in the Travel & Hospitality sector. In
his decades of experience with corporations such as Marriott
International, Microsoft, Yahoo, and Atari, along with several
startups, he has held executive roles in marketing, business
development, and product development. Over the past decade
Kozik’s core focus has been the behavioral economics of
online consumers and communities, and methods to maximize their
lifetime value, and leveraging technology to reduce acquisition
costs while increasing retention.
Mr. Kozik was appointed to the Board of Directors based on his
marketing and product brand skills.
Joseph Barnes-
Mr. Barnes was
appointed President of GrowLife Hydroponics, Inc. on August 16,
2017 and was appointed Senior Vice President of Business
Development for GrowLife, Inc. on October 10, 2014. Mr. Barnes
works, Colorado. Mr. Barnes joined GrowLife in 2010 and is
responsible for all GrowLife Hydroponics operations. He led the
sales team that recorded sales in 2014 of more than $8 million, a
100% increase from the previous year.
Mr. Barnes made the progressive and entrepreneurial decision to
work with GrowLife after seeing the agricultural benefits of indoor
growing. He is deeply passionate about clean and sustainable grows,
and has deep relationships with many trusted cultivators. He holds
extensive knowledge of indoor growing methods with
concentrating on maximizing the yields for clean and
healthy crops.
Barnes was a highly regarded snowboard instructor in Vail, Colorado
prior to joining GrowLife. He worked with many top snowboard
professionals, and received a Level 1 certification from American
Association Snowboard Instructors (AASI). Before his days on the
slopes, Barnes was also a recruiting manager focusing on placing
senior executives with international pharmaceutical/biotech
companies. He also owned and operated Chrome Night Life Arena, a
20,000 square foot indoor/outdoor venue based in Philadelphia with
more than 65 employees.
Certain Significant Employees
There are no significant employees required to be disclosed under
Item 401(c) of Regulation S-K.
Family Relationships
There are no family relationships among our directors and executive
officers.
Involvement in Certain Legal Proceedings
None of
our current directors or executive officers has, to the best of our
knowledge, during the past ten years:
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Had any petition under the federal bankruptcy laws or any state
insolvency law filed by or against, or had a receiver, fiscal
agent, or similar officer appointed by a court for the business or
property of such person, or any partnership in which he was a
general partner at or within two years before the time hereof, or
any corporation or business association of which he was an
executive officer at or within two years before the time
hereof;
●
Been convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
●
Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining him
from, or otherwise limiting, the following activities:
●
Acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the
Commodity Futures Trading Commission, or an associated person of
any of the foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated person,
director or employee of any investment company, bank, savings and
loan association or insurance company, or engaging in or continuing
any conduct or practice in connection with such
activity;
●
Engaging in any type of business practice; or
●
Engaging in any activity in connection with the purchase or sale of
any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities
laws;
●
Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any federal or
state authority barring, suspending, or otherwise limiting for more
than 60 days the right of such person to engage in any
activity described in (i) above, or to be associated with
persons engaged in any such activity;
●
Been found by a court of competent jurisdiction in a civil action
or by the SEC to have violated any federal or state securities law,
where the judgment in such civil action or finding by the SEC has
not been subsequently reversed, suspended, or vacated;
or
●
Been found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any
federal commodities law, where the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended, or vacated.
Committees of the Board of Directors
The Board has three standing committees to facilitate and assist
the Board in the execution of its responsibilities. The committees
are currently the Audit Committee, the Nominations and Governance
Committee, and the Compensation Committee. The Committees were
formed on June 3, 2014 by the current board of directors. The Audit
Committee, Compensation and Nominations and Governance Committees
each have one management directors and two independent directors.
The table below shows current membership for each of the
standing Board committees.
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Audit
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Compensation
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Nominations and
Governance
|
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Executive
Committee
|
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Marco
Hegyi (Interim Chairman)
|
|
Katherine
McLain (Chairman)
|
|
Katherine
McLain (Chairman)
|
|
Marco
Hegyi (Chairman)
|
|
Thom
Kozik
|
|
Marco
Hegyi
|
|
Marco
Hegyi
|
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Katherine
McLain
|
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Thom
Kozik
|
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Thom
Kozik
|
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Compensation Committee Interlocks and Insider
Participation
None of
our executive officers serves as a member of the board of directors
or compensation committee, or other committee serving an equivalent
function, of any other entity that has one or more of its executive
officers serving as a member of our board of directors or our
compensation committee.
Code of Conduct and Ethics
We have
adopted conduct and ethics standards titled the code of ethics,
which is available at www.growlifeinc.com. These standards were
adopted by our board of directors to promote transparency and
integrity. The standards apply to our board of directors,
executives and employees. Waivers of the requirements of our code
of ethics or associated polices with respect to members of our
board of directors or executive officers are subject to approval of
the full board.
Section 16(a) Beneficial Ownership Reporting
Compliance
Our executive officers, directors and 10% stockholders are required
under Section 16(a) of the Exchange Act to file reports of
ownership and changes in ownership with the SEC. Copies of these
reports must also be furnished to us.
Based solely on a review of copies of reports furnished to us, as
of December 31, 2018 our executive officers, directors and 10%
holders complied with all filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview of Compensation Program
This Compensation Discussion and Analysis describes the material
elements of compensation awarded to, earned by or paid to each of
our executive officers named in the Compensation Table on page
35 under “Remuneration of Executive Officers” (the
“Named Executive Officers”) who served during the year
ended December 31, 2018. This compensation discussion primarily
focuses on the information contained in the following tables and
related footnotes and narrative for the last completed fiscal year.
We also describe compensation actions taken after the last
completed fiscal year to the extent that it enhances the
understanding of our executive compensation disclosure. The
principles and guidelines discussed herein would also apply to any
additional executive officers that the Company may hire in the
future.
The Compensation Committee of the Board has responsibility for
overseeing, reviewing and approving executive compensation and
benefit programs in accordance with the Compensation
Committee’s charter. The members of the Compensation
Committee are Marco Hegyi, Thom Kozik and Katherine McLain. We
expect to appoint one independent Directors to serve on the
Compensation Committee during 2018.
Compensation Philosophy and Objectives
The major compensation objectives for the Company’s executive
officers are as follows:
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●
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to
attract and retain highly qualified individuals capable of making
significant contributions to our long-term success;
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●
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to
motivate and reward named executive officers whose knowledge,
skills, and performance are critical to our success;
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●
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to
closely align the interests of our named executive officers and
other key employees with those of its shareholders;
and
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●
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to
utilize incentive based compensation to reinforce performance
objectives and reward superior performance.
|
Role of Chief Executive Officer in Compensation
Decisions
The Board approves all compensation for the chief executive
officer. The Compensation Committee makes recommendations on the
compensation for the chief executive officer and approves all
compensation decisions, including equity awards, for our executive
officers. Our chief executive officer makes recommendations
regarding the base salary and non-equity compensation of other
executive officers that are approved by the Compensation Committee
in its discretion.
Setting Executive Compensation
The Compensation Committee believes that compensation for the
Company’s executive officers must be managed to what we can
afford and in a way that allows for us to meet our goals for
overall performance. During 2018 and 2017, the Compensation
Committee and the Board compensated its Chief Executive Officers,
President and Chief Financial Officer at the salaries indicated in
the compensation table. This compensation reflected our financial
condition. The Compensation Committee does not use a peer group of
publicly-traded and privately-held companies in structuring the
compensation packages.
Executive Compensation Components for the Year Ended December 31,
2018
The Compensation Committee did not use a formula for allocating
compensation among the elements of total compensation during the
year that ended December 31, 2018. The Compensation Committee
believes that in order to attract and retain highly effective
people it must maintain a flexible compensation structure. For the
year that ended December 31, 2018, the principal components of
compensation for named executive officers were base
salary.
Base Salary
Base salary is intended to ensure that our employees are fairly and
equitably compensated. Generally, base salary is used to
appropriately recognize and reward the experience and skills that
employees bring to the Company and provides motivation for career
development and enhancement. Base salary ensures that all employees
continue to receive a basic level of compensation that reflects any
acquired skills which are competently demonstrated and are
consistently used at work.
Base salaries for the Company’s named executive officers are
initially established based on their prior experience, the scope of
their responsibilities and the applicable competitive market
compensation paid by other companies for similar positions. Mr.
Hegyi, Mr. Scott and Mr. Barnes were compensated as described above
based on the financial condition of the Company.
Performance-Based Incentive Compensation
The Compensation Committee believes incentive compensation
reinforces performance objectives, rewards superior performance and
is consistent with the enhancement of stockholder value. All of the
Company’s Named Executive Officers are eligible to receive
performance-based incentive compensation. The Compensation
Committee did not recommend or approve payment of any
performance-based incentive compensation to the Named Executive
Officers during the year ended December 31, 2018 based on our
financial condition.
Ownership Guidelines
The Compensation Committee does not require our executive officers
to hold a minimum number of our shares. However, to directly align
the interests of executive officers with the interests of the
stockholders, the Compensation Committee encourages each executive
officer to maintain an ownership interest in the
Company.
Stock Option Program
Stock options are an integral part of our executive compensation
program. They are intended to encourage ownership and retention of
the Company’s common stock by named executive officers and
employees, as well as non-employee members of the Board. Through
stock options, the objective of aligning employees’ long-term
interest with those of stockholders may be met by providing
employees with the opportunity to build a meaningful stake in the
Company.
The Stock Option Program assists us by:
-
enhancing the link between the creation of stockholder value and
long-term executive incentive compensation;
-
providing an opportunity for increased equity ownership by
executive officers; and
-
maintaining competitive levels of total compensation.
Stock option award levels are determined by the Compensation
Committee and vary among participants’ positions within the
Company. Newly hired executive officers or promoted executive
officers are generally awarded stock options, at the discretion of
the Compensation Committee, at the next regularly scheduled
Compensation Committee meeting on or following their hire or
promotion date. In addition, such executives are eligible to
receive additional stock options on a discretionary basis after
performance criteria are achieved.
Options are awarded at the closing price of our common stock on the
date of the grant or last trading day prior to the date of the
grant. The Compensation Committee’s policy is not to grant
options with an exercise price that is less than the closing price
of our common stock on the grant date.
Generally, the majority of the options granted by the Compensation
Committee vest quarterly over two to three years of the 5-10-year
option term. Vesting and exercise rights cease upon termination of
employment and/or service, except in the case of death (subject to
a one year limitation), disability or retirement. Stock options
vest immediately upon termination of employment without cause or an
involuntary termination following a change of control. Prior to the
exercise of an option, the holder has no rights as a stockholder
with respect to the shares subject to such option, including voting
rights and the right to receive dividends or dividend
equivalents.
The Named Executive Officers received stock option grants and
warrants during the year ended December 31, 2018 as outlined
below.
Retirement and Other Benefits
We have no other retirement, savings, long-term stock award or
other type of plans for the Named Executive Officers.
Perquisites and Other Personal Benefits
During the year ended December 31, 2018, we provided the Named
Executive Officers with medical insurance and nominal health club
benefits. The Company paid $10,273 in life insurance for Mr. Hegyi
and $27,018 in insurance for Mr. Scott. No other perquisites or
other personal benefits were provided to Named Executive Officers.
The committee expects to review the levels of perquisites and other
personal benefits provided to Named Executive Officers
annually.
Employment and consulting agreements are discussed
below.
Tax and Accounting Implications
Deductibility of Executive Compensation
Subject to certain exceptions, Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code") generally denies a
deduction to any publicly held corporation for compensation paid to
its chief executive officer and its three other highest paid
executive officers (other than the principal financial officer) to
the extent that any such individual's compensation exceeds $1
million. “Performance-based compensation” (as defined
for purposes of Section 162(m)) is not taken into account for
purposes of calculating the $1 million compensation limit, provided
certain disclosure, shareholder approval and other requirements are
met. We periodically review the potential consequences of Section
162(m) and may structure the performance-based portion of our
executive compensation to comply with certain exceptions to Section
162(m). However, we may authorize compensation payments that do not
comply with the exceptions to Section 162(m) when we believe that
such payments are appropriate and in the best interests of the
stockholders, after taking into consideration changing business
conditions or the officer's performance
Accounting for Stock-Based Compensation
We account for stock-based payments including its Stock Option
Program in accordance with the requirements of ASC 718,
“Compensation-Stock Compensation.”
COMPENSATION COMMITTEE REPORT
The Compensation Committee, sets and administers policies that
govern the Company's executive compensation programs, and incentive
and stock programs. The Compensation Committee of the Company has
reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of Regulation S-K with management and,
based on such review and discussions, the Compensation Committee
recommended to the Board that the Compensation Discussion and
Analysis be included in this Annual Report on Form 10-K for year
ended December 31, 2018.
THE COMPENSATION COMMITTEE
Katherine McLain (Chairman)
Marco Hegyi
Thom Kozik
EXECUTIVE COMPENSATION
REMUNERATION OF EXECUTIVE OFFICERS
The following table provides information concerning remuneration of
the chief executive officer, the chief financial officer and
another named executive officer for the years ended December 31,
2018 and 2017:
Summary Compensation Table
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Principal
Position
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Marco Hegyi, Chief Excutive
Officer, Chairman of the Board and Director (2)
|
12/31/2018
|
$
255,234
|
$
20,000
|
$
-
|
$
-
|
$
-
|
$
285,023
|
$
560,257
|
|
12/31/2017
|
$
250,000
|
$
-
|
$
-
|
$
-
|
$
-
|
$
205,273
|
$
455,273
|
|
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|
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|
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|
Mark E. Scott, Chief Financial
Officer and Director (3)
|
12/31/2018
|
$
147,140
|
$
20,000
|
$
-
|
$
-
|
$
40,000
|
$
27,018
|
$
234,158
|
|
12/31/2017
|
$
138,250
|
$
-
|
$
-
|
$
-
|
$
18,000
|
$
28,047
|
$
184,297
|
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|
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|
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|
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|
Joseph Barnes,President of GrowLife
Hydroponics, Inc. (4)
|
12/31/2018
|
$
152,515
|
$
20,000
|
$
-
|
$
-
|
$
36,000
|
$
-
|
$
208,515
|
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|
12/31/2017
|
$
138,670
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$
-
|
$
-
|
$
-
|
$
24,000
|
$
-
|
$
162,670
|
(1)
For 2013, reflects
the aggregate grant date fair value of stock awards granted during
the relevant fiscal year calculated in accordance with FASB ASC
Topic 718 as reflected in the terms of the August 12, 2012
Compensation Plan. For 2014,
these
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
(2)
Mr.
Hegyi was paid a salary of $275,000 during the period October 15,
2018 to December 31, 2018 and a salary of $250,000 during the
period January 1, 2018 to October 14, 2018 and the year ended
December 31, 2017. Mr. Hegyi received a discretionary bonus of
$20,000 during the year ended December 31, 2018.
We paid life insurance of $10,273 for Mr. Hegyi
during the years ended December 31, 2018 and 2017,
respectively.
On October 21, 2018 and 2017, a Mr. Hegyi a 5
year Warrant to purchase up to 10,000,000 shares of our common
stock at an exercise price of $0.01 per share vested. The warrants
were valued at $390,000 and $192,000 we recorded $178,750 and
$195,000 as compensation expense for the years ended December 31,
2018 and 2017, respectively.. On October 15, 2018, Mr. Hegyi
received Warrants to purchase up to 48,000,000 shares of our common
stock at an exercise price of $0.012 per share and which vest on
October 15, 2018, 2019 and 2020. The Warrants are exercisable for 5
years. The warrant that vested on October 15, 2018 was valued at
$96,000 and we recorded this amount compensation expense for the
year ended December 31, 2018.
(3)
Mr. Scott was paid a salary of $165,000 during the
period October 15, 2018 to December 31, 2018 and a salary of
$150,000 during the period January 1, 2018 to October 14, 2018 and
the year ended December 31, 2017. Mr. Scott received a
discretionary bonus of $20,000 during the year ended December 31,
2018.
Mr. Scott was reimbursed $27,018
and $28,047 for insurance expenses during the years ended December
31, 2018 and 2017, respectively.
On October 15, 2018, an entity controlled by Mr.
Scott was granted an option to purchase 20,000,000 shares of common
stock
at an exercise price of $0.012 per share.
On October 15, 2017, an entity controlled by Mr.
Scott was granted an option to purchase 12,000,000 shares of common
stock
at an exercise price of $0.006 per share. The stock
option grants vest quarterly over three years and are exercisable
for 5 years. The stock option grants were valued at $40,000 and
$18,000. The Company recorded $8,833 and $1,500 as compensation
expense for the years ended December 31, 2018 and 2017,
respectively.
(4)
Mr. Barnes was paid a salary of $165,000 during the
period October 15, 2
0
18 to December 31, 2018 and
a salary of $150,000 during the period January 1, 2018 to October
14, 2018 and the year ended December 31, 2017. Mr. Barnes received
a discretionary bonus of $20,000 during the year ended December 31,
2018.
On October 15, 2018, Mr. Barnes
was granted an option to purchase 18,000,000 shares of common
stock
at an exercise price of $0.012 per share.
On October 25, 2017, Mr. Barnes was granted an
option to purchase 10,000,000 shares of common stock
at an
exercise price of $0.007 per share. The stock option grants vest
quarterly over three years and are exercisable for 5 years. The
stock option grants were valued at $36,000 and $24,000. The Company
recorded $8,550 and $2,000 as compensation expense for the years
ended December 31, 2018 and 2017, respectively.
Grants of Stock Based Awards during the year ended December 31,
2018
The Compensation Committee approved the following performance-based
incentive compensation to the Named Executive Officers for the year
ended December 31, 2018:
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Estimated
Future
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Estimated
Future
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All
Other
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P
ayouts
Under
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Payouts
Under
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All
Other
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Option
Awards;
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Non-Equity
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Equity
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Stock
Awards;
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Number
of
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Incentive
Plan
|
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Incentive
Plan
|
|
Number
of
|
Securities
|
Exercise
or
|
Grant
Date
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Name
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Marco Hegyi
|
-
|
$
-
|
-
|
$
-
|
-
|
-
|
-
|
-
|
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
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|
Mark E. Scott
(2)
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$
-
|
-
|
$
-
|
-
|
-
|
-
|
20,000,000
|
-
|
$
0.012
|
$
40,000
|
|
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Joseph Barnes
(3)
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|
$
-
|
-
|
$
-
|
-
|
-
|
-
|
18,000,000
|
-
|
$
0.012
|
$
36,000
|
(1)
These amounts reflect the grant date market value
as required by Regulation S-K Item 402(n)(2), computed in
accordance with FASB ASC Topic 718.
(2)
On October 15, 2018, an entity
controlled by Mr. Scott was granted an option to purchase
20,000,000 shares of common stock
at an exercise price of
$0.012 per share. The stock option grant vests quarterly over three
years and is exercisable for 5 years. The stock option grant was
valued at $40,000
(3)
On October 15, 2018, Mr. Barnes was
granted an option to purchase 18,000,000 shares of common
stock
at an exercise price of $0.012 per share. The stock
option grant vests quarterly over three years and is exercisable
for 5 years. The stock option grant was valued at
$36,000.
Outstanding Equity Awards as of December 31, 2018
The Named Executive Officers had the following outstanding equity
awards as of December 31, 2018:
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Option
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Expiration
|
|
|
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|
|
Name
|
(#)
|
(#)
|
(#)
|
|
Date
|
(#)
|
|
(#)
|
|
|
Marco Hegyi
(2)
|
-
|
-
|
-
|
$
-
|
|
-
|
$
-
|
-
|
$
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark E. Scott
(3)
|
4,000,000
|
-
|
-
|
$
0.010
|
7/30/2019
|
-
|
$
-
|
-
|
$
-
|
|
|
5,000,000
|
7,000,000
|
-
|
$
0.006
|
10/15/2022
|
-
|
$
-
|
-
|
$
-
|
|
|
1,666,667
|
18,333,333
|
-
|
$
0.012
|
10/23/2023
|
-
|
$
-
|
-
|
$
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Barnes
(4)
|
8,000,000
|
-
|
-
|
$
0.001
|
10/9/2019
|
-
|
$
-
|
-
|
$
-
|
|
|
4,166,667
|
5,833,333
|
|
$
0.007
|
10/25/2022
|
-
|
$
-
|
-
|
$
-
|
|
|
1,500,000
|
8,608,334
|
-
|
$
0.012
|
10/23/2023
|
-
|
$
-
|
-
|
$
-
|
(1)
These amounts reflect the grant date market value
as required by Regulation S-K Item 402(n)(2), computed in
accordance with FASB ASC Topic 718.
(2)
On October 15, 2018, an entity
controlled by Mr. Scott was granted an option to purchase
20,000,000 shares of common stock
at an exercise price of
$0.012 per share.
On October 15, 2017,
an entity controlled by Mr. Scott was granted an option to purchase
12,000,000 shares of common stock
at an exercise price of
$0.006 per share. The stock option grants vest quarterly over three
years and are exercisable for 5 years. The stock option grants were
valued at $40,000 and $18,000 The Company recorded $8,833 and
$1,500 as compensation expense for the years ended December 31,
2018 and 2017, respectively..An entity controlled by Mr. Scott has
an additional 4,000,000 share stock option grant that is fully
vested.
(3)
On October 15, 2018, Mr.
Barnes was granted an option to purchase 18,000,000 shares of
common stock
at an exercise price of $0.012 per share.
On October 25, 2017, Mr. Barnes was
granted an option to purchase 10,000,000 shares of common
stock
at an exercise price of $0.007 per share. The stock
option grants vest quarterly over three years and are exercisable
for 5 years. The stock option grants were valued at $36,000 and
$24,000. The Company recorded $8,550 and $2,000 as compensation
expense for the years ended December 31, 2018 and 2017,
respectively. Mr. Barnes stock option grant consists of 8,000,000
shares of our common stock that vested quarterly over three years
beginning October 1, 2014 and 2,000,000 shares of our common stock
that vested October 10, 2014. On October 12, 2016, we amended the
exercise price of the stock option grants for Mr. Barnes to $0.010
per share.
Option Exercises and Stock Vested for the year ended December 31,
2018
Mr.
Hegyi, Scott and Barnes did not have any option exercised or stock
that vested during the year ended December 31, 2018.
Pension Benefits
We do not provide any pension benefits.
Nonqualified Deferred Compensation
We do not have a nonqualified deferral program.
Employment Agreements
Employment Agreement with Marco Hegyi
On
October 15, 2018, the Board of Directors approved an Employment
Agreement with Marco Hegyi pursuant to which we engaged Mr. Hegyi
as its Chief Executive Officer through October 15, 2021. Mr.
Hegyi’s previous Employment Agreement was set to expire on
October 21, 2018.
Mr.
Hegyi’s annual compensation is $275,000. Mr. Hegyi is also
entitled to receive an annual bonus equal to four percent (4%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Mr.
Hegyi received a Warrant to purchase up to 16,000,000 shares of our
common stock at an exercise price of $0.012 per share which vest
immediately. In addition, Mr. Hegyi received two Warrants to
purchase up to 16,000,000 shares of common stock of the Company at
an exercise price of $0.012 per share which vest on October 15,
2019 and 2020, respectively. The Warrants are exercisable for 5
years.
Mr.
Hegyi will be entitled to participate in all group employment
benefits that are offered by us to our senior executives and
management employees from time to time, subject to the terms and
conditions of such benefit plans, including any eligibility
requirements. In addition, the Company will purchase and maintain
during the Term an insurance policy on Mr. Hegyi’s life in
the amount of $2,000,000 payable to Mr. Hegyi’s named heirs
or estate as the beneficiary.
If we terminate Mr. Hegyi’s employment at any time prior to
the expiration of the Term without Cause, as defined in the
Employment Agreement, or if Mr. Hegyi terminates his employment at
any time for “Good Reason” or due to a
“Disability”, Mr. Hegyi will be entitled to receive (i)
his Base Salary amount through the end of the Term; and (ii) his
Annual Bonus amount for each year during the remainder of the
Term.
Employment Agreement with Mark E. Scott
On
October 15, 2018, the Compensation Committee approved an Employment
Agreement with Mark E. Scott pursuant to which the Company engaged
Mr. Scott as its Chief Financial Officer through October 15, 2021.
Mr. Scott’s previous Agreement was cancelled.
Mr.
Scott’s annual compensation is $165,000. Mr. Scott is also
entitled to receive an annual bonus equal to two percent (2%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Our
Board of Directors granted Mr. Scott an option to purchase twenty
million shares of our Common Stock under our 2017 Amended and
Restated Stock Incentive Plan at an exercise price of $0.012 per
share. The Shares vest quarterly over three years. All options will
have a five-year life and allow for a cashless exercise. The stock
option grant is subject to the terms and conditions of our Amended
and Restated Stock Incentive Plan, including vesting requirements.
In the event that Mr. Scott’s continuous status as employee
to us is terminated by us without Cause or Mr. Scott terminates his
employment with us for Good Reason as defined in the Scott
Agreement, in either case upon or within twelve months after a
Change in Control as defined in our amended and Restated Stock
Incentive Plan, then 100% of the total number of Shares shall
immediately become vested.
Mr.
Scott is entitled to participate in all group employment benefits
that are offered by us to our senior executives and management
employees from time to time, subject to the terms and conditions of
such benefit plans, including any eligibility requirements. In
addition, we are required purchase and maintain an insurance policy
on Mr. Scott’s life in the amount of $2,000,000 payable to
Mr. Scott’s named heirs or estate as the beneficiary.
Finally, Mr. Scott is entitled to twenty days of vacation annually
and also has certain insurance and travel employment
benefits.
If we terminate Mr. Scott’s employment at any time prior to
the expiration of the Term without Cause, as defined in the
Employment Agreement, or if Mr. Scott terminates his employment at
any time for “Good Reason” or due to a
“Disability”, Mr. Scott will be entitled to receive (i)
his Base Salary amount for ninety days; and (ii) his Annual Bonus
amount for each year during the remainder of the
Term.
Employment Agreement with Joseph Barnes
On
October 15, 2018, our Compensation Committee approved an Employment
Agreement with Joseph Barnes pursuant to which we engaged Mr.
Barnes as President of the GrowLife Hydroponics Company through
October 15, 2021. Mr. Barnes’s previous Agreement was
cancelled.
Mr.
Barnes’s annual compensation is $165,000. Mr. Barnes is also
entitled to receive an annual bonus equal to two percent (2%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Our
Board of Directors granted Mr. Barnes an option to purchase
eighteen million shares of the Company’s Common Stock under
the Company’s 2017 Amended and Restated Stock Incentive Plan
at an exercise price of $0.012 per share. The Shares vest quarterly
over three years. All options will have a five-year life and allow
for a cashless exercise. The stock option grant is subject to the
terms and conditions of our Amended and Restated Stock Incentive
Plan, including vesting requirements. In the event that Mr.
Barnes’s continuous status as employee to us is terminated by
us without Cause or Mr. Barnes terminates his employment with us
for Good Reason as defined in the Barnes Agreement, in either case
upon or within twelve months after a Change in Control as defined
in our Amended and Restated Stock Incentive, then 100% of the total
number of Shares shall immediately become vested.
Mr.
Barnes is entitled to participate in all group employment benefits
that are offered by us to our senior executives and management
employees from time to time, subject to the terms and conditions of
such benefit plans, including any eligibility requirements. In
addition, the Company is required purchase and maintain an
insurance policy on Mr. Barnes’s life in the amount of
$2,000,000 payable to Mr. Barnes’s named heirs or estate as
the beneficiary. Finally, Mr. Barnes is entitled to twenty days of
vacation annually and also has certain insurance and travel
employment benefits.
If we terminate Mr. Barnes’s employment at any time prior to
the expiration of the Term without Cause, as defined in the
Employment Agreement, or if Mr. Barnes terminates his employment at
any time for “Good Reason” or due to a
“Disability”, Mr. Barnes will be entitled to receive
(i) his Base Salary amount for ninety days; and (ii) his Annual
Bonus amount for each year during the remainder of the
Term.
Potential Payments upon Termination or Change in
Control
The Company’s Employment Agreement with Marco Hegyi has
provisions providing for severance payments as detailed
below.
|
|
|
|
|
|
|
|
Executive
|
|
|
|
|
|
|
Payments
Upon
|
|
|
|
|
|
|
Separation
|
|
|
|
|
|
|
Compensation:
|
|
|
|
|
|
|
Base salary
(1)
|
$
-
|
$
-
|
$
575,000
|
$
575,000
|
$
-
|
|
Performance-based
incentive
|
|
|
|
|
|
|
compensation
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Stock
options
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
Benefits and
Perquisites:
|
|
|
|
|
|
|
Health and welfare
benefits
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Accrued vacation
pay
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
Total
|
$
-
|
$
-
|
$
575,000
|
$
575,000
|
$
-
|
(1)
Reflects amounts to be paid upon termination
without cause and upon termination in a change of control, less any
months worked. All outstanding warrants fully vest under certain
conditions.
The Company’s Employment Agreement with Mark E. Scott has
provisions providing for severance payments as detailed
below.
|
|
|
|
|
|
|
|
Executive
|
|
|
|
|
|
|
Payments
Upon
|
|
|
|
|
|
|
Separation
|
|
|
|
|
|
|
Compensation:
|
|
|
|
|
|
|
Base salary
(1)
|
$
-
|
$
-
|
$
41,250
|
$
41,250
|
$
-
|
|
Performance-based
incentive
|
|
|
|
|
|
|
compensation
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Stock
options
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
Benefits and
Perquisites:
|
|
|
|
|
|
|
Health and welfare
benefits
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Accrued vacation
pay
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
Total
|
$
-
|
$
-
|
$
41,250
|
$
41,250
|
$
-
|
(2)
Reflects amounts to be paid upon termination
without cause and upon termination in a change of control. All
outstanding stock options vests fully vest under certain
conditions.
The Company’s Employment Agreement with Joe Barnes has
provisions providing for severance payments as detailed
below.
|
|
|
|
|
|
|
|
Executive
|
|
|
|
|
|
|
Payments
Upon
|
|
|
|
|
|
|
Separation
|
|
|
|
|
|
|
Compensation:
|
|
|
|
|
|
|
Base salary
(1)
|
$
-
|
$
-
|
$
41,250
|
$
41,250
|
$
-
|
|
Performance-based
incentive
|
|
|
|
|
|
|
compensation
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Stock
options
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
Benefits and
Perquisites:
|
|
|
|
|
|
|
Health and welfare
benefits
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Accrued vacation
pay
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
Total
|
$
-
|
$
-
|
$
41,250
|
$
41,250
|
$
-
|
(1)
Reflects amounts to be paid upon termination
without cause and upon termination in a change of control. There
outstanding stock options vests fully vest under certain
conditions.
DIRECTOR COMPENSATION
We primarily use stock grants to incentive compensation to attract
and retain qualified candidates to serve on the Board. This
compensation reflected the financial condition of the Company. In
setting director compensation, we consider the significant amount
of time that Directors expend in fulfilling their duties to the
Company as well as the skill-level required by our members of the
Board. On February 1, 2018, a director compensation program was
implemented. The directors are compensated at $60,000 annually and
the annual share award is based on the close price on January 31 of
that year.
During year ended December 31, 2018, Marco Hegyi and Mr. Scott did
not receive any compensation for their service as directors. The
compensation disclosed in the Summary Compensation Table on page 35
represents the total compensation.
Director Summary Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
$
|
|
|
|
$
|
|
|
|
Michael E. Fasci
(2)
|
$
-
|
$
125,781
|
$
-
|
$
-
|
$
-
|
$
-
|
$
125,781
|
|
|
|
|
|
|
|
|
|
|
Katherine McLean
(3)
|
-
|
57,863
|
-
|
-
|
-
|
-
|
57,863
|
|
|
|
|
|
|
|
|
|
|
Thom Kozik
(4)
|
-
|
19,562
|
-
|
-
|
-
|
-
|
19,562
|
|
|
|
|
|
|
|
|
|
|
|
$
-
|
$
203,205
|
$
-
|
$
-
|
$
-
|
$
-
|
$
77,425
|
(1)
These amounts reflect the grant date market value
as required by Regulation S-K Item 402(n)(2), computed in
accordance with FASB ASC Topic 718.
(2)
On February 1, 2018, we issued 3,789,041 shares of our common stock
to Mr. Fasci that was valued at $0.02 per share or $75,781. On
December 6, 2018, we issued Mr. Fasci 5,000,000 shares of our
common stock that was valued at $0.01 per share or $50,000. On
December 6, 2018, Michael E. Fasci resigned as a Member of the
Board of Directors.
(3)
On February 1, 2018, we issued 2,893,151 shares of our common stock
to Katherine McLain that was valued at $0.02 per share or
$57,863.
(4)
On February 1, 2018, we issued 978,082 shares of our common stock
to Thom Kozik that was valued at $0.02 per share or
$19,562.
Compensation Paid to Board Members
Our independent non-employee directors are not compensated in
cash. The only compensation has been in the form of
stock awards. There is a stock compensation plan for independent
non-employee directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the
ownership of our common stock as of December 31, 2018
by:
|
|
●
|
each director and nominee for director;
|
|
|
|
|
|
|
●
|
each person known by us to own beneficially 5% or more of our
common stock;
|
|
|
|
|
|
|
●
|
each officer named in the summary compensation table elsewhere in
this report; and
|
|
|
|
|
|
|
●
|
all directors and executive officers as a group.
|
The amounts and percentages of common stock beneficially owned are
reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a “beneficial
owner” of a security if that person has or shares voting
power,” which includes the power to vote or to direct the
voting of such security, or “investment power,” which
includes the power to dispose of or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of
any securities of which that person has the right to acquire
beneficial ownership within 60 days. Under these rules more than
one person may be deemed a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities
as to which such person has no economic interest.
Unless otherwise indicated below, each beneficial owner named in
the table has sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws
where applicable. The address of each beneficial owner is 5400
Carillon Point, Kirkland, WA 98033 and the address of more than 5%
of common stock is detailed below.
|
|
Shares
Beneficially Owned
|
|
|
|
|
|
Directors and Named
Executive Officers-
|
|
|
|
Marco Hegyi
(2)
|
46,000,000
|
1.3
%
|
|
Mark E. Scott
(3)
|
23,666,667
|
*
|
|
Katherine McLain
(4)
|
4,893,151
|
*
|
|
Thom Kozik
(5)
|
2,978,082
|
*
|
|
Joseph Barnes
(6)
|
13,966,667
|
*
|
|
Total Directors and
Officers (5 in total)
|
91,504,567
|
2.7
%
|
* Less than 1%.
(1)
Based on 3,437,599,095 shares of common
stock outstanding as of December 31, 2018.
(2) Reflects the shares beneficially owned by Marco Hegyi,
including warrants
to purchase 53,500.000 shares of our
common stock.
(3) Reflects the shares beneficially owned by Mark E. Scott,
including stock option grants totaling 10,666,667 shares that Mr.
Scott has the right to acquire in sixty days.
(4)
Reflects the shares beneficially owned
by
Katherine McLain.
(5)
Reflects the shares beneficially owned
by
Thom Kozik.
(6)
Reflects the shares beneficially owned
by Joseph Barnes, including stock option grants totaling 13,666,667
shares that Mr. Barnes has the right to acquire in sixty
days.
|
|
Shares
Beneficially Owned
|
Name and Address
of Beneficial Owner
|
|
|
|
CANX USA LLC
(1)
|
|
|
|
410 South Rampart
Blvd., Suite 350
|
540,000,000
|
13.6
%
|
|
Las Vegas, NV
89145
|
|
|
|
|
|
4.99
%)
|
(1) Reflects
a warrant to purchase common stock totaling 540,000,000
beneficially owned by CANX USA LLC. CANX does not consider
themselves a control group based on the individual ownership and
legal structure of CANX. Each owner has a 4.99% ownership limit and
the owners cannot act as a control group.
On February 15,
2019, we 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. Subsequent to the year ended December 31,
2018, in exchange for the Agreement and cancellation of the CANX
Agreements and Warrants, we 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Review and Approval of Related Person Transactions
We have operated under a Code of Conduct for many years. Our Code
of Conduct requires all employees, officers and directors, without
exception, to avoid the engagement in activities or relationships
that conflict, or would be perceived to conflict, with the
Company’s interests or adversely affect its reputation. It is
understood, however, that certain relationships or transactions may
arise that would be deemed acceptable and appropriate upon full
disclosure of the transaction, following review and approval to
ensure there is a legitimate business reason for the transaction
and that the terms of the transaction are no less favorable to the
Company than could be obtained from an unrelated
person.
The Audit Committee is responsible for reviewing and approving all
transactions with related persons. The Company reviews all
relationships and transactions in which the Company and our
directors and executive officers or their immediate family members
are participants to determine whether such persons have a direct or
indirect material interest. As required under SEC rules,
transactions that are determined to be directly or indirectly
material to the Company or a related person are
disclosed.
Since
January 1, 2017, the Company engaged in the following reportable
transactions with our directors, executive officers, holders of
more than 5% of our voting securities, and affiliates or
immediately family members of our directors, executive officers and
holders of more than 5% of our voting securities.
Certain Relationships
Please
see the transactions with Chicago Venture Partners, L.P. discussed
in Note 10, 11, 13 and 17.
Transactions with Marco Hegyi
On
October 21, 2018 and 2017, a Mr. Hegyi Warrant to purchase up to
10,000,000 shares of our common stock at an exercise price of $0.01
per share vested. The Warrant is exercisable for 5 years. . The
warrants were valued at $390,000 and $192,000 we recorded $178,750
and $195,000 as compensation expense for the years ended December
31, 2018 and 2017, respectively. On October 15, 2018, Mr. Hegyi
received Warrants to purchase up to 48,000,000 shares of our common
stock at an exercise price of $0.012 per share and which vest on
October 15, 2018, 2019 and 2020. The Warrants are exercisable for 5
years. The warrant that vested on October 15, 2018 was valued at
$96,000 and we recorded this amount compensation expense for the
year ended December 31, 2018.
On
October 15, 2018, the Board of Directors approved an Employment
Agreement with Marco Hegyi pursuant to which the Company engaged
Mr. Hegyi as its Chief Executive Officer through October 15, 2021.
See Note 15 for additional details.
Transactions with an Entity Controlled by Mark E.
Scott
On October 15, 2018, an entity controlled by Mr. Scott was granted
an option to purchase 20,000,000 shares of common stock
at
an exercise price of $0.012 per share.
On October 15, 2017, an entity controlled by Mr.
Scott was granted an option to purchase 12,000,000 shares of common
stock
at an exercise price of $0.006 per share. The stock
option grants vest quarterly over three years and are exercisable
for 5 years. The stock option grants were valued at $40,000 and
$18,000. The Company recorded $8,833 and $1,500 as compensation
expense for the years ended December 31, 2018 and 2017,
respectively
On
October 15, 2018, the Compensation Committee of the Company
approved an Employment Agreement with Mark E. Scott pursuant to
which the Company engaged Mr. Scott as its Chief Financial Officer
through October 15, 2021. Mr. Scott’s previous Agreement was
cancelled. See Note 15 for additional details.
Transaction with Joseph Barnes
On October 15, 2018, Mr. Barnes was granted an option to purchase
18,000,000 shares of common stock
at an exercise price of
$0.012 per share.
On October 25, 2017,
Mr. Barnes was granted an option to purchase 10,000,000 shares of
common stock
at an exercise price of $0.007 per share. The
stock option grants vest quarterly over three years and are
exercisable for 5 years. The stock option grants were valued at
$36,000 and $24,000, The Company recorded $8,550 and $2,000 as
compensation expense for the years ended December 31, 2018 and
2017, respectively.
On
October 15, 2018, the Compensation Committee of the Company
approved an Employment Agreement with Joseph Barnes pursuant to
which the Company engaged Mr. Barnes as President of the GrowLife
Hydroponics Company through October 15, 2021. Mr. Barnes’s
previous Agreement was cancelled. See Note 15 for additional
details.
Transactions with Michael E. Fasci
On
February 4, 2017, we issued 1,000,000 shares of our common stock to
Michael E. Fasci pursuant to a service award for $15,000. The
shares were valued at the fair market price of $0.015 per share. On
April 27, 2017, we issued 1,000,000 shares of our common stock to
Michael E. Fasci pursuant to a service award for $9,000. The shares
were valued at the fair market price of $0.009 per share. On April
27, 2017, we issued 2,000,000 shares of our common stock to Michael
E. Fasci pursuant to a consulting agreement for $18,000. The shares
were valued at the fair market price of $0.009 per share. On
November 2, 2017, we issued 2,000,000 shares of our common stock to
Michael E. Fasci pursuant to a consulting agreement for $10,000.
The shares were valued at the fair market price of $0.005 per
share.
On
February 1, 2018, we issued 3,789,041 shares of our common stock to
Mr. Fasci that was valued at $0.02 per share or $75,781. On
December 6, 2018, we issued Mr. Fasci 5,000,000 shares of our
common stock that was valued at $0.01 per share or $50,000. On
February 6, 2018, Michael E. Fasci resigned as a Member of the
Board of Directors.
Transactions with Katherine McLain
Ms.
Katherine McLain was appointed as a director on February 14, 2017.
On June 28, 2017, we issued 1,000,000 shares of our common stock to
Ms. McLain pursuant to a service award for $9,000. The shares were
valued at the fair market price of $0.009 per share. On October 23,
2017, we issued 1,000,000 shares of our common stock to Ms. McLain
pursuant to a service award for $5,000. The shares were valued at
the fair market price of $0.005 per share. On February 1, 2018, we
issued 2,893,151 shares of our common stock to Katherine McLain
that was valued at $0.02 per share or $57,863.
Transaction with Thom Kozik
Mr.
Kozik was appointed as a director on October 5, 2017. On October
23, 2017, we issued 2,000,000 shares of our common stock to Mr.
Kozik pursuant to a service award for $10,000. The shares were
valued at the fair market price of $0.005 per share. On February 1,
2018, we issued 978,082 shares of our common stock to Thom Kozik
that was valued at $0.02 per share or $19,562.
Director Independence
The Board has affirmatively determined that Katherine McLain, and
Thom Kozik are independent as of December 31, 2018. For
purposes of making that determination, the Board used
NASDAQ’s Listing Rules even though the Company is not
currently listed on NASDAQ.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Committee Pre-Approval Policy
The Audit Committee has established a pre-approval policy and
procedures for audit, audit-related and tax services that can be
performed by the independent auditors without specific
authorization from the Audit Committee subject to certain
restrictions. The policy sets out the specific services
pre-approved by the Audit Committee and the applicable limitations,
while ensuring the independence of the independent auditors to
audit the Company's financial statements is not impaired. The
pre-approval policy does not include a delegation to management of
the Audit Committee’s responsibilities under the Exchange
Act. During the year ended December 31, 2018, the Audit Committee
pre-approved all audit and permissible non-audit services provided
by our independent auditors.
Service Fees Paid to the Independent Registered Public Accounting
Firm
On July
13, 2016, we dismissed PMB Helin Donovan LLP as our independent
registered public accounting firm. On July 13, 2016 we engaged the
services of SD Mayer and Associates, LLP as our new independent
registered public accounting firm to audit our consolidated
financial statements as of December 31, 2018 and 2017 for the years
then ended. The decision to change accountants was approved by our
Audit Committee.
The following is the breakdown of aggregate fees paid for the last
two fiscal years:
|
|
|
|
|
|
|
|
|
Audit
fees
|
$
64,501
|
$
73,371
|
|
Audit related
fees
|
28,754
|
21,000
|
|
Tax
fees
|
9,850
|
12,700
|
|
All other
fees
|
14,500
|
25,570
|
|
|
|
|
|
|
$
117,605
|
$
132,641
|
-
“Audit Fees” are fees paid for to Mayer for
professional services for the audit of our financial
statements.
-
“Audit-Related fees” are fees paid to Mayer for
professional services not included in the first two categories,
specifically, SAS 100 reviews, SEC filings and consents, and
accounting consultations on matters addressed during the audit or
interim reviews, and review work related to quarterly
filings.
-
“Tax Fees” are fees primarily for tax compliance paid
to Mayer in connection with filing US income tax
returns.
-
“All other fees were paid to Mayer and PMB related to the
review of registration statements on Form S-1.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND
ORGANIZATION
GrowLife,
Inc. (“GrowLife” or the “Company”) is
incorporated under the laws of the State of Delaware and is
headquartered in Kirkland, Washington. The Company was founded in
2012 with the Closing of the Agreement and Plan of Merger with SGT
Merger Corporation
.
The
Company’s goal of becoming the nation’s largest
cultivation facility service provider for the production of
organics, herbs and greens and plant-based medicines has not
changed. The Company’s mission is to best serve more
cultivators in the design, build-out, expansion and maintenance of
their facilities with products of high quality, exceptional value
and competitive price. Through a nationwide network of
knowledgeable representatives, regional centers and its e-commerce
website, GrowLife provides essential and hard-to-find goods
including media (i.e., farming soil), industry-leading hydroponics
equipment, organic plant nutrients, and thousands more products to
specialty grow operations across the United States.
The
Company primarily sells through its wholly owned subsidiary,
GrowLife Hydroponics, Inc. GrowLife companies distribute and sell
over 15,000 products through its e-commerce distribution channel,
GrowLifeEco.com, and through our regional retail storefronts.
GrowLife and its business units are organized and directed to
operate strictly in accordance with all applicable state and
federal laws.
On June
7, 2013, GrowLife Hydroponics completed the purchase of Rocky
Mountain Hydroponics, LLC, a Colorado limited liability company
(“RMC”), and Evergreen Garden Center, LLC, a Maine
limited liability company (“EGC”). The effective date
of the purchase was June 7, 2013.
On October 3, 2017, the Company closed the acquisition of 51% of
the Purchased Assets from David Reichwein, a Pennsylvania resident,
GIP International Ltd, a Hong Kong corporation and DPR
International LLC, a Pennsylvania limited liability corporation.
The Purchased Assets include intellectual property, copy rights and
trademarks related to reflective tiles and flooring.
The Company did not acquire business, customer list or
employees.
The Company acquired its 51% interest in
the Purchased
Assets for $400,000. The Company
funded equipment
and rent of an office
lease.
On February 16,
2018, the Company purchased the remaining 49% of the Purchased
Assets in exchange for a one-time payment of $250,000.
As 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 were 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
$11,444,782 and $5,320,974 for the years ended December 31, 2018
and 2017, respectively. Our net cash used in operating activities
was $3,854,506 and $2,082,493 for 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 December 31, 2018, the
accumulated deficit was $141,176,087.
The Company
has experienced recurring operating losses and negative operating
cash flows since inception and has financed its working capital
requirements during this period primarily through the recurring
issuance of convertible notes payable and advances from a related
party.
The audit 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 December 31, 2018, the Company had uninsured
deposits in the amount of $1,923,046.
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 $120,000 and
$20,000 as of Decem
ber 31, 2018
and
2017, 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 primarily on actual historical return
rates. We record estimated sales returns as reductions to sales,
cost of goods sold, and accounts receivable and an increase to
inventory. Returned products which are recorded as inventory are
valued based upon the amount we expect to realize upon its
subsequent disposition. As of December 31, 2018 and 2017, there was
a reserve for sales returns of $40,000 and $10,000, 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
December 31, 2018, there are also (i) stock option grants
outstanding for the purchase of
100
million common shares at a $0.010
average exercise price; (ii) warrants for the purchase of
902.8
million common shares at
a $0.029 average exercise price; and (iii)
112.8
million
shares related to convertible debt that can be
converted at $0.002535 per share. In addition, the Company has an
unknown number of common shares to be issued under the Chicago
Venture, Iliad and St. George financing agreements.
As of
December 31, 2017
, there are
also (i) stock option grants outstanding for the purchase of
56,000,000 common shares at a $0.007 average exercise price; (ii)
warrants for the purchase of 595 million common shares at a $0.031
average exercise price; and (iii) 241,766,075 million
shares related to convertible debt that can be
converted at $0.002535 per share. In addition, we have an unknown
number of common shares to be issued under the
Chicago
Venture Partners, L.P.
financing
agreements.
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
In July
2015, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2015-11, “Simplifying the
Measurement of Inventory,” Topic 330, “Inventory”
(ASU 2015-11). The amendments in ASU 2015-11, which apply to
inventory that is measured using any method other than the last-in,
first-out (LIFO) or retail inventory method, require that entities
measure inventory at the lower of cost and net realizable value.
The amendments in ASU 2015-11 should be applied on a prospective
basis. ASU 2015-11 is effective for fiscal years beginning after
December 15, 2016 and interim periods within those years. The
Company adopted the amendments of ASU 2015-11 effective January 1,
2018. The adoption of this standard did not have a material impact
on the Company’s consolidated financial statements for the
year ended December 31, 2018.
In
March 2016, the FASB issued ASU 2016-09, “Improvements to
Employee Share-Based Payment Accounting,” Topic 718,
“Compensation-Stock Compensation” (ASU 2016-09). ASU
2016-09 includes provisions intended to simplify various aspects
related to how share-based payments are accounted for and presented
in the Company’s financial statements, including income tax
consequences, forfeitures and classification on the statement of
cash flows. Under previous guidance, excess tax benefits and
deficiencies from share-based compensation arrangements were
recorded in equity when the awards vested or were settled. ASU
2016-09 requires prospective recognition of excess tax benefits and
deficiencies in income tax expense, rather than paid-in-capital.
The Company adopted the amendments of ASU 2016-09 effective January
1, 2018.The adoption of this standard did not have a material
impact on the Company’s consolidated statements of income for
the year ended December 31, 2018.
In
addition, under ASU 2016-09, excess tax income tax benefits from
share-based compensation arrangements are classified as cash flow
from operations, rather than as cash flow from financing
activities. For the year ended December 31, 2018, there were no
excess income tax benefits.
The
Company has elected to continue to estimate the number of
share-based awards expected to vest, as permitted by ASU 2016-09,
rather than electing to account for forfeitures as they
occur.
ASU
2016-09 requires excess tax benefits and deficiencies to be
prospectively excluded from assumed future proceeds in the
calculation of diluted shares, resulting in an immaterial decrease
in diluted weighted average shares outstanding for the year ended
December 31, 2018.
In
January 2017, the FASB issued ASU 2017-04, “Simplifying the
Test for Goodwill Impairment,” Topic 350, “Intangibles
– Goodwill and Other” (ASU 2017-04). The amendments in
ASU 2017-04 simplify the accounting for goodwill impairment for all
entities by requiring impairment charges to be based on the first
step in the current two-step impairment test. An impairment charge
for the amount by which the carrying amount exceeds the reporting
unit’s fair value should be recognized; however, the loss
recognized should not exceed the total amount of goodwill allocated
to that reporting unit. The amendments should be applied on a
prospective basis. Early adoption is permitted for annual and
interim goodwill impairment testing dates after January 1, 2017,
and the ASU is effective for the Company’s first quarter of
the fiscal year ending December 31, 2020. The Company is currently
evaluating the impact that the adoption of these provisions will
have on its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, “Leases,”
Topic 842, “Leases” (ASU 2016-02). ASU No. 2016-02
requires lessees to recognize a right-of-use asset and
corresponding lease liability for all leases with terms of more
than 12 months. Recognition, measurement and presentation of
expenses will depend on classification as a finance or operating
lease. ASU 2016-02 also requires certain quantitative and
qualitative disclosures. The provisions of ASU 2016-02 are
effective for the Company’s first quarter of the fiscal year
ending December 31, 2020, with early adoption permitted. The
Company will apply the transition provisions of ASU 2016-02 at its
adoption date, rather than the earliest comparative period
presented in the financial statements, as permitted by ASU 2018-11,
“Leases,” Topic 842, “Targeted
Improvements,” released in July 2018.
The
adoption of ASU 2016-02 may result in a material increase to the
Company’s consolidated balance sheets for lease liabilities
and right-of-use assets. The Company is also performing a
comprehensive review of its current processes to determine and
implement changes required to support the adoption of this
standard. The Company is currently evaluating the other effects the
adoption of ASU 2016-02 will have on its consolidated financial
statements.
In
January 2018, the FASB issued ASU 2018-01, “Leases,”
Topic 842, “Land Easement Practical Expedient for Transition
to Topic 842” (ASU 2018-01). ASU 2018-01 permits an entity to
elect a transition practical expedient to not assess, under
Accounting Standards Codification (ASC) 842, land easements that
exist or expired before the standard’s effective date that
were not previously accounted for as leases under ASC 840. The
Company plans to elect this practical expedient in implementing ASU
2016-02.
In May
2014, the FASB issued ASU 2014-09, “Revenue from Contracts
with Customers,” Topic 606, “Revenue from Contracts
with Customers” (ASU 2014-09). ASU 2014-09 provides guidance
for revenue recognition and will replace most existing revenue
recognition guidance in GAAP when it becomes effective. ASU
2014-09’s core principle is that a company will recognize
revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the company
expects to be entitled for the transfer of those goods or services.
ASU 2014-09 permits the use of either the retrospective or
cumulative effect transition method. Additionally, the amendments
in this ASU provide a practical expedient for entities to recognize
the incremental costs of obtaining a contract as an expense when
incurred if the amortization period of the asset that the entity
otherwise would have recognized is one year or less, The Company
plans to elect this practical expedient upon adoption.
In July
2015, the FASB issued ASU 2015-14, “Revenue from Contracts
with Customers – Deferral of the Effective Date.” The
FASB approved the deferral of ASU 2014-09, by extending the new
revenue recognition standard’s mandatory effective date by
one year and permitting public companies to apply the new revenue
standard to annual reporting periods beginning after December 15,
2017. The guidance in ASU 2014-09 will be effective for the Company
in the first quarter of the fiscal year ending December 31,
2019.
Further
to ASU 2014-09 and ASU 2015-14, the FASB issued ASU 2016-08,
“Revenue from Contracts with Customers,” Topic 606,
“Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)” (ASU 2016-08) in March 2016, ASU 2016-12,
“Revenue from Contracts with Customers,” Topic 606,
“Narrow-Scope Improvements and Practical Expedients”
(ASU 2016-12) in May 2016 and ASU 2016-20, “Revenue from
Contracts with Customers,” Topic 606, “Technical
Corrections and Improvements” (ASU 2016-20) in December 2016.
The amendments in ASU 2016-08 clarify the implementation guidance
on principal versus agent considerations, including indicators to
assist an entity in determining whether it controls a specified
good or service before it is transferred to the customers. ASU
2016-12 addresses narrow-scope improvements to the guidance on
collectability, non-cash consideration, and completed contracts at
transition. Additionally, the amendments in this ASU provide a
practical expedient for contract modifications at transition and an
accounting policy election related to the presentation of sales
taxes and other similar taxes collected from customers. The Company
plans to make such election. The Company also plans to elect the
practical expedient in ASU 2016-20 that provides entities do not
need to disclose the transaction price allocated to performance
obligations when the related contracts have a duration of one year
or less. This includes loyalty rewards, which can be redeemed in
the month subsequent to the quarter earned, and marketing
promotions that cross accounting periods. Both of these classes of
transactions are currently immaterial to the Company. The effective
date and transition requirements for ASU 2016-08, ASU 2016-12 and
ASU 2016-20 are the same as for ASU 2014-09.
The
Company does not plan to early adopt the new revenue recognition
guidance; adoption will be on the modified retrospective basis
beginning in fiscal year 2019. The Company has substantially
concluded its assessment of the impact of the adoption of this
standard on its consolidated financial statements. Most of the
Company’s revenue is expected to continue to be generated
from point-of-sale transactions, which ASU 2014-09 treats generally
consistent with current accounting standards. The Company does not
expect this standard will have a material impact on the accounting
for point-of-sale transactions or related areas including the right
of return and customer incentives. Although the impact on the
consolidated financial statements is not expected to be material,
additional disclosures will be required.
In June
2018, the FASB issued ASU 2018-07, “Compensation-Stock
Compensation,” Topic 718, “Improvements to Nonemployee
Share-Based Payment Accounting” (ASU 2018-07) as part of its
Simplification Initiative to reduce complexity when accounting for
share-based payments to non-employees. ASU 2018-07 expands the
scope of Topic 718 to more closely align share-based payment
transactions for acquiring goods and services from non-employees
with the accounting for share-based payments to employees, with
certain exceptions. The provisions of ASU 2018-07 are effective for
the Company’s first quarter of the fiscal year ending
December 31, 2020, with early adoption permitted.
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 were 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 December 31, 2018 and 2017 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
$
417,570
|
$
110,000
|
|
Work
in process
|
35,280
|
-
|
|
Finished
goods
|
459,814
|
375,678
|
|
Inventory
reserve
|
(120,000
)
|
(20,000
)
|
|
Total
|
$
792,664
|
$
465,678
|
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 December 31, 2018 and 2017 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery,
equipment and tooling
|
$
943,326
|
$
365,861
|
|
Furniture
and fixtures
|
-
|
49,787
|
|
Computer
equipment
|
16,675
|
52,304
|
|
Leasehold
improvements
|
14,703
|
56,965
|
|
Total
property and equipment
|
974,704
|
524,917
|
|
Less
accumulated depreciation and amortization
|
(261,839
)
|
(222,228
)
|
|
Net
property and equipment
|
$
712,866
|
$
302,689
|
Fixed assets, net of accumulated depreciation, were $712,866 and
$302,689 as of December 31, 2018 and 2017, respectively.
Accumulated depreciation was $261,839 and $222,228 as of December
31, 2018 and 2017, respectively. Total depreciation expense was
$80,125 and $1,890 for the years ended December 31, 2018 and 2017,
respectively. All equipment is used for manufacturing, selling,
general and administrative purposes and accordingly all
depreciation is classified in cost of goods sold, selling, general
and administrative expenses. The Company began depreciation on the
purchased machine January 1, 2018 when significant operations
began.
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 December 31, 2018 and 2017 consisted of the
following:
|
|
Estimated
|
|
|
|
|
Useful Lives
|
|
|
|
|
|
|
|
|
Customer
lists
|
3
years
|
$
1,604,341
|
$
-
|
|
Patents
|
3
years
|
1,818,740
|
|
|
Less:
accumulated amortization
|
|
(142,628
)
|
-
|
|
Intangible
assets, net
|
|
$
3,280,453
|
$
-
|
Total amortization expense was $142,628 and $0 for the years ended
December 31, 2018 and 2017, respectively.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-Clone Enterprises, Inc., a California corporation
that was founded in January 2000.
The Company
acquired 51% of
EZ-Clone for $2,040,000, payable as follows: (i) a cash payment of
$645,000; and (ii) the issuance of 107,307,692 restricted shares of
the Company’s common stock at a price of $0.013 per share or
$1,395,000. The Company has the obligation to acquire the remaining
49% of EZ-Clone within one year for
$1,960,000, payable as follows: (i) a cash payment
of $855,000; and (ii) the issuance of 85,000,000 shares of the
Company’s common stock at a price of $0.013 per share or
$1,105,000.
The fair value of the intellectual property associated with the
assets acquired 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- ACCOUNTS PAYABLE
Accounts payable were $1,054,371 and $821,398 as of December
31, 2018 and December 31, 2017, respectively. Such liabilities
consisted of amounts due to vendors for inventory purchases, audit,
legal and other expenses incurred by the Company.
NOTE 9- ACCRUED EXPENSES
Accrued expenses were $261,954 and $133,988 as of December 31,
2018 and, 2017, respectively. Such liabilities consisted of amounts
due to
Go Green Hydroponics, Inc. and TCA – Go Green
SPV, LLC and
sales tax and payroll
liabilities.
On
August 17, 2018, the Company entered into an Asset Purchase
Agreement with Go Green Hydroponics, Inc. and TCA – Go Green
SPV, LLC. The Company acquired the inventory of Go Green but agreed
to pay the Seller 100% of the proceeds generated from the sale of
the closing inventory until all closing inventory has been sold.
The Company recorded accrued expenses $98,150 as of December 31,
2018 related to the sale of inventory. Also, the Company agreed to
pay 5% of all gross revenue of Company earned or in any way related
to the Purchased Assets generated between October 1, 2018 and
December 31, 2019, up to a maximum of $200,000. The Company
estimated gross revenue for that period to be approximately
$1,200,000 and recorded a $60,000 liability. The Company recorded
an impairment of acquired assets in the amount of $60,000 as of
December 31, 2018. In addition, the Company recorded an additional
accrued liability of $1,986 as of December 31, 2018.
NOTE 10 – CONVERTIBLE NOTES PAYABLE, NET
Convertible
notes payable as of
December
31,
2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% OID Convertible
Promissory Notes
|
$
2,982,299
|
$
135,780
|
$
-
|
$
3,118,079
|
|
7%
Convertible note ($850,000)
|
270,787
|
15,267
|
-
|
286,054
|
|
|
$
3,253,086
|
$
151,047
|
$
-
|
$
3,404,133
|
Convertible
notes payable as of
December
31,
2017 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6%
Secured convertible note (2014)
|
$
39,251
|
$
1,974
|
$
-
|
$
41,225
|
|
7%
Convertible note ($850,000)
|
250,000
|
321,652
|
-
|
571,652
|
|
10% OID Convertible
Promissory Notes
|
2,980,199
|
120,492
|
(698,547
)
|
2,402,144
|
|
|
$
3,269,450
|
$
444,118
|
$
(698,547
)
|
$
3,015,021
|
6% Secured Convertible Note and Secured Credit Facility
(2014)
On
March 13, 2018, the Company, received a Notice of Conversion from
Logic Works LLC converting principal and interest of $41,690 owed
under that a 6% Convertible Note into 16,445,609 shares of our
common stock with a fair value of $248,329. As of March 13, 2018,
the outstanding balance on the Convertible Note was
$0.
7% Convertible Notes Payable
As of
December 31, 2017
, the
outstanding principal on the 7% convertible note was $250,000 and
accrued interest was $321,652, which results in a total liability
of $571,652.
On
February 12, 2018, the Company received a Notice of Conversion from
Forglen LLC converting principal and interest of $321,945 owed
under that 7% Convertible Note as amended June 19, 2014 into
127,000,000 shares of the Company’s common stock with a fair
value of $2,235,200. On March 12, 2018, the Company entered into a
Second Amendment to the Note. Pursuant to the Amendment, the
Note’s maturity date has been extended to December 31, 2019,
and interest accrues at 7% per annum, compounding on the maturity
date. Additionally, after review of the Note and accrued interest,
the Parties agreed that as of March 12, 2018, the outstanding
balance on the Note was $270,787.
As of
December 31, 2018
, the
outstanding principal on this 7% convertible note was $270,787 and
accrued interest was $15,267, which results in a total liability of
$286,054.
10% Convertible Promissory Notes
Funding from Chicago Venture Partners, L.P. (“Chicago
Venture”)
As
of December 31, 2017
, the
outstanding principal balance due to Chicago Venture was
$2,980,199, accrued interest was $120,492, net of the discount of
$698,547, which results in a total amount of
$2,402,144.
As
of December 31, 2018
, the
outstanding principal balance due to Chicago Venture is $1,112,200
and accrued interest was $90,931, which results in a total amount
of $1,203,230.
During
the year ended December 31, 2018, Chicago Venture converted
principal and interest of $3,104,181 into 525,587,387 shares of our
common stock at a per share conversion price of $0.0059 with a fair
value of $7,756,330. The Company recognized $6,565,415 loss on debt
conversions during the year ended December 31, 2018.
During
the year ended December 31, 2018, the Company recorded an OID debt
discount expense of $660,472 to interest expense related to the
Chicago Venture financing.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement with Iliad Research and Trading, L.P.
(“Iliad”)
On
August 10, 2018, the Company closed the transactions described
below with Iliad.
On
August 7, 2018, the Company executed the following agreements with
Iliad: (i) Securities Purchase Agreement; (ii) Secured Promissory
Notes; and (iii) Security Agreement (collectively the “Iliad
Agreements”). The Company entered into the Iliad Agreements
with the intent to acquire working capital to grow our
businesses.
The
total amount of funding under the Iliad Agreements is $1,500,000.
The Convertible Promissory Note carries an original issue discount
of $150,000 and a transaction expense amount of $5,000, for total
debt of $1,655,000. The Company agreed to reserve three times the
number of shares based on the redemption value with a minimum of
150 million shares of its common stock for issuance upon conversion
of the Debt, if that occurs in the future. If not converted sooner,
the Debt is due on or before August 7, 2019. The Debt carries an
interest rate of ten percent (10%). The Debt is convertible, at
Iliad’s option, into our common stock at $0.015 per share
subject to adjustment as provided for in the Secured Promissory
Notes. The Company’s obligation to pay the Debt, or any
portion thereof, is secured by all of our assets. The Company has
$504,098 available under this debt financing.
Securities Purchase Agreement, Secured Promissory Notes and
Security Agreement with Iliad
On
October 15, 2018, we executed the following agreements with Iliad:
(i) Securities Purchase Agreement; (ii) Secured Promissory Notes;
(iii) Security Agreement; and (iv) Warrant to Purchase Shares of
Common Shares (collectively the “Iliad Agreements”).
The Company entered into the Iliad Agreements with the intent to
acquire EZ-Clone Enterprises, Inc.
The
total amount of funding under the Iliad Agreements is $700,000. The
Convertible Promissory Note carries an original issue discount of
$70,000 and a transaction expense amount of $5,000, for total debt
of $775,000. The Company agreed to reserve 350 million shares of
its common stock for issuance upon conversion of the Debt, if that
occurs in the future. If not converted sooner, the Debt is due on
or before July 15, 2018. The Debt carries an interest rate of ten
percent (10%). The Debt is convertible, at Iliad’s option,
into the Company’s common stock at 65% of the lowest trading
prices in the twenty trading days before conversion.
The
Warrant is exercisable for a period of five (5) years from the
Closing, for the purchase of up to $387,500 shares of our Common
Stock at the market price as of the date of exercise as defined in
the agreements. The Warrant is subject to a cashless exercise
option at the election of Iliad and other adjustments as detailed
in the Warrant. The fair value of the warrant is $118,615 at
December 31, 2018.
Our
obligation to pay the Debt, or any portion thereof, is secured by
all of the Company’s assets.
At
December 31, 2018 the outstanding principal balance due to Iliad
Research and Trading, L.P. is $1,870,000, accrued interest of
$44,849 resulting in a total of $1,914,849. On January 17, 2019,
the Company repaid $650,000 to Iliad.
NOTE 11 – DERIVATIVE LIABILITY
In
April 2008, the FASB issued a pronouncement that provides guidance
on determining what types of instruments or embedded features in an
instrument held by a reporting entity can be considered indexed to
its own stock for the purpose of evaluating the first criteria of
the scope exception in the pronouncement on accounting for
derivatives. This pronouncement was effective for financial
statements issued for fiscal years beginning after December 15,
2008.
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 $1,795,473 as of December 31,
2018
.
For the year ended
December 31, 2018, the Company recorded non-cash income of $977,732
related to the “change in fair value of derivative”
expense related to the Chicago Venture and Iliad financing. The
income related to a decline in the share price and Chicago Venture
converted principal and interest of $3,104,181 into 525,587,387
shares of our common stock at a per share conversion price of
$0.0059.
Derivative liability
as of
December 31, 2018
was as
follows:
|
|
|
|
|
|
|
|
Fair Value Measurements Using Imputs
|
|
|
Financial Instruments
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative
Instruments
|
$
-
|
$
1,795,473
|
$
-
|
$
1,795,473
|
|
|
|
|
|
|
|
Total
|
$
-
|
$
1,795,473
|
$
-
|
$
1,795,473
|
NOTE 12 –
RELATED PARTY
TRANSACTIONS AND CERTAIN RELATIONSHIPS
Since
January 1, 2017, the Company engaged in the following reportable
transactions with our directors, executive officers, holders of
more than 5% of our voting securities, and affiliates or
immediately family members of our directors, executive officers and
holders of more than 5% of our voting securities.
Certain Relationships
Please
see the transactions with Chicago Venture Partners, L.P. discussed
in Notes 10, 11, 13 and 17.
Transactions with Marco Hegyi
On
October 21, 2018 and 2017, a Mr. Hegyi Warrant to purchase up to
10,000,000 shares of our common stock at an exercise price of $0.01
per share vested. The Warrant is exercisable for 5 years. The
warrants were valued at $390,000 and $192,000 we recorded $178,750
and $195,000 as compensation expense for the years ended December
31, 2018 and 2017, respectively. On October 15, 2018, Mr. Hegyi
received Warrants to purchase up to 48,000,000 shares of our common
stock at an exercise price of $0.012 per share and which vest on
October 15, 2018, 2019 and 2020. The Warrants are exercisable for 5
years. The warrant that vested on October 15, 2018 was valued at
$96,000 and we recorded this amount compensation expense for the
year ended December 31, 2018.
On
October 15, 2018, the Board of Directors approved an Employment
Agreement with Marco Hegyi pursuant to which the Company engaged
Mr. Hegyi as its Chief Executive Officer through October 15, 2021.
See Note 15 for additional details.
Transactions with an Entity Controlled by Mark E.
Scott
On October 15, 2018, an entity controlled by Mr. Scott was granted
an option to purchase 20,000,000 shares of common stock
at
an exercise price of $0.012 per share.
On October 15, 2017, an entity controlled by Mr.
Scott was granted an option to purchase 12,000,000 shares of common
stock
at an exercise price of $0.006 per share. The stock
option grants vest quarterly over three years and are exercisable
for 5 years. The stock option grants were valued at $40,000 and
$18,000. The Company recorded $8,833 and $1,500 as compensation
expense for the years ended December 31, 2018 and 2017,
respectively.
On
October 15, 2018, the Compensation Committee of the Company
approved an Employment Agreement with Mark E. Scott pursuant to
which the Company engaged Mr. Scott as its Chief Financial Officer
through October 15, 2021. Mr. Scott’s previous Agreement was
cancelled. See Note 15 for additional details.
Transaction with Joseph Barnes
On October 15, 2018, Mr. Barnes was granted an option to purchase
18,000,000 shares of common stock
at an exercise price of
$0.012 per share.
On October 25, 2017,
Mr. Barnes was granted an option to purchase 10,000,000 shares of
common stock
at an exercise price of $0.007 per share. The
stock option grants vest quarterly over three years and are
exercisable for 5 years. The stock option grants were valued at
$36,000 and $24,000. The Company recorded $8,550 and $2,000 as
compensation expense for the years ended December 31, 2018 and
2017, respectively
On
October 15, 2018, the Compensation Committee of the Company
approved an Employment Agreement with Joseph Barnes pursuant to
which the Company engaged Mr. Barnes as President of the GrowLife
Hydroponics Company through October 15, 2021. Mr. Barnes’s
previous Agreement was cancelled. See Note 15 for additional
details.
Transactions with Michael E. Fasci
On
February 4, 2017, the Company issued 1,000,000 shares of our common
stock to Michael E. Fasci pursuant to a service award for $15,000.
The shares were valued at the fair market price of $0.015 per
share. On April 27, 2017, the Company issued 1,000,000 shares of
our common stock to Michael E. Fasci pursuant to a service award
for $9,000. The shares were valued at the fair market price of
$0.009 per share. On April 27, 2017, the Company issued 2,000,000
shares of our common stock to Michael E. Fasci pursuant to a
consulting agreement for $18,000. The shares were valued at the
fair market price of $0.009 per share. On November 2, 2017, the
Company issued 2,000,000 shares of our common stock to Michael E.
Fasci pursuant to a consulting agreement for $10,000. The shares
were valued at the fair market price of $0.005 per
share.
On
February 1, 2018, the Company issued 3,789,041 shares of our common
stock to Mr. Fasci that was valued at $0.02 per share or $75,781.
On December 6, 2018, the Company issued Mr. Fasci 5,000,000 shares
of our common stock that was valued at $0.01 per share or $50,000.
On December 6, 2018, Michael E. Fasci resigned as a Member of the
Board of Directors.
Transactions with Katherine McLain
Ms.
Katherine McLain was appointed as a director on February 14, 2017.
On June 28, 2017, the Company issued 1,000,000 shares of our common
stock to Ms. McLain pursuant to a service award for $9,000. The
shares were valued at the fair market price of $0.009 per share. On
October 23, 2017, the Company issued 1,000,000 shares of our common
stock to Ms. McLain pursuant to a service award for $5,000. The
shares were valued at the fair market price of $0.005 per share. On
February 1, 2018, the Company issued 2,893,151 shares of our common
stock to Katherine McLain that was valued at $0.02 per share or
$57,863.
Transaction with Thom Kozik
Mr.
Kozik was appointed as a director on October 5, 2017. On October
23, 2017, the Company issued 2,000,000 shares of our common stock
to Mr. Kozik pursuant to a service award for $10,000. The shares
were valued at the fair market price of $0.005 per share. On
February 1, 2018, the Company issued 978,082 shares of our common
stock to Thom Kozik that was valued at $0.02 per share or
$19,562.
NOTE 13 – 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 year ended December 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
March 13, 2018, the Company, received a Notice of Conversion from
Logic Works LLC converting principal and interest of $41,690 owed
under that a 6% Convertible Note into 16,445,609 shares of our
common stock with a fair value of $248,329. As of March 13, 2018,
the outstanding balance on the Convertible Note was
$0.
During
the year ended December 31, 2018, the Company issued 2,400,000
shares of its common stock to a service provider pursuant to
conversions of debt totaling $33,000. The shares were valued at the
fair market price of $0.0138 per share.
During
the year ended December 31, 2018, the Company issued 6,250,000
shares of its common stock to a service provider and a former
director related to services. The shares were valued at the fair
market price of $0.0104 per share or $65,000.
During
the year ended December 31, 2018, Chicago Venture converted
principal and interest of $3,104,181 into 525,587,387 shares of our
common stock at a per share conversion price of $0.0059 with a fair
value of $7,756,330. The Company recognized $6,565,415 loss on debt
conversions during the year ended December 31, 2018.
During
the year ended December 31, 2018, an employee exercised a stock
option grant for 1,000,000 shares at $0.006 or $6,000.
Securities Purchase Agreements with St. George Investments,
LLC
On February 9, 2018, the Company executed the following agreements
with St. George Investments LLC, a Utah limited liability company:
(i) Securities Purchase Agreement; and (ii) Warrant to 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. The Company issued St. George 6,410,256
shares of newly issued restricted Common Stock of the Company at a
purchase price of $0.0156 per share.
On
April 26, 2018, the Company entered into and closed on a Common
Stock Purchase Agreement with St. George Investments, LLC, Pursuant
to the St. George Agreements, the Company sold and agreed to issue
to St. George 4,950,495 shares of newly issued restricted Common
Stock of the Company at a purchase price of $0.0202 per
share.
On May
25, 2018, the Company entered into and closed on a Common Stock
Purchase Agreement with St. George Investments, LLC, Pursuant to
the St. George Agreements, the Company sold and agreed to issue to
St. George 5,128,205 shares of newly issued restricted Common Stock
of the Company at a purchase price of $0.0195 per
share.
On
October 15, 2018, the Company closed the Purchase and Sale
Agreement with EZ-Clone and issued 107,307,692 restricted shares of
our common stock at a price of $0.013 per share or
$1,395,000.
On
November 30, 2018, the Company closed its
Rights Offering. We received $2,533,648
under the Rights Offering and issued 211,137,293 shares of common
stock at $0.012 per share.
During
the year ended December 31, 2017, the Company had had the following
sales of unregistered of equity securities to accredited investors
unless otherwise indicated:
On
February 28, 2017, Logic Works converted principal and interest of
$291,044 into 82,640,392 shares of the Company’s common stock
at a per share conversion price of $0.004.
During the year ended December 31, 2017,
five vendors
converted debt of $559,408 into 64,869,517 shares of the
Company’s common stock at the fair market price of $0.0086
per share.
During the year ended December 31, 2017,
four directors were
issued 10,000,000 shares of the Company’s common stock at the
fair market price of $0.0076 per share for 2017 director
services.
During
the year ended December 31, 2017, Chicago Venture converted
principal and accrued interest of $2,688,000 into 554,044,030
shares of the Company’s common stock at a per share
conversion price of $0.0049.
Warrants
The
Company issued the following warrants during the year ended
December 31, 2018
:
On
February 9, 2018, the Company executed the following agreements
with St. George Investments LLC and issued a warrant to purchase of
up to 48,687,862 shares of the Company’s Common Stock at an
exercise price of $0.05 per share. The Warrant is subject to a
cashless exercise option at the election of St. George and other
adjustments as repricing as detailed in the Warrant.
On
October 15, 2018, Mr. Hegyi received Warrants to purchase up to
48,000,000 shares of our common stock at an exercise price of
$0.012 per share and which vest on October 15, 2018, 2019 and 2020.
The Warrants are exercisable for 5 years. The warrant that vested
on October 15, 2018 was valued at $96,000 and we recorded this
amount compensation expense for the year ended December 31,
2018.
The
Warrant is exercisable for a period of five (5) years from the
Closing, for the purchase of up to $387,500 shares of our Common
Stock at the market price as of the date of exercise as defined in
the agreements. The Warrant is subject to a cashless exercise
option at the election of Iliad and other adjustments as detailed
in the Warrant. The fair value of the warrant is $118,615 at
December 31, 2018.
On
November 30, 2018, the Company closed its
Rights Offering. The Company received
$2,533,648 under the Rights Offering and issued 211,137,293 shares
of common stock at $0.012 per share. The Company also issued five
year warrants to acquire 105,568,642 shares of common stock
exercisable at $.018 and five year warrants to acquire 105,568,642
shares of common stock exercisable $.024 per
share.
On
February 15, 2019, the Company entered into a 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 December 31, 2018 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
595,000,000
|
$
0.029
|
|
Issued
|
307,825,146
|
0.025
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
-
|
-
|
|
Expired
|
-
|
-
|
|
Outstanding
at end of period
|
902,825,146
|
$
0.029
|
|
Exerciseable
at end of period
|
902,825,146
|
|
A
summary of the status of the warrants outstanding as of December
31, 2018 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
540,000,000
|
0.33
|
$
0.033
|
540,000,000
|
$
0.033
|
|
55,000,000
|
7.67
|
0.010
|
55,000,000
|
0.010
|
|
48,000,000
|
5.75
|
0.012
|
16,000,000
|
0.012
|
|
48,687,862
|
4.08
|
0.050
|
48,687,862
|
0.050
|
|
211,137,284
|
2.92
|
0.021
|
211,137,284
|
0.021
|
|
902,825,146
|
1.44
|
$
0.029
|
870,825,146
|
0.029
|
Warrants
had no intrinsic value as of December 31, 2018.
The
warrants were valued using the following assumptions:
|
Assumptions
|
|
|
Dividend
yield
|
0
%
|
|
Expected
life
|
|
|
Expected
volatility
|
200
%
|
|
Risk
free interest rate
|
0.78
%
|
NOTE 14– 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 year ended December 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 $13,000.
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 $6,500.
On May 1, 2018, an employee was granted an option to purchase
2,000,000 shares of common stock
at an exercise price of
$0.020 per share. The stock option grant vests quarterly over one
year and is exercisable for 5 years. The stock option grant was
valued at $13,000.
On June 1, 2018, an employee was granted an option to purchase
2,000,000 shares of common stock
at an exercise price of
$0.020 per share. The stock option grant vests quarterly over one
year and is exercisable for 5 years. The stock option grant was
valued at $13,000.
On October 15, 2018, an entity controlled by Mr. Scott was granted
an option to purchase 20,000,000 shares of common stock
at
an exercise price of $0.012 per share. The stock option grant vests
quarterly over three years and are exercisable for 5 years. The
stock option grants were valued at $40,000 and the Company recorded
this amount as compensation expense for the year ended December 31,
2018.
On October 15, 2018, Mr. Barnes was granted an option to purchase
18,000,000 shares of common stock
at an exercise price of
$0.012 per share. The stock option grant vests quarterly over three
years and are exercisable for 5 years. The stock option grants were
valued at $36,000 and the Company recorded this amount as
compensation expense for the year ended December 31,
2018.
As of December 31, 2018, there are 100,000,000 options to purchase
common stock at an average exercise price of $0.010 per share
outstanding under the 2017 Amended and Restated Stock Incentive
Plan. The Company recorded $44,682 and $29,250 of compensation
expense, net of related tax effects, relative to stock options for
the years ended December 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 December 31, 2018, there
is $140,970 of total unrecognized costs related to employee granted
stock options that are not vested. These costs are expected to be
recognized over a period of approximately 3.79 years.
During the year ended December 31, 2017, the Company had the
following stock option activity:
On June
28, 2017, the Company’s Compensation Committee granted four
advisory committee members each an option to purchase 500,000
shares of the Company’s common stock under the
Company’s 2011 Stock Incentive Plan at an exercise price of
$0.009 per share, the fair market price on June 28,
2017.
On
October 1, 2017, Mr. Reichwein was granted an option to purchase
20,000,000 shares of our common stock under our 2011 Stock
Incentive Plan at $0.006 per share. The shares vest as
follows:
|
|
|
|
|
|
i
|
Ten
million shares vested immediately;
|
|
|
|
|
|
|
ii
|
Ten
million shares vest on a quarterly basis over two years beginning
on the date of grant.
|
The
stock option grants are exercisable for 5 years and were valued at
$20,000.
On October 15, 2017, an entity controlled by Mr. Scott was granted
an option to purchase 12,000,000 shares of common stock
at
an exercise price of $0.006 per share. The stock option grant vests
quarterly over three years and is exercisable for 5 years. The
stock option grant was valued at $18,000.
On October 25, 2017, Mr. Barnes was granted an option to purchase
10,000,000 shares of common stock
at an exercise price of
$0.007 per share. The stock option grant vests quarterly over three
years and is exercisable for 5 years. The stock option grant was
valued at $24,000.
Stock option activity for the years ended December 31, 2018 and
2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
December 31, 2016
|
12,010,000
|
$
0.010
|
$
120,500
|
|
Granted
|
44,000,000
|
0.006
|
280,000
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeitures
|
(10,000
)
|
(0.050
)
|
(500
)
|
|
Outstanding as of
December 31, 2017
|
56,000,000
|
0.007
|
400,000
|
|
Granted
|
45,000,000
|
0.013
|
596,000
|
|
Exercised
|
(1,000,000
)
|
0.006
|
(6,000
)
|
|
Forfeitures
|
-
|
-
|
-
|
|
Outstanding as of
December 31, 2018
|
100,000,000
|
$
0.010
|
$
990,000
|
The following table summarizes information about stock options
outstanding and exercisable at
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.006
|
31,000,000
|
3.75
|
$
0.006
|
18,333,333
|
$
0.006
|
|
0.007
|
10,000,000
|
3.75
|
0.007
|
4,166,667
|
0.007
|
|
0.009
|
2,000,000
|
1.50
|
0.009
|
1,000,000
|
0.009
|
|
0.010
|
12,000,000
|
0.88
|
0.010
|
12,000,000
|
0.010
|
|
0.012
|
38,000,000
|
4.75
|
0.012
|
3,166,667
|
0.012
|
|
|
7,000,000
|
4.39
|
0.020
|
1,416,667
|
0.020
|
|
|
100,000,000
|
3.79
|
$
0.010
|
40,083,333
|
$
0.008
|
Stock
option grants totaling 31,000,000 shares of common stock have an
intrinsic value of $18,333 as of December 31, 2018.
The
stock option grants were valued using the following
assumpti0ns:
|
Assumptions
|
|
|
Dividend
yield
|
0
%
|
|
Expected
life
|
|
|
Expected
volatility
|
140
%
|
|
Risk
free interest rate
|
0.02
%
|
NOTE 15 –
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, 2018, 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, 2019.
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 December 31,
|
|
|
2019
|
$
534,795
|
|
2020
|
925,511
|
|
2021
|
549,776
|
|
2022
|
-
|
|
2023
|
-
|
|
Beyond
|
-
|
|
Total
|
$
2,010,082
|
Employment Agreements
Employment Agreement with Marco Hegyi
On
October 15, 2018, the Board of Directors of GrowLife, Inc. (the
“Company”) approved an Employment Agreement with Marco
Hegyi pursuant to which the Company engaged Mr. Hegyi as its Chief
Executive Officer through October 15, 2021. Mr. Hegyi’s
previous Employment Agreement was set to expire on October 21,
2018.
Mr.
Hegyi’s annual compensation is $275,000. Mr. Hegyi is also
entitled to receive an annual bonus equal to four percent (4%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
Mr.
Hegyi received a Warrant to purchase up to 16,000,000 shares of
common stock of the Company at an exercise price of $0.012 per
share which vest immediately. In addition, Mr. Hegyi received two
Warrants to purchase up to 16,000,000 shares of common stock of the
Company at an exercise price of $0.012 per share which vest on
October 15, 2019 and 2020, respectively. The Warrants are
exercisable for 5 years.
Mr.
Hegyi will be entitled to participate in all group employment
benefits that are offered by the Company to the Company’s
senior executives and management employees from time to time,
subject to the terms and conditions of such benefit plans,
including any eligibility requirements. In addition, the Company
will purchase and maintain during the Term an insurance policy on
Mr. Hegyi’s life in the amount of $2,000,000 payable to Mr.
Hegyi’s named heirs or estate as the
beneficiary.
If the Company terminates Mr. Hegyi’s employment at any time
prior to the expiration of the Term without Cause, as defined in
the Employment Agreement, or if Mr. Hegyi terminates his employment
at any time for “Good Reason” or due to a
“Disability”, Mr. Hegyi will be entitled to receive (i)
his Base Salary amount through the end of the Term; and (ii) his
Annual Bonus amount for each year during the remainder of the
Term.
Employment Agreement with Mark E. Scott
On
October 15, 2018, the Compensation Committee of the Company
approved an Employment Agreement with Mark E. Scott pursuant to
which the Company engaged Mr. Scott as its Chief Financial Officer
through October 15, 2021. Mr. Scott’s previous Agreement was
cancelled.
Mr.
Scott’s annual compensation is $165,000. Mr. Scott is also
entitled to receive an annual bonus equal to two percent (2%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
The
Company’s Board of Directors granted Mr. Scott an option to
purchase twenty million shares of the Company’s Common Stock
under the Company’s 2018 Amended and Restated Stock Incentive
Plan at an exercise price of $0.012 per share. The Shares vest
quarterly over three years. All options will have a five-year life
and allow for a cashless exercise. The stock option grant is
subject to the terms and conditions of the Company’s Amended
and Restated Stock Incentive Plan, including vesting requirements.
In the event that Mr. Scott’s continuous status as employee
to the Company is terminated by the Company without Cause or Mr.
Scott terminates his employment with the Company for Good Reason as
defined in the Scott Agreement, in either case upon or within
twelve months after a Change in Control as defined in the
Company’s Amended and Restated Stock Incentive, then 100% of
the total number of Shares shall immediately become
vested.
Mr.
Scott is entitled to participate in all group employment benefits
that are offered by the Company to the Company’s senior
executives and management employees from time to time, subject to
the terms and conditions of such benefit plans, including any
eligibility requirements. In addition, the Company is required
purchase and maintain an insurance policy on Mr. Scott’s life
in the amount of $2,000,000 payable to Mr. Scott’s named
heirs or estate as the beneficiary. Finally, Mr. Scott is entitled
to twenty days of vacation annually and also has certain insurance
and travel employment benefits.
If the Company terminates Mr. Scott’s employment at any time
prior to the expiration of the Term without Cause, as defined in
the Employment Agreement, or if Mr. Scott terminates his employment
at any time for “Good Reason” or due to a
“Disability”, Mr. Scott will be entitled to receive (i)
his Base Salary amount for ninety days; and (ii) his Annual Bonus
amount for each year during the remainder of the
Term.
Employment Agreement with Joseph Barnes
On
October 15, 2018, the Compensation Committee of the Company
approved an Employment Agreement with Joseph Barnes pursuant to
which the Company engaged Mr. Barnes as President of the GrowLife
Hydroponics Company through October 15, 2021. Mr. Barnes’s
previous Agreement was cancelled.
Mr.
Barnes’s annual compensation is $165,000. Mr. Barnes is also
entitled to receive an annual bonus equal to two percent (2%) of
the Company’s EBITDA for that year. The annual bonus shall be
paid no later than 31 days following the end of each calendar
year.
The
Company’s Board of Directors granted Mr. Barnes an option to
purchase eighteen million shares of the Company’s Common
Stock under the Company’s 2017 Amended and Restated Stock
Incentive Plan at an exercise price of $0.012 per share. The Shares
vest quarterly over three years. All options will have a five-year
life and allow for a cashless exercise. The stock option grant is
subject to the terms and conditions of the Company’s and
Amended and Restated Stock Incentive Plan, including vesting
requirements. In the event that Mr. Barnes’s continuous
status as employee to the Company is terminated by the Company
without Cause or Mr. Barnes terminates his employment with the
Company for Good Reason as defined in the Barnes Agreement, in
either case upon or within twelve months after a Change in Control
as defined in the Company’s Amended and Restated Stock
Incentive Plan, then 100% of the total number of Shares shall
immediately become vested.
Mr.
Barnes is entitled to participate in all group employment benefits
that are offered by the Company to the Company’s senior
executives and management employees from time to time, subject to
the terms and conditions of such benefit plans, including any
eligibility requirements. In addition, the Company is required
purchase and maintain an insurance policy on Mr. Barnes’s
life in the amount of $2,000,000 payable to Mr. Barnes’s
named heirs or estate as the beneficiary. Finally, Mr. Barnes is
entitled to twenty days of vacation annually and also has certain
insurance and travel employment benefits.
If the Company terminates Mr. Barnes’s employment at any time
prior to the expiration of the Term without Cause, as defined in
the Employment Agreement, or if Mr. Barnes terminates his
employment at any time for “Good Reason” or due to a
“Disability”, Mr. Barnes will be entitled to receive
(i) his Base Salary amount for ninety days; and (ii) his Annual
Bonus amount for each year during the remainder of the
Term.
NOTE 16 – INCOME TAXES
The
Company has incurred losses since inception, which have generated
net operating loss carryforwards. The net operating loss
carryforwards arise from United States
sources.
Pretax
losses arising from United States operations were $11,473,137 for
the year ended December 31, 2018.
Pretax
losses arising from United States operations were approximately
$5,320,974 for the year ended December 31, 2018.
The
Company has net operating loss carryforwards of approximately
$19,101,728, which expire in 2022-2036. Because it is not more
likely than not that sufficient tax earnings will be generated to
utilize the net operating loss carryforwards, a corresponding
valuation allowance of approximately $4,011,363 was established as
of December 31, 2018. Additionally, under the Tax Reform Act of
1986, the amounts of, and benefits from, net operating losses may
be limited in certain circumstances, including a change in
control.
Section 382
of the Internal Revenue Code generally imposes an annual limitation
on the amount of net operating loss carryforwards that may be used
to offset taxable income when a corporation has undergone
significant changes in its stock ownership. There can be no
assurance that the Company will be able to utilize any net
operating loss carryforwards in the future. The Company is subject
to possible tax examination for the years 2012 through
2018
For the year ended December 31, 2018, the Company’s effective
tax rate differs from the federal statutory rate principally due to
net operating losses and equity issued for services.
U.S. Tax Reform
On
December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the
Tax Reform Act). The Tax Reform Act significantly revises the
future ongoing federal income tax by, among other things, lowering
U.S. corporate income tax rates effective January 1, 2018. The
Company has calculated a blended U.S. federal income tax rate of
approximately 21% for the fiscal year ending December 31, 2018 and
21.0% for subsequent fiscal years. Remeasurement of the
Company’s deferred tax balance under the Tax Reform Act
resulted in a non-cash tax benefit reduction of approximately $2.5
million for the year ended December 31, 2018.
The
changes included in the Tax Reform Act are broad and complex. The
final transition impacts of the Tax Reform Act may differ from the
above estimate due to, among other things, changes in
interpretations of the Tax Reform Act, any legislative action to
address questions that arise because of the Tax Reform Act and any
changes in accounting standards for income taxes or related
interpretations in response to the Tax Reform Act.
The principal components of the Company’s deferred tax assets
at December 31, 2018 and 2017 are as follows:
|
|
|
|
|
U.S. operations
loss carry forward and state at statutory rate of 40%
|
$
4,011,363
|
$
3,068,992
|
|
Less valuation
allowance
|
4,011,363
|
3,068,992
|
|
Net deferred tax
assets
|
-
|
-
|
|
Change in valuation
allowance
|
$
4,011,363
|
$
3,068,992
|
A reconciliation of the United States Federal Statutory rate to the
Company’s effective tax rate for the years ended December 31,
2018 and 2017 is as follows:
|
|
|
|
|
Federal statutory
rate
|
-21.0
%
|
-21.0
%
|
|
State income tax
rate
|
-6.0
%
|
-6.0
%
|
|
Change
in valuation allowance
|
27.0
%
|
27.0
%
|
|
Effective tax
rate
|
0.0
%
|
0.0
%
|
The
Company’s tax returns for 2012 to 2018 are open to review by
the Internal Revenue Service.
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.
There were the material events subsequent to
December 31,
2018:
Transactions 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.
Repayment of Securities Purchase Agreement, Secured Promissory
Notes and Security Agreement with Iliad
On
January 17, 2019, the Company repaid $650,000 to Iliad due under
the October 15, 2018 funding transaction with Iliad.
Trading on Pink Sheet Stock Systems
As of March 4, 2019, the Company began to trade on
the
Pink
Sheet stocks system.
The
Company’s bid price had closed below $0.01 for more than 30
consecutive calendar days.