ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.PROCEDURES
Evaluation of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer, who serves as our principal executive officer and our Chief Financial Officer, who serves as our principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
29
As of December 31, 2013, our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2013, our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) ofunder the Securities Exchange Act of 1934. Under the supervision and for assessingwith the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting.reporting as of the end of the period covered by this report based on the framework in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our principal executive officer and principal financial officer concluded that our internal control over financial reporting were not effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with United States generally accepted accounting principles.
Pursuant to Regulation S-K Item 308(b), this Annual Report on Form 10-K does not include an attestation report of our company’s registered public accounting firm regarding internal control over financial reporting. The effectiveness of our internal control over financial reporting as of December 31, 2016 has not been audited by SD Mayer & Associates, LLP, an independent registered public accounting firm.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition,Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost.
Management has assesseda) Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive and principal financial officers concluded as of December 31, 2016 that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses in our internal controls over financial reporting discussed immediately below.
Identified Material Weakness
A material weakness in our internal control over financial reporting asis a control deficiency, or combination of December 31, 2013. In makingcontrol deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.
Management identified the following material weakness during its assessment of internal controlcontrols over financial reporting, management usedreporting:
Audit Committee:
On June 3, 2014, we formed an Audit Committee and appointed an audit committee financial expert as defined by SEC and as adopted under the criteria established in Internal Control — Integrated Framework, issued by theSarbanes-Oxley Act of 2002. Prior to this, we did not have an Audit Committee of Sponsoring Organizations of the Treadway Commission. This assessment included an evaluation of the design of our internal control overto oversee financial reporting and testingused external service providers to ensure compliance with the SEC requirements. The current Audit Committee has one independent directors. We expect to expand this committee during 2017.
Other Weaknesses:
Our information systems lack sufficient controls limiting access to key applications and data.
Our inventory system lacked standardized product descriptions and effective controls to ensure the accuracy, valuation, and timeliness of the operational effectivenessfinancial accounting process around inventory, including a lack of those controls. Based on the results of this assessment, management has concluded that our internal control over financial reporting was not effective as of December 31, 2013 dueaccuracy and basis for valuation resulting in adjustments to the limited size of our staff and budget. The following weaknesses/areas of concern were uncovered by our evaluation:
· | The lack of a computerized accounting system that links the Company’s different physical locations |
· | The lack of a centralized Accounting/Finance department operating from the same location as the Company’s senior management |
· | A lack of an offsite backup for the Company’s critical computerized data |
· | A lack of a detailed, and written, set of company policies and procedures |
· | Our information systems lack sufficient controls limiting access to key applications and data |
· | Our inventory system lacks standardized product descriptions and effective controls to ensure the accuracy, valuation, and timeliness of the financial accounting process around inventory, including a lack of accuracy and basis for valuation resulting in adjustments to the amount of cost of revenues and the carrying amount of inventory. |
b) Changes in Internal Control over Financial Reporting
ThereDuring the quarter ended December 31, 2016, there were no changes in our internal controlcontrols over financial reporting that occurred during this fiscal quarter, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the fourth quarter of the year ended December 31, 2013Exchange Act, that have materially affected, or that areis reasonably likely to have a materially affect, on our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.INFORMATION
None.There were no disclosures of any information required to be filed on Form 8-K during the three months ended December 31, 2016 that were not filed.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.GOVERNANCE The following changes in directors and named executive officers occurred during the year ending December 31, 2015 and 2016:
●
Marco Hegyi was appointed President on December 4, 2013 and Director on December 9, 2013. Mr. Hegyi was appointed Chairman of the Board and CEO on April 1, 2016.
●
Mark Scott was appointed Director on May 21, 2014, Chairman of the Audit Committee on June 3, 2014 and Consulting Chief Financial Officer on July 31, 2014. Mr. Scott resigned as Director and Chairman of the Audit Committee on October 18, 2015. Mr. Mark Scott was re-appointed to the Board of Directors and Secretary of GrowLife, Inc. on February 14, 2017.
●
Joseph Barnes was appointed Senior Vice President of Business Development on October 10, 2014.
●
Michael Fasci was appointed Director on October 27, 2015 and Chairman of the Audit and Compensation Committees on November 11, 2015. Mr. Fasci was appointed Secretary on April 1, 2016, which he resigned from on February 14, 2017.
●
Tara Antal was appointed Director on October 27, 2015 and resigned on March 4, 2016.
●
Brad Fretti was appointed Director on October 27, 2015 and Chairman of the Compensation Committee on November 11, 2015. Mr. Fretti resigned as Director and Chairman of the Compensation Committee on March 4, 2016.
Directors and Executive Officers
The following table sets forth the names, ages, and positions ofcertain information about our current executive officers and directors. All directors serve until the next annual meeting of stockholders or until their successors are elected and qualified. Officers are appointed by our board of directors and their terms of office are, except to the extent governed by an employment contract, at the discretion of our board of directors.executive officers:
Name | Age | Age | | Position Held and TenureDirector/ Executive Officer |
| | | | |
Sterling C. Scott | | 58 | | Director since April 5, 2012
Chief Executive Officer, President, Secretary since April 5, 2012
|
John Genesi | | 49 | | Named Chief Financial Officer July 22, 2013 |
Justin Manns | | 38 | | Former Chief Financial Officer, resigned July 22, 2013. Former Director, resigned as a Director December 19, 2013. Currently Controller of GrowLife Hydroponics, Inc. |
Marco Hegyi | 59 | 56Chairman of the Board, CEO, President and Nominations and Governance Committee Chairman (1) |
| | Joined the Company as President on December 4, 2013. Also joined the Company’s Board of Directors on December 9, 2013 | |
Rob HuntMark E. Scott | 63 | Consulting Chief Financial Officer |
| | 41 | |
Michael E. Fasci | 58 | Director, Audit Committee Chairman and Secretary (2)(3) |
| | Joined the Company as | |
Joseph Barnes | 44 | Senior Vice President of GrowLife Hydroponics, Inc. on June 7, 2013. Also joined the Company’s Board of Directors on June 7, 2013 |
Eric Shevin | | 48 | | Joined the Company’s Board of Directors on April 1, 2013 |
Alan Hammer | | 67 | | Joined the Company’s Board of Directors on December 17, 2013 |
Anthony Ciabattoni | | 70 | | Joined the Company’s Board of Directors on December 19, 2013 |
Jeff Giarraputo | | 43 | | Joined the Company’s Board of Directors on December 19, 2013 |
Craig Ellins | | 59 | | Former Director who resigned as a Director April 12, 2013. Originally joined the Company as a Director March 9, 2011 |
Bob Kurilko | | 50 | | Former Director who resigned as a Director November 2, 2013. Originally joined the Company as a Director June 29, 2012Business Development |
Biographical Information* Independent director
Sterling C. Scott - Mr. Scott has almost 30 years of experience in a combination of managing small to medium sized businesses and in practicing business law. Mr. Scott was an associate and partner with Jenner & Block in Washington D.C. and concentrated on federal regulatory issues affecting businesses and related litigation until 1990. Subsequently, he transitioned to the Senior Management Team and General Counsel for Technical Management Services Company (TAMSCO), a privately held company with 800 employees and worldwide business interests, along with directly managing a TAMSCO incubator company engaged in innovative microbial solutions to water contamination. Most recently, Mr. Scott has served as Chief Executive Officer of SG Technologies, Corp. and has led the successful development and marketing of its innovative Stealth Grow LED line of technology products for the hydroponics industry. Mr. Scott received a Bachelor of Arts in Social Sciences from Shimer College and a Juris Doctor from DePaul University. Mr. Scott’s past experience, qualifications, attributes and skills led to the conclusion that Mr. Scott should serve on our Board in light of our proposed business and structure. Mr. Scott’s prior experience as Chief Executive Officer of SG Technologies, Corp., where he gained invaluable experience and contacts within both the hydroponics and cannabis industries, combined with his legal background, make him perfectly suited to be the Company’s Chief Executive Officer and a Director. Given the currently “challenging” legal framework(1) Member of the cannabis industry, having a Chief Executive OfficerAudit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominations and Director with a strong legal background is considered, by the Company, to give us a significant advantage as related to corporate strategy.Governance Committee.
All directors hold office until their successors are duly appointed or until their earlier resignation or removal.
John Genesi - Marco HegyiMr. Genesi serves as the Company’s Chief Financial Officer, a position that he has held since July 22, 2013. Mr. Genesi has extensive experience in both public accounting and corporate finance, having served as the Chief Financial Officer at two other public companies. John’s corporate career in accounting/finance began in 1988 after he graduated from California State University, Fullerton with a Bachelor of Arts degree in Business Administration with a concentration in Finance. He began his career in the Finance department of a major U.S. aerospace company. After 5 years in the aerospace industry, John moved to Montana to manage a 6,000-acre ranching and mining operation. Next up was a venture capital backed high-tech startup in Silicon Valley, where he worked as Controller for a company that eventually grew to 300 employees. After his Silicon Valley experience, John moved back to southern California to become the Chief Financial Officer at Technical Services & Logistics, Inc (“TSLi”). It was here that he gained his first SEC reporting experience, as TSLi completed a reverse merger into a publicly traded shell company. John’s next CFO role came at LandBank Group, Inc. and its sister company, Strategic Financial Companies, LLC. As CFO of these companies, John presided over LandBank’s reverse merger into a publicly traded shell company and its subsequent SEC reporting obligations. While building and managing LandBank, John was also helping to take Strategic from a business plan to a company with over 100 employees and $30 million in revenue. During the five (5) years prior to joining GrowLife, Mr. Genesi served as Controller for a $35M Los Angeles based healthcare company (July2012 through March 2013) and as Chief Financial Officer of LandBank Group, Inc. and Strategic Financial Companies, LLC (June 2006 – May 2012).
Justin Manns - Mr. Manns serves as the Controller of GrowLife Hydroponics, Inc. while also managing the Company’s retail store in Santa Rosa, CA. Mr. Manns has an array of experience in public accounting, business management, and biological and health sciences. He has worked as a marine biologist, collecting, recording and analyzing data for the National Marine Fishery Service. He has served as an auditor for Ernst and Young in McLean, Virginia and the Reznick Group in Bethesda, Maryland. Mr. Manns received a Bachelor of Science in Accounting and Business Management from the The Robert H. Smith School of Business at the University of Maryland. He received a Bachelor of Science degree in Environmental & Biological Sciences from Antioch College in Yellow Springs, Ohio. Mr. Manns’ past experience, qualifications, attributes and skills led to the conclusion that Mr. Manns should serve on our Board in light of our proposed business and structure. During the five (5) years prior to joining GrowLife, Inc., Mr. Manns served as the Chief Financial Officer of SG Technologies, Corp. (August 2011 - March 2012) and prior to his work at SG Technologies, Corp. he worked as a Chiropractic Physician in Columbus, Ohio.
Marco Hegyi - Mr. Hegyi joined the CompanyGrowLife as its President on December 4, 2013 and a Member of its Board of Directors on December 9, 2013.2013 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. Mr. Hegyi has served as an independent director of Visualant, Inc. since February 14, 2008 and as Chairman of the Board sincefrom May 2011, and served at the Chairman of Visualant, Inc.the Audit and Compensation committees until his departure on February 2015. Previously, Mr. Hegyi has beenwas a principal with the Chasm Group sincefrom 2006 to January 2014, where he has provided business consulting services. As a management consultant, Mr. Hegyi has applied his extensive technology industry experience to help early-stage companies. Over the last four years hecompanies and has focused on business planning, operational management, and financial supervision.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 Directordirector of boards, finance, compensation and audit committee chair, Chief Operating Officer, Vice-Presidentchief operating officer, vice-president of sales and marketing, Senior Directorsenior director of product management, and he began his career as a systems software engineer. His patents issued to date include Configuring and Allocating Software Product Technical Services, United States US 7904875, issued March 8, 2011; Systems and Methods for Processing Eggs , United States US 8455026, issued June 4, 2013; Systems and Methods for Processing Eggs , United States US 8455030, issued June 4, 2013; and, Systems and Methods for Processing Eggs, United States US 8657098, issued February 25, 2014.
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. As
Michael E. Fasci– Mr. Fasci joined GrowLife as a Member of its Board of Directors on October 27, 2015 and was appointed Audit Committee Chairman on November 11, 2015. On April 1, 2016, Mr. Fasci was appointed as the Secretary of the Company, continuesbut resigned on February 14, 2017. Mr. Fasci is a 30-year veteran in the finance sector having served as an officer and director of many public and private companies. Mr. Fasci is a seasoned operator across various industries and has served in both CEO and CFO capacities for both growth and turnaround situations. Mr. Fasci began his career as a field engineer and then manager of various remediation filtration and environmental monitoring projects globally before focusing his efforts on the daily operations, accounting and financial reporting and SEC compliance of the numerous companies he has served. Mr. Fasci resides in East Taunton, Massachusetts and studied Electrical Engineering at Northeastern University and maintains his qualification as an Enrolled Agent of the Internal Revenue Service.
Mr. Fasci was appointed to grow/expand, it will need a highly skilled individual such as Mr. Hegyi to manage the Company’s business operations while also interacting with the investment community.Board of Directors based on his financial, SEC and governance skills.
Robert HuntMark E. Scott – Mr. Hunt, age 41,Mark 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.
Mr. Scott served as (i) Chief Financial Officer, Secretary and Treasurer of Visualant, 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 previously served as Chief Financial Officer and Secretary of IA Global, Inc. from October 2003 to June 2011. Mr. Scott also provides consulting services to other non-public 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 directorcertified public accountant and Executive Vice Presidentreceived a Bachelor of GrowLife, Inc as well as the current President of GrowLife Hydroponics. Mr. Hunt has spent the past five yearsArts in the Gardening Industry specializing in Organic and Hydroponic growing methods formerly as the majority owner and CEO of both Rocky Mountain Hydroponics (RMH) in Colorado and Evergreen Garden Centers (EGC) in Massachusetts, New Hampshire, and Maine. He is a professional consultant to many dispensary owners and license seekers in multiple jurisdictions.
As the CEO of RMH and EGC, Mr. Hunt grew from one location to five and significantly increased revenue over each year of leadership, building it to annual sales of close to four million dollars. Mr. Hunt is also an active attorney in the State of Colorado, where he has helped advise and guide many cannabis dispensaries through a rapidly changing legal landscape.
Mr. Hunt is also the Chairman of the Coalition for Responsible Patient Care, based in Massachusetts, where he has taken an active role in helping to develop and implement the fledgling medical cannabis market in the Commonwealth.
Mr. Hunt has authored articles for publications as diverse as Hydrolife Magazine, Urban Garden and the Medical Marijuana Business Daily (MMBD). He is often quoted in articles as a professional in both the hydroponics and the medical cannabis industry, including publications such as The Boston Globe, The Boston Herald, The Boston Business Journal, CannaBusiness Magazine, The Phoenix, and Wicked Local. Mr. Hunt has also been a panelist for the National Cannabis Industry Association (NCIA) and the MMBD. He has been interviewed by: Entrepreneur Magazine, Fortune Magazine, The Boston Business Journal, NBC News, ABC News, The Boston Herald, MMJ Business Daily, iCannabis Radio, Unregular Radio, and The Cannabis Financial Network as well as numerous other publications and media outlets.
As one of the principal developers of Cannabis.org, a website focused on changing the scheduling of cannabis away from being a schedule I drug on the Federal Government’s list of controlled substances, Rob has been responsible for the majority of the written blogging commentary on the Cannabis.org Facebook page (www.https://www.facebook.com/tellthetruthfederalgovernment) and website (www.cannabis.org).
Mr. Hunt graduated from Suffolk University Law School in 2007 where in his final year he completed a semester long independent study about the disparity between cannabis being a Schedule I drug according to the Federal Government, yet at the time, thirteen U.S. States had medicinal cannabis laws on their books.
Rob graduatedAccounting from the University of Vermont in 2003 where heWashington.
Mr. Scott was the Speaker of the Senate in the Student Government and active in helping change the rules preventing students with prior arrests for drug possession from being prevented in obtaining federally backed student loans. Priorappointed to this Mr. Hunt was the CEO of All About Content, a technology start-up based in Aliso Viejo, CA. He has also found success as both an accomplished sushi chef and a competitive professional skier.
The Company added Mr. Hunt to its Board of Directors becausebased on his financial, SEC and governance skills.
Joseph Barnes- Mr. Barnes was appointed Senior Vice President of Business Development for GrowLife, Inc. on October 10, 2014. Mr. Hunt’s vastBarnes works from our Avon (Vail), Colorado store. Mr. Barnes joined GrowLife in 2010 and is responsible for all national sales operations including direct sales, retail and e-commerce. 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 contacts within bothhealthy 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 cannabisslopes, Barnes was also a recruiting manager focusing on placing senior executives with international pharmaceutical/biotech companies. He also owned and hydroponics industries. An important part of the Company’s strategy is to grow via acquisitions, and we believe that Mr. Hunt’soperated 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 industry experience and related network of contacts should proveemployees required to be extremely valuable to the implementationdisclosed under Item 401(c) of the Company’s strategic vision.Regulation S-K.
Eric Shevin - Mr. Shevin, through his practice “Law Offices of Eric D. ShevinFamily Relationships
There are no family relationships among our directors and Associates”, represents clients exclusively in the area of State and Federal criminal law with a focus on marijuana and drug cases. Mr. Shevin’s practice, at which he has worked for the prior five (5) years, also represents clients in matters dealing with medical marijuana business formation and corporate representation. Presently, Mr. Shevin teaches a course on Medical Marijuana Laws to the Los Angeles County Judiciary, in addition to teaching at the NACDL Advanced Criminal Law Seminar in Aspen, Colorado. Mr. Shevin represents individuals nationally and has won significant victories for his clients in Hawaii, Louisiana, North Carolina, Utah, Arkansas, Missouri, Ohio, New York, Nevada, Texas, and Tennessee. Prior to starting his own practice, Mr. Shevin was a partner in a high volume criminal defense practice specializing in marijuana matters, unlawful searches, illegal police conduct, and unauthorized destruction of evidence. Mr. Shevin represented the California Hemp and Health Initiative on Writ of Mandate to the California Supreme Court and developed expertise in the areas of cannabis yield ratios, medical efficacy of marijuana, and government cultivation guidelines.executive officers.
Mr. Shevin received his Juris Doctor degree
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:
● 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 Universityfollowing 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 San Diegoany of the foregoing, or as an investment adviser, underwriter, broker or dealer in 1992. Mr. Shevin completed a judicial clerkshipsecurities, 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 Honorable Judge Bernard Revakpurchase 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 San Diego Superior CourtBoard of Directors
The Board has three standing committees to facilitate and interned withassist the San Diego County District Attorney’s office, Juvenile Division. Mr. Shevin obtained his BachelorBoard in the execution of Science degree at San Diego State University in 1989. He is past Presidentits 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 two management directors. The table below shows current membership for each of the Financial Management Association’s National Honor Society. Through 20 years of daily courtroom experience, Mr. Shevin has developed extensive knowledge of all issues concerning marijuana and medical marijuana, including, but not limited to, defending marijuana cases in State and Federal court, cannabis yield ratios, medical efficacy of marijuana, and State Guidelines for the operation of cooperatives.standing Board committees.
Mr. Shevin has been published in The 420 Times, “As A Medical Marijuana Patient, What Are My Rights?”; Volume 3, 2010 and the West Coast Leaf, “LA’s Strict Ordinance Draws Patient Backlash”; Volume 3, No. 2, Summer 2010. Mr. Shevin has also been featured and/or quoted in more than 25 articles and news stories including the following media outlets: Los Angeles Times, Los Angeles Daily Journal, ABC News, CBS News, MSNBC, Fox News, Newshour with Jim Lehrer, Huffington Post, National Public Radio, Hartford Courant, Orange County Register, Orange County Weekly, The 420 Times, West Coast Leaf, Marijuana Anti Prohibition Project, Press Enterprise, Metropolitan News Enterprise, Hemp Evolution, The Compassion Club, Cannabis News, The Medical Marijuana Magazine, The Marijuana News, and High Times Freedom Fighter of the Month.
Mr. Shevin’s published opinion was “People v. Bergen, 166 Cal.App.4th 161 (2008). Established conclusive rights of medical marijuana patients to manufacture concentrated cannabis without the use of chemicals”.
His teaching experience includes:
· Audit | “HAS MEDICINE GONE TO POT; (The Marijuana Law, Its Impact on You
| Compensation | | Nominations and Our Community)”, 2nd Annual Pasadena Medical Society and Alliance Community Forum.Governance |
Michael E. Fasci (Chairman) | | Michael E. Fasci (Chairman) | | Marco Hegyi (Chairman) |
· | National Association of Criminal Defense Lawyers, Advanced Criminal Law Seminar, Aspen 2011. “TOMORROWS ISSUES TODAY, DEFENDING MEDICAL MARIJUANA CASES IN FEDERAL COURT AND MEDICAL MARIJUANA BUSINESS FORMATION AND REPRESENTATION.
|
· | “MEDICAL MARIJUANA LEGAL SEMINAR”, Course on Medical Marijuana Law to the Los Angeles County Judiciary, Winter 2011.
|
· | “MEDICAL MARIJUANA LEGAL ISSUES”, National Business Institute, Continuing Education for Legal Professionals. April 2011, 2012.
|
· | “MARIJUANA LAWS; WHAT’S THE LATEST”, Criminal Law Section MCLE Event, San Fernando Valley Bar Association. January, 2013.
|
Mr Shevin’s awards, honors, and affiliations are as follows:
· | Member, United States Supreme Court. |
· | Southern California Super Lawyer for 2004, 2005 and 2009, 2012, 2013. |
· | Defender of Justice Award, Americans for Safe Access, 2008. |
· | Lifetime member, Legal Committee for the National Organization for the Reform of Marijuana Laws. |
· | Sustaining member, Criminal Courts Bar Association, Los Angeles County. |
Mr. Shevin’s legal experience/expertise in the cannabis industry was the motivation to add him to the Company’s Board of Directors. As the country’s legal framework related to cannabis evolves and changes, at what we believe will be a rapid pace, having a legal expert such as Mr. Shevin is considered, by the Company, to be critical in helping us plan and implement corporate strategy in a law abiding manner.
Alan Hammer – Mr. Hammer is a partner in the Roseland, New Jersey law firmCompensation Committee Interlocks and Insider Participation
None of Brach Eichler L.L.C., at which he has been employed the past five (5) years. He joined the predecessor firm immediately after graduation in 1971. He is former Managing Partner and a Member of the Executive Committee and Real Estate Practice Group. He has concentrated his practice in the areas of investment real estate transactions and tax certiorari proceedings. He has been peer review rated as AV Preeminent by Martindale-Hubbell for 25 years, its highest rating. He has been recognized by his peers as among the Best Lawyers in America and as a New Jersey Super Lawyer for the last 10 years. In 2014 he was named by Best Lawyers as the 2014 Newark Litigation – Real Estate “Lawyer of the Year”. He is also a Tier 1 attorney in Chambers USA. In addition to the practice of law, since 1972 when Mr. Hammer acquired his first apartment house he has been personally active in the ownership, management, and operation of investment properties, primarily apartment complexes, in New Jersey and Eastern Pennsylvania. Mr. Hammer served as Acting Chairman and CEO of Kushner Companies from August 2005 through September 2007 while continuing to practice law with the firm. Kushner Companies is a private real estate company which owned and operated over 20,000 apartments in New Jersey, New York, Pennsylvania, Delaware and Maryland as well as industrial properties, retail properties, office buildings, and hotels. After completing the successful sale of a 17,000 unit multifamily portfolio comprised of 86 properties in four states to AIG for an amount close to two billion dollars, Mr. Hammer returned to the full time practice of law. Mr. Hammer earned his J.D. from Rutgers University of Law in 1971 and his B.S. in real estate from Rider University in 1968. He is a member of the Bars of New Jersey, New York, and Pennsylvania.
The Company added Mr. Hammer to its Board of Directors because of his legal background and also because of his vast real estate experience. We have previously mentioned the importance of having strong legal experience to help us devise and implement corporate strategy, but the Company also believes that real estate will be a significant factor in the future of the cannabis industry. As more dispensaries and grow operations enter the industry, they will need facilities, ie real estate, in which to conduct their operations. We believe that having a Director such as Mr. Hammer, who has a tremendous real estate background, is a very significant advantage to the Company.
Anthony Ciabattoni - Mr. Ciabattoni has an entrepreneurial background that includes the formation, growth, and eventual sale of three successful start-up companies. Since 1996, Mr. Ciabattoni has been a private investor and currently manages a diverse investment portfolio with assets ranging from real estate, satellite communications, and software. His business background includes sales and marketing management positions with two Fortune 150 companies. He was the founder of Pacific Business Interiors, which became the largest distributor of Steelcase office furniture in Southern California, and a leading facilities management service provider to Fortune 500 companies. In addition to serving as President and CEO of Pacific Business Interiors from 1983 until its sale in 1996, Mr. Ciabattoni founded Recycled Office Solutions in 1993, a re-manufacturer of office furniture systems. Since selling those companies, Mr. Ciabattoni has been involved in a wide range of investments in the real estate, energy, and private equity sectors. Heour executive officers serves as a member of the Boardboard of Advisors for Waveland Capital Group, LLC,directors or compensation committee, or other committee serving an investment banking firmequivalent function, of any other entity that advises and raises capital for early-stage medical technology companies, including NeoMatrix, LLC. Mr. Ciabattoni servedhas one or more of its executive officers serving as a directormember of Transeastern Properties, a real estate development company recently acquiredour 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 Technical Olympic USA, Inc. Mr. Ciabattoni received a Bachelorour board of Arts Degree from the University of Delaware.
Mr. Ciabattoni’s past experience building, growing,directors to promote transparency and selling companies were the qualifications that prompted us to add himintegrity. The standards apply to our Boardboard of Directors. The Company is committeddirectors, executives and employees. Waivers of the requirements of our code of ethics or associated polices with respect to growing from its current size/statemembers of our board of directors or executive officers are subject to one that is an industry leader in termsapproval of both size and scope. Given his past success in building companies, we believe that having Mr. Ciabattoni as a Director will help us achieve our growth related goals.the full board.
Jeff Giarraputo - Mr. Giarraputo has served on the Board of Directors of GrowLife, Inc. since December 19, 2013. In 1996 Mr. Giarraputo co-founded the global advertising agency Factory Design Labs, the visionary leader in customer creation for culture-driven lifestyle brands. From 1996 until current, Mr. Giarraputo has built Factory Design Labs into a multi-national agency with offices in Denver, USA, Shanghai, China and Verbier, Switzerland. In 2004, Mr. Giarraputo co-founded Beatport, the largest music store for DJs in the world. Beatport was privately held and headquartered in Denver, USA and Berlin, Germany until it was acquired in 2013. Mr. Giarraputo currently consults with a number of private equity companies as an advisor and/or board member. He is also an investor and mentor in several start-ups and later stage companies.
The Company added Mr. Giarraputo to its Board of Directors because of his sales and marketing, and in particular his “branding”, experience/expertise. The Company is committed to establishing the GrowLife brand as an industry leader, which makes an individual with Mr. Giarraputo’s experience and skillset a welcome addition to our Board of Directors.
Significant Employees
None.
Family Relationships
None.
Voting Arrangements
None.
Section 16(a) Beneficial Ownership Reporting Compliance.Compliance
Our executive officers, directors and 10% stockholders are required under Section 16(a) of the Securities Exchange Act of 1934 requires that our executive officers and directors, and persons who own more than ten percent of a registered class of our equity securities,to file reports of ownership and changes in ownership with the SEC. ExecutiveCopies of these reports must also be furnished to us.
Except as follows, based solely on a review of copies of reports furnished to us, as of December 31, 2016 our executive officers, directors and greater-than-ten percent stockholders are required by SEC regulations to furnish us10% holders complied with all filing requirements.
Person | | Transaction Date | | |
Michael E. Fasci
| 4 | 5/25/2016 | 5/27/2016 | ��5/31/2016 |
Marco Hegyi
| 4 | 10/21/2017 | 10/2/2016 | 10/25/2016 |
CANX and Logic Works Ownership
On July 10, 2014, we entered into a Waiver and Modification Agreement, Amended and Restated Joint Venture Agreement, Secured Credit Facility and Secured Convertible Note with CANX, and Logic Works LLC, a lender and shareholder of the Company.
CANX does not consider itself a beneficial owner due to its position that it has a 4.99% ownership limit. CANX further disclaims it has acted as a control group with Logic Works Therefore, CANX has not made any Section 16(a) forms they file. Based solelyfilings. Likewise, at this time, we do not consider CANX a control party under SEC Rules.
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 our reviewpage 26 under “Remuneration of the copies of the forms received by us and written representations from certain reporting persons that they have complied with the relevant filing requirements, we believe that,Executive Officers” (the “Named Executive Officers”) who served during the year ended December 31, 2013, all2016. 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 directors and greater-than-ten percent stockholders complied with all Section 16(a) filing requirements.
Item 405 – Compliance with Section 16(a) ofthat the SEA, 1934 – Regulation S-KCompany may hire in the future.
The Company has a duty to file certain forms pursuant to Section 16(a)Compensation Committee of the SEABoard has responsibility for overseeing, reviewing and approving executive compensation and benefit programs in regards to insider trading of officers, directors, and beneficial owners of more than ten (10%) of any class of equity securitiesaccordance with the Compensation Committee’s charter. The member of the Company. BasedCompensation Committee is Michael E. Fasci. We expect to appoint two independent Directors to serve on review of copies of such forms received by it, or written representations from certain reporting persons, the Company believes all filing requirements applicable to its officers, directorsCompensation Committee during 2017.
Compensation Philosophy and greater than ten (10%) percent beneficial owners were complied with exceptObjectives
The major compensation objectives for the following below:
Item 405a Requirements
Section 16(a) Beneficial Ownership Reporting Compliance
Form 3
Form 3 is an initial reporting document to be filed by all insiders during the fiscal year listing the insider’s holdings of company securities, including derivative securities suchCompany’s executive officers are as stock options. The insider must file a Form 3 within 10 calendar days of becoming a director, officer, or greater than ten (10%) beneficial owner of Company stock. The insider must file a Form 3 even if the insider does not have a pecuniary interest in any stock of the company at the time of filing.
The following director(s), officer(s), or beneficial owner(s) of more than ten (10%) percent of any class of equity securities failed to file Form 3 on a timely basis as required by Section 16(a) of the SEA during the most recent fiscal year or prior fiscal years.
follows:
| 1. | Marco Hegyi |
| ● | to attract and retain highly qualified individuals capable of making significant contributions to our long-term success; |
| | |
| ● | to motivate and reward named executive officers whose knowledge, skills, and performance are critical to our success; |
| | |
| ● | to closely align the interests of our named executive officers and other key employees with those of its shareholders; and |
| | |
| ● | to utilize incentive based compensation to reinforce performance objectives and reward superior performance. |
Marco Hegyi has one (1) Form 3 filing where zero (0) transactions neededRole 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 be reported, butwhat we can afford and in a way that allows for us to meet our goals for overall performance. During 2016 and 2015, the Form 3 wasCompensation 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 the financial condition of the Company. The Compensation Committee does not filed onuse a timely basis. Currently,peer group of publicly-traded and privately-held companies in structuring the Company is aware that there is one (1) known failure to file a required Form 3. However, the Company will remedy the situation by filing Marco Hegyi’s Form 3 no later than March 31, 2014.compensation packages.
Executive Compensation Components for the Year Ended December 31, 2016
Alan Hammer has one (1) Form 3 filing where zero (0) transactions neededThe Compensation Committee did not use a formula for allocating compensation among the elements of total compensation during the year that ended December 31, 2016. The Compensation Committee believes that in order to be reported, butattract and retain highly effective people it must maintain a flexible compensation structure. For the Form 3 was not filed on a timely basis. Currently,year that ended December 31, 2016, 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 is awareand provides motivation for career development and enhancement. Base salary ensures that there is one (1) known failureall employees continue to filereceive a required Form 3. However, the Company will remedy the situation by filing Alan Hammer’s Form 3 no later than March 31, 2014.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 and Mr. Scott were compensated as described above based on the financial condition of the Company.
Anthony Ciabattoni has one (1) Form 3 filing where zero (0) transactions needed to be reported, but the Form 3 was not filed on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 3. However, the Company will remedy the situation by filing Alan Hammer’s Form 3 no later than March 31, 2014.Performance-Based Incentive Compensation
Jeffrey Giarraputo has one (1) Form 3 filing where zero (0) transactions needed to be reported, but the Form 3 was not filed on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 3. However, the Company will remedy the situation by filing Alan Hammer’s Form 3 no later than March 31, 2014.
Form 4
Form 4 reflects any change in an insider’s beneficial ownership of the company’s securities, including transactions that are exempt from short-swing profit recovery under Rule 16b-3 under the SEA, such as the grant, exercise or conversion of stock options or other derivative securities or the withholdings of shares for tax purposes and must be filed within two (2) days of the transaction
The following director(s), officer(s), or beneficial owner(s) of more than ten (10%) percent of any class of equity securities failed to file Form 4 on a timely basis as required by Section 16(a) of the SEA during the most recent fiscal year or prior fiscal years.
Sterling Scott has three (3) Form 4 filings where three (3) transactions were not reported on a timely basis. Currently, the Company is aware that there are three (3) known failures to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Sterling Scott that reflects these transactions no later than March 31, 2014. The Company also acknowledges that Sterling Scott’s Form 5 reflecting these transactions is also not filed on a timely basis.
John Genesi has one (1) Form 4 filing where one (1) transaction was not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for John Genesi that reflects this transaction no later than March 31, 2014. The Company also acknowledges that John Genesi’s Form 5 reflecting this transaction is also not filed on a timely basis.
Justin Manns has one (1) Form 4 filing where four (4) transactions were not reported on a timely basis. Currently, there are no known failures, and thus, the Company does not intend to file a subsequent Form 4 or 5 for Justin Manns.
Marco Hegyi has one (1) Form 4 filing where one (1) transaction was not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Marco Hegyi that reflects this transaction no later than March 31, 2014. The Company also acknowledges that Marco Hegyi’s Form 5 reflecting this transaction is also not filed on a timely basis.
Robert Hunt has one (1) Form 4 filing where two (2) transactions were not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Robert Hunt that reflects these transactions no later than March 31, 2014. The Company also acknowledges that Robert Hunt’s Form 5 reflecting these transactions is also not filed on a timely basis.
Eric Shevin has three (3) Form 4 filings where three (3) transactions were not reported on a timely basis. Currently, the Company is aware that there are three (3) known failures to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Eric Shevin that reflects these transactions no later than March 31, 2014. The Company also acknowledges that Eric Shevin’s Form 5 reflecting these transactions is also not filed on a timely basis.
Alan Hammer has one (1) Form 4 filing where one (1) transaction was not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Alan Hammer that reflects this transaction no later than March 31, 2014. The Company also acknowledges that Alan Hammer’s Form 5 reflecting this transaction is also not filed on a timely basis.
Anthony Ciabattoni has one (1) Form 4 filing where one (1) transaction was not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Anthony Ciabattoni that reflects this transaction no later than March 31, 2014. The Company also acknowledges that Anthony Ciabattoni’s Form 5 reflecting this transaction is also not filed on a timely basis.
Jeffrey Giarraputo has one (1) Form 4 filing where one (1) transaction was not reported on a timely basis. Currently, the Company is aware that there is one (1) known failure to file a required Form 4. However, the Company will remedy the situation by filing a Form 5 for Jeffrey Giarraputo that reflects this transaction no later than March 31, 2014. The Company also acknowledges that Jeffrey Giarraputo’s Form 5 reflecting this transaction is also not filed on a timely basis.
Craig Ellins has two (2) Form 4 filings where two (2) transactions were not reported on a timely basis. Currently, the Company is aware that there are two (2) known failures to file a required Form 4. The Company is trying to remedy the situation by filing a Form 5 for Craig Ellins that reflects these transactions. However, Craig Ellins resigned from the Board of Directors in April, 2013Compensation Committee believes incentive compensation reinforces performance objectives, rewards superior performance and is currently unavailable. The Company will file and discloseconsistent with the appropriate information as soon as the Company receives the requisite information.
Robert Kurilko has five (5) Form 4 filings where five (5) transactions were not reported on a timely basis. Currently, the Company is aware that there are five (5) known failures to file a required Form 4. The Company is trying to remedy the situation by filing a Form 5 for Robert Kurilko that reflects these transactions. However, Robert Kurilko resigned from the Boardenhancement of Directors in November, 2013 and is currently unavailable. The Company will file and disclose the appropriate information as soon as the Company receives the requisite information.
Form 5
Form 5 is the annual report where insiders must file within 45 days after the endstockholder value. All of the Company’s fiscal year. Any person who was an insider atNamed Executive Officers are eligible to receive performance-based incentive compensation. The Compensation Committee did not recommend or approve payment of any time during the fiscal year must file a Form 5 unless either the insider had no reportable transactions required to be reported on a Form 4 or Form 5. Form 5 must include all reportable transactions that were exempt from the Form 4 and the two-day filing rule.
Please see above as to how the Company will file director(s), officer(s), and greater than ten (10%) percent beneficial owners Form 5.
Committees of the Board of Directors
We do not have a separately designated audit,performance-based incentive compensation or nominating committee of our Board and the functions customarily delegated to these committees are performed by our full Board. We are not a “listed company” under SEC rules and are therefore not required to have separate committees comprised of independent directors. The Company has, however, determined that Bob Kurilko (a former member as of November 2, 2013), Eric Shevin, Alan Hammer, Anthony Ciabattoni, and Jeff Giarraputo are “independent” as that term is defined in Section 5605 of the NASDAQ Marketplace Rules as required by the NASDAQ Stock Market.
The Board does not have a nominations committee because the Board does not believe that a defined policy with regard to the consideration of candidates recommended by stockholders is necessary at this time because the functions of such committee are adequately performed by our Board. There are no specific minimum qualifications that the Board believes must be met by a candidate recommended by the Board. Currently, the entire Board decides on nominees, on the recommendation of any member of the Board, followed by the Board’s review of the candidates’ resumes and interviews of candidates. Based on the information gathered, the Board then makes a decision on whether to recommend the candidates as nominees for director. We do not pay any fee to any third party, or parties, to identify or evaluate or assist in identifying or evaluating potential nominees.
The Board does not have an audit committee. However, for certain purposes of the rules and regulations of the SEC and in accordance with the Sarbanes-Oxley Act of 2002, our Board is deemed to be its audit committee and as such functions as an audit committee and performs some of the same functions as an audit committee including: (i) selection and oversight of our independent accountant; (ii) establishing procedures for the receipt, retention, and treatment of complaints regarding accounting, internal controls, and auditing matters; and (iii) engaging outside advisors. Our Board has determined that its members do not include a person who is an “audit committee financial expert” within the meaning of the rules and regulations of the SEC. Our Board has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member’s financial sophistication. Accordingly, our Board believes that each of its members has sufficient knowledge and experience to fulfill the duties and obligations of an audit committee.
The Board does not have a compensation committee because the Board believes that it is not necessary to have a compensation committee at this time because the functions of such committee are adequately performed by our Board.
Stockholder Communications
Our Board has determined not to adopt a formal methodology for communications from stockholders on the belief that any communication would be brought to the Board’s attention by our ChiefNamed Executive Officer, Sterling C. Scott.
Meetings of the Board of Directors and Committees
Our Board took a number of actions by written consent of all of the directorsOfficers during the year ended December 31, 2013. Such actions2016 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 written consent of all directorsCompensation Committee and vary among participants’ positions within the Company. Newly hired executive officers or promoted executive officers are according to Delaware corporate law and our bylaws, valid and effective as if they had been passedgenerally awarded stock options, at a meetingthe discretion of the directors duly called and held. The Board held approximately fifteen general meetings during 2013. Each director attendedCompensation Committee, at least 75%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 allour common stock on the meetingsdate of the Boardgrant 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 or annually over five years of the 5-10-year option term. Vesting and exercise rights cease upon termination of employment and/or service, except in 2013. While the Companycase 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 not establishedno rights as a policystockholder with respect to members of the Board attending annual meetings, each director is encouragedshares subject to attendsuch option, including voting rights and the annual meeting of stockholders. We did not hold an annual meeting of security holders during our last fiscal year. Our directorsright to receive dividends or dividend equivalents.
The Named Executive Officers received stock option grants and officers do not receive remuneration from us unless approved by our Board or pursuant to an employment contract. No compensation has been paid to our directors for attendance at any meetingswarrants during the last fiscal year.
Board Leadership Structure and Role in Risk Oversight
We do not separate the roles of Chief Executive Officer and Chairman of the Board because we believe that such roles are adequately performed by Sterling C. Scott. The benefits of Mr. Scott’s leadership of the Board stem from his experience in managing small to medium sized businesses and his involvement in the hydroponics industry, which provide a unique understanding of our culture and business. Also, servingyear ended December 31, 2016 as both the Chief Executive Officer and Chairman of the Board ensures that a constant flow of Company related information is available between the Board and our senior management. This flow of communication enables Mr. Scott to identify issues, proposals, strategies and other considerations for future Board discussions and to assume the lead in many of the resulting discussions during Board meetings. Our Board has responsibility for the oversight of risk management. A fundamental part of risk management is not only understanding the risks we face and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for us. The involvement of the Board in setting our business strategy is a key part of its assessment of risk management and the determination of what constitutes our appropriate level of risk. The Board regularly discusses with management our major risk exposures, their potential impact on us, and the steps taken to manage these risks. In addition, the Board may retain, on such terms as determined by the Board, in its sole discretion, independent legal, financial, and other consultants and advisors to advise and assist the Board in fulfilling its oversight responsibilities.
Code of Ethics
A code of ethics relates to written standards that are reasonably designed to deter wrongdoing and to promote:
| · | Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
| · | Full, fair, accurate, timely, and understandable disclosure in reports and documents that are filed with, or submitted to, the SEC and in other public communications made by an issuer; |
| · | Compliance with applicable governmental laws, rules and regulations; |
| · | The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and |
| · | Accountability for adherence to the code. |
| · | We have not adopted a corporate code of ethics that applies to our executive officers. |
outlined below.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table and related footnotes show the compensation paid during the fiscal years ended December 31, 2013 and 2012, to the Company’s named executive officers:
Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | Option Awards ($) | | All Other Compensation ($) | | Total ($) |
Sterling C. Scott (1, 13) | | 2013 | | 20,000 | | | | 58,333 | | 537,600 | | | | 615,933 |
CEO, President, Secretary and Director | | 2012 | | | | | | 41,667 | | | | | | 41,667 |
| | | | | | | | | | | | | | |
John Genesi (2, 13) | | 2013 | | 79,167 | | | | | | 448,000 | | | | 527,167 |
Chief Financial Officer | | 2012 | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Justin Manns (3) | | 2013 | | 78,330 | | | | 46,667 | | | | | | 124,997 |
Former CFO and Director, current Controller GrowLife Hydroponics, Inc. | | 2012 | | 41,548 | | | | 33,333 | | | | | | 74,881 |
| | | | | | | | | | | | | | |
Marco Hegyi (4) | | 2013 | | 10,834 | | | | | | | | 1,725,000 | | 1,735,834 |
President and Director | | 2012 | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Robert Hunt (5, 13) | | 2013 | | 49,777 | | | | | | 228,000 | | 9,000 | | 286,777 |
Director and President of | | 2012 | | | | | | | | | | | | |
GrowLife Hydroponics, Inc. | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Eric Shevin (6) | | 2013 | | | | | | $30,000 | | | | | | $30,000 |
Director | | 2012 | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Alan Hammer (7) | | 2013 | | | | | | $1,667 | | | | | | $1,667 |
Director | | 2012 | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Anthony Ciabattoni (8) | | 2013 | | | | | | $1,444 | | | | | | $1,444 |
Director | | 2012 | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Jeff Giarraputo (9) | | 2013 | | | | | | $1,444 | | | | | | $1,444 |
Director | | 2012 | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Bob Kurilko (14) | | 2013 | | | | | | $33,667 | | | | | | $33,667 |
Director | | 2012 | | | | | | $17,000 | | | | | | $17,000 |
| | | | | | | | | | | | | | |
Brian B. Sagheb (10) | | 2013 | | | | | | | | | | | | |
Former CEO, CFO, Secretary, and Director | | 2012 | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Craig Ellins (11) | | 2013 | | | | | | 10,000 | | | | | | 10,000 |
Former CEO, CFO, Secretary, and Director | | 2012 | | | | | | 15,000 | | | | | | 15,000 |
| | | | | | | | | | | | | | |
Todd Denkin (12) | | 2013 | | | | | | | | | | | | |
Former Director | | 2012 | | 15,889 | | | | | | | | | | 15,889 |
1) | Mr. Scott has served as GrowLife’s Chief Executive Officer since April 5, 2012. In 2013, Mr. Scott earned $20,000 in salary for his services as Chief Executive Officer. Mr. Scott was also issued 5,833,333 shares of our common stock valued at $58,333 for compensation for being an officer during the year ended December 31, 2013. In 2012, Mr. Scott was issued 4,166,667 shares of our common stock valued at $41,667 for compensation for being an officer. In November 2013, the Company’s Board of Directors granted Mr. Scott a stock option via the Company’s 2011 Stock Incentive Plan to purchase 12,000,000 shares of the Company’s common stock at an exercise price of $0.085 per share, which represents the fair value of one share of the Company’s common stock on the date of grant. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing from and after October 31, 2013, they could be exercised at any time on or after the grant date, the term was ten years, and the options could be exercised on a cashless basis. The Company valued the options at $537,600 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 82.77%; (iii) risk free rate of 0.02%, (iv) expected term of 3 years, and a per share market price of $0.085, which was the closing price of the Company’s shares on November 1, 2013. Beginning in November 2013 and ending October 2015, the Company will expense the $537,600 at the rate of $22,400 per month over the 24-month vesting term of the option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”). |
Retirement and Other Benefits2) | Mr. Genesi became the Company’s Chief Financial Officer on July 22, 2013. Mr. Genesi earned $79,167 in salary during the year ended December 31, 2013. In November 2013, the Company’s Board of Directors granted Mr. Genesi a stock option via the Company’s 2011 Stock Incentive Plan to purchase 10,000,000 shares of the Company’s common stock at an exercise price of $0.085 per share, which represents the fair value of one share of the Company’s common stock on November 1, 2013. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing from and after October 31, 2013, they could be exercised at any time on or after the grant date, the term was ten years, and the options could be exercised on a cashless basis. The Company valued the options at $448,000 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 82.77%; (iii) risk free rate of 0.02%, (iv) expected term of 3 years, and a per share market price of $0.085, which was the closing price of the Company’s shares on November 1, 2013. Beginning in November 2013 and ending October 2015, the Company will expense the $448,000 at the rate of $18,667 per month over the 24-month vesting term of the option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”). |
3) | Mr. Manns has served as GrowLife’s Chief Financial Officer since June 28, 2012. He resigned this position in July 2013 to become the Controller for GrowLife Hydroponics, Inc. During the year ended December 31, 2013, Mr. Manns was issued 4,666,667 shares of the Company’s common stock valued at $46,667 for compensation for being an officer. Mr. Manns also received a salary totaling $78,330 during fiscal year 2013 for his services as CFO of GrowLife, Inc. and Controller of GrowLife Hydroponics, Inc. Mr. Manns resigned as a Director of the Company on December 19, 2013. In 2012, Mr. Manns was issued 3,333,333 shares of our common stock valued at $33,333 for compensation for being an officer. |
We have no other retirement, savings, long-term stock award or other type of plans for the Named Executive Officers.4) | Mr. Hegyi joined the Company on December 4, 2013 as its President and became a member of its Board of Directors on December 9, 2013. Mr. Hegyi was paid a salary totaling $10,834 during the year ended December 31, 2013. On December 11, 2013, the Company issued 25,000,000 warrants to Hegyi, LLC (“Hegyi”), an entity controlled by Mr. Hegyi. The warrants have a ten-year term with an original exercise price of $0.08 per share. The warrants vest immediately and are exercisable in whole, or in part, at any time and from time to time on or after the issue date and on or before the termination date. The Company valued the warrants at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 88.81%; (iii) risk free rate of 0.02%, and (iv) expected term of 3 years, which resulted in a value of $1,725,000. |
5) | Mr. Hunt joined the Company on June 7, 2013 as the President of GrowLife Hydroponics, Inc. and a member of the Company’s Board of Directors. Mr. Hunt was paid a salary totaling $49,777 during the year ended December 31, 2013 and a housing allowance totaling $9,000. In November 2013, the Company’s Board of Directors approved a stock option grant to Mr. Hunt via the Company’s 2011 Stock Incentive Plan to purchase 12,000,000 shares of the Company’s common stock at an exercise price of $0.043 per share, which represents the fair value of one share of the Company’s common stock on June 7, 2013. The option grant was made retro-active to June 7, 2013, the date on which Mr. Hunt became a Director of the Company and the President of GrowLife Hydroponics, Inc. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing from and after June 7, 2013, they could be exercised at any time on or after the grant date, the term was ten years, and the options could be exercised on a cashless basis. The Company valued the options at $228,000 using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 82.77%; (iii) risk free rate of 0.04%, (iv) expected term of 2 years, and a per share market price of $0.043, which was the closing price of the Company’s shares on June 7, 2013. Beginning in June 2013 and ending May 2015, the Company will expense the $228,000 at the rate of $9,500 per month over the 24-month vesting term of the option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”). |
Perquisites and Other Personal Benefits6) | Mr. Shevin joined the Company April 1, 2013 as an independent member of its Board of Directors. During the year ended December 31, 2013, Mr. Shevin was issued 1,500,000 shares of the Company’s common stock, valued at $30,000 in the aggregate, as compensation for serving as an independent member of the Company’s Board of Directors. |
7) | Mr. Hammer joined the Company December 17, 2013 as an independent member of its Board of Directors. During the year ended December 31, 2013, Mr. Hammer was issued 83,333 shares of the Company’s common stock, valued at $1,667 in the aggregate, as compensation for serving as an independent member of the Company’s Board of Directors. |
During the year ended December 31, 2016, we provided the Named Executive Officers with medical insurance. The Company paid $10,273 in life insurance for Mr. Hegyi and $9,755 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.8) | Mr. Ciabattoni joined the Company December 19, 2013 as an independent member of its Board of Directors. During the year ended December 31, 2013, Mr. Ciabattoni was issued 72,222 shares of the Company’s common stock, valued at $1,444 in the aggregate, as compensation for serving as an independent member of the Company’s Board of Directors. Mr. Ciabattoni shares were issued to the Ciabattoni Living Trust, of which Mr. Ciabattoni is the Trustee. |
9) | Mr. Giarraputo joined the Company December 19, 2013 as an independent member of its Board of Directors. During the year ended December 31, 2013, Mr. Giarraputo was issued 72,222 shares of the Company’s common stock, valued at $1,444 in the aggregate, as compensation for serving as an independent member of the Company’s Board of Directors. |
Employment and consulting agreements are discussed below.10) | Mr. Sagheb served as our CEO from March 9, 2011 through May 17, 2011 and from September 16, 2011 through January 17, 2012. Mr. Sagheb served as our CFO, Secretary and Director from March 9, 2011 through January 17, 2012. Mr. Sagheb had no involvement with the Company during the year ended December 31, 2013. |
11) | Mr. Ellins served as a member of the Company’s Board of Directors from January 1, 2013 through March 31, 2013; he resigned as a Board member on April 12, 2013. During the year ended December 31, 2013, Mr. Ellins was issued 500,000 shares of the Company’s common stock, valued at $10,000 in the aggregate, as compensation for serving as a member of the Company’s Board of Directors. Since resigning as a member of the Company’s Board of Directors, Mr. Ellins has had no involvement with the Company. Mr. Ellins served as our CEO, CFO, and Secretary from January 17, 2012 through April 5, 2012. In 2012, Mr. Ellins was issued 1,500,000 shares of our common stock valued at $15,000 for compensation for being a director. |
Tax and Accounting ImplicationsDeductibility 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 Proxy Statement.
THE COMPENSATION COMMITTEE
Michael E. Fasci (Chairman)
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, 2016 and 2015:
Summary Compensation Table
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Principal Position | | | | | | | | |
Marco Hegyi, President and Director (2) | 12/31/2016 | $250,000 | $- | $- | $- | $- | $34,231 | $284,231 |
| 12/31/2015 | $250,000 | $- | $- | $- | $- | $8,561 | $258,561 |
| | | | | | | |
Mark E. Scott, Consulting Chief Financial Officer (3) | 12/31/2016 | $156,250 | $- | $60,000 | $- | $- | $9,755 | $226,005 |
| 12/31/2015 | $156,250 | $- | $- | $- | $7,312 | $- | $163,562 |
| | | | | | | |
Joseph Barnes, Senior Vice President of Business | 12/31/2016 | $120,000 | $- | $- | $- | $- | $- | $120,000 |
Development (4) | 12/31/2015 | $90,000 | $- | $- | $- | $- | $- | $90,000 |
12) | Mr. Denkin resigned as a director on April 5, 2012. Since his resignation he has had no involvement with the Company. |
13) | The above mentioned stock and option grants were recorded in accordance with Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation – Stock Compensation���. The Company measured, and recorded, the fair value of the option grant as of the date of grant and is amortizing the computed value of the option grant over the related vesting period. |
14) | Mr. Kurilko is a former director who resigned as of November 2, 2013. During fiscal year 2013, Mr. Kurilko received 1,683,333 shares s compensation for Board service for January 1, 2013 through November 2, 2013. During fiscal year 2012, Mr. Kurilko received 1,700,000 shares.
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Employment Contracts(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 $250,000 during the year ended December 31, 2016 and $250,000 (cash salary of $203,500 and accrued salary of $46,500) during the year ended December 31, 2015. This 2015 accrual was based on the tight cash flow of the Company and agreed to by Mr. Hegyi, but there was no formal deferral agreement. There was no accrued interest paid on the unpaid salary.
On June 7, 2013,April 15, 2016, an entity controlled by Marco Hegyi converted $20,000 of accrued salary into 1,000,000 shares of our common stock at the market price of $0.020 per share. On October 12, 2016, an entity controlled by Marco Hegyi converted $40,000 of accrued salary into 4,000,000 shares of our common stock at the market price of $0.010 per share. The shares were valued at the fair market price of $0.01 per share.
We paid life insurance of $10,273 and $8,561 for Mr. Hegyi during the years ended December 31, 2016 and 2015, respectively. On October 21, 2016, Mr. Hegyi received a Warrant to purchase up to 10,000,000 shares of our common stock at an exercise price of $0.01 per share. In addition, Mr. Hegyi received Warrants to purchase up to 10,000,000 shares of our common stock at an exercise price of $0.01 per share which vest on October 21, 2017 and 2018. The Warrants are exercisable for 5 years. The warrants were valued at $390,000 and we entered into an Executive Services Agreement (the “Hunt Agreement”) with Rob Hunt, pursuant to which we engaged Mr. Hunt, fromrecorded $23,958 of compensation expense for the close of business on June 7, 2013 through June 7, 2015, to provide consulting and management services as the President of GrowLife Hydroponics, Inc. Upon Mr. Hunt’s employment by the Company, the Company shall pay Mr. Hunt an annual salary of $75,000 (the “Base Salary”). Such Base Salary shall increase to the annual rate of $100,000 on the first day of the month following the month in which GrowLife’s gross monthly sales reach $840,000. Mr. Hunt shall also be entitled to receive an annual cash bonus (“Bonus”) as follows for its fiscal year 2013: 175% of the Base Salary in effectwarrants that had vested as of December 31, 2016.
(3) Mark E. Scott was appointed consulting Chief Financial Officer on July 31, 2014. Mr. Scott was paid a consulting fee of $156,250 during the year ended December 31, 2016 and $156,250 (cash salary of $105,000 and accrued salary of $51,250 during the year ended December 31, 2015. This accrual was based on the tight cash flow of the Company’s applicable fiscalCompany and agreed to by Mr. Scott, but there was no formal deferral agreement. There was no accrued interest paid on the unpaid consulting fee.
On January 4, 2016, an entity controlled by Mr. Scott converted $30,000 of accrued consulting fees and expenses into 3,000,000 shares of our common stock at the market price $0.010 per share. On October 21, 2016, an entity controlled by Mr. Scott converted $40,000 in accrued consulting and expenses into 4,000,000 shares of our common stock at $0.01 per share. The price per share was based on the thirty-day trailing average.
Mr. Scott was reimbursed $9,755 for insurance expenses during the year if GrowLife achieves 100% of sales projections for such fiscal year; 100% of the Base Salary in effect as ofended December 31, of the Company’s applicable fiscal year, if GrowLife achieves at least 80% but less than 100% of sales projections for such fiscal year; and 50% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves at least 50% but less than 80% of sales projections for such fiscal year. The Bonus, if any, shall be paid to2016. On October 21, 2016, Mr. Hunt upon the earlier of (1) the completion of the preparation of the Company’s audited financial statements for such fiscal year and (2) April 1 of the Company’s next fiscal year. Mr. Hunt shall be entitled to receive an annual cash bonus (“Bonus”) as follows for its fiscal year 2014: 175% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves 100% of sales projections for such fiscal year; 100% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves at least 80% but less than 100% of sales projections for such fiscal year; and 50% of the Base Salary in effect as of December 31 of the Company’s applicable fiscal year, if GrowLife achieves at least 50% but less than 80% of sales projections for such fiscal year. The Bonus, if any, shall be paid to Mr. Hunt upon the earlier of (1) the completion of the preparation of the Company’s audited financial statements for such fiscal year and (2) April 1 of the Company’s next fiscal year. Mr. Hunt shall receive, upon approval by the Company’s Board of Directors, non-qualified options to purchase 12,000,000Scott was granted 6,000,000 shares of the Company’s common stock at a$0.01 per share exerciseor $60,000. The price equalper share was based on the thirty-day trailing average. An entity controlled by Mr. Scott had a two million share stock option that was previously issued vest on April 18, 2016 upon the Company securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB. The option was valued at $7,312.
Grants of Stock Based Awards during the year ended December 31, 2016
The Compensation Committee approved the following performance-based incentive compensation to the fairNamed Executive Officers for the year ended December 31, 2016:
| | | Estimated Future Payouts Under | Estimated Future Payouts Under | | | | |
| | | Non-Equity Incentive Plan | | | | | |
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| | | | | (#) | (#) | (#) | (#) | (#) | | |
Marco Hegyi | - | $- | - | $- | - | - | - | - | - | $- | $- |
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Mark E. Scott (2) | - | $- | - | $- | - | - | - | 6,000,000 | - | $0.010 | $60,000 |
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Joseph Barnes | - | $- | - | $- | - | - | - | - | - | $- | $- |
(1)These amounts reflect the grant date market value of one share of the Company’s common stock on the date of grant, which is June 7, 2013 and represents the date on which Mr. Hunt became a Director of the Company and President of GrowLife Hydroponics, Inc, vesting in 24 equal monthly installments on the last day of each month commencing from and after June 7, 2013. The Company shall also apply for and obtain “term” life insurance upon the life of Mr. Hunt, effective as of January 1, 2012, in an amount equal to Mr. Hunt’s then current Base Salary. The beneficiary of such policy shall be the person(s) designatedrequired by Mr. Hunt. During Mr. Hunt’s term of employment hereunder, the Company shall provide to Mr. Hunt a monthly housing stipend of $1,500. In the event that the Company and Mr. Hunt mutually agree to Mr. Hunt’s relocation to Los Angeles County, California, the Company shall pay Mr. Hunt’s relocation costs, up to a maximum amount of $5,000, and shall pay for reasonable temporary housing for Mr. Hunt and his family for a period of 3 months. During Mr. Hunt’s term of employment hereunder, Mr. Hunt and, to the extent applicable, Mr. Hunt’s dependents and beneficiaries, shall be allowed to enjoy and participate in all benefit plans and programs, including improvements or modifications of the same, which are now, or may hereafter be, available to other executive employees of the Company and its subsidiaries. Such benefit plans and programs shall include, without limitation, medical insurance, D&O insurance, and such similar benefits, plans and programs as may be maintained by the Company. During Mr. Hunt’s term of employment hereunder, Mr. Hunt shall be entitled to incur and be reimbursed by the Company for all reasonable business expenses. Mr. Hunt’s engagement with the Company may be terminated for the reasons set forth below. To the extent Mr. Hunt serves as a member of the Company’s Board of Directors, at the request of the Company’s Board of Directors, Mr. Hunt agrees to resign from his position as a director of the Company within 24 hours after his engagement is terminated. This Agreement shall terminate upon Mr. Hunt’s death (“Death”). The Company shall pay Mr. Hunt’s estate (i) on the date it would have been payable to Mr. Hunt any unpaid Base Salary and accrued vacation, if any, earned prior to Mr. Hunt’s Death, and (ii) any unpaid reimbursements due Mr. Hunt for expenses incurred by Mr. Hunt prior to his Death. If, as a result of Mr. Hunt’s incapacity due to physical or mental illness, thereby causing Mr. Hunt to have been absent from the full time performance of substantially all of his material duties with the Company for a continuous period of 180 days, Mr. Hunt’s engagement may be terminated by the Company or by Mr. Hunt for “Disability.” If terminated for disability, the Company shall pay Mr. Hunt: (a) any unpaid Base Salary and accrued vacation, if any, earned prior to the Effective Date of Termination, and (b) any unpaid reimbursements due for expenses incurred prior to the Effective Date of Termination. The Company may terminate Mr. Hunt’s engagement hereunder for Cause. In the event of termination for Cause, Mr. Hunt will be entitled to such Base Salary and accrued vacation, if any, earned through the date of termination which earned amounts shall be payable on the date of termination for Cause, but will not be entitled to any other salary, benefits, bonuses, or other compensation after such date. This Agreement may also be terminated Without Cause by the Company at any time by the delivery to Mr. Hunt of a written notice of termination. Upon such termination, Mr. Hunt shall be entitled to receive the following: (a) such Base Salary and accrued vacation, if any, earned through the date of termination; (b) a termination fee equal to his then-current Base Salary for six equal monthly installments; and (c) his options shall continue to vestRegulation S-K Item 402(n)(2), computed in accordance with their terms, and such options shall expireFASB ASC Topic 718.
(2) On October 21, 2016, an entity controlled by Mr. Scott, our Chief Financial Officer, was granted 6,000,000 shares of our common stock at $0.01 per share. The price per share was based on the latest termination date set forth inthirty-day trailing average.
Outstanding Equity Awards as of December 31, 2016
The Named Executive Officers had the applicable stock option agreements. Mr. Hunt may terminate this Agreement upon 30 days written notice to the Company. In the event Mr. Hunt terminates this Agreement for “Good Reason,” Mr. Hunt shall be entitled to receive: (a) such Base Salary and accrued vacation, if any, earned through the datefollowing outstanding equity awards as of termination; (b) a termination fee equal to his then-current Base Salary for six equal monthly installments; and (c) his options shall continue to vest in accordance with their terms, and such options shall expire on the latest termination date set forth in the applicable stock option agreements. In the event Mr. Hunt terminates this Agreement other than for Disability or Good Reason, the Company shall pay Mr. Hunt: (a) such Base Salary and accrued vacation, if any, earned through the date of termination; and (b) any unpaid reimbursements for expenses incurred through the date of termination.December 31, 2016:
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| | | | | Option | | | | |
| | | | | Expiration | | | | |
Name | (#) | (#) | (#) | | Date | (#) | | (#) | |
Marco Hegyi (2) | - | - | - | $- | | - | $- | - | $- |
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Mark E. Scott (3) | 1,777,778 | 2,222,222 | - | $0.01 | 7/30/2019 | - | $- | - | $- |
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Joseph Barnes (4) | 6,500,000 | 1,500,000 | - | $0.01 | 10/9/2019 | - | $- | - | $- |
(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 November 3, 2013,October 21, 2016, an entity controlled by Mr. Scott cancelled stock option grants totaling 12,000,000 shares of our common stock at $0.01 per share. An entity controlled by Mr. Scott has an additional 2,000,000 share stock option grant which continues to vest monthly over 36 months and a 2,000,000 share stock option grant which vests upon the achievement of certain performance goals related to acquisitions.
(3) Mr. Barnes stock option grant consists of 6,500,000 shares of our common stock which vest 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, 2016
Mr. Hegyi, Scott and Barnes did not have any option exercised or stock that vested during the year ended December 31, 2016.
Pension Benefits
We do not provide any pension benefits.
Nonqualified Deferred Compensation
We do not have a nonqualified deferral program.
Employment and Consulting Agreements
Employment Agreement with Marco Hegyi
On October 21, 2016, we entered into an Executive Services Agreement (the “Scott Agreement”) with Sterling Scott, pursuant to which we engaged Mr. Scott, from the close of business on November 2, 2013 through November 2, 2016, to provide consulting and management services as our Chief Executive Officer. Per the terms of the Scott Agreement, Mr. Scott shall receive an annual salary of $120,000, he shall be eligible for any benefits made generally available by the Company, he shall be eligible to receive any bonuses made generally available by the Company, and he shall be reimbursed for any reasonable expenses incurred while performing his duties as the Company’s Chief Executive Officer. The Scott Agreement also granted Mr. Scott non-qualified options to purchase 12,000,000 shares of the Company’s common stock at an exercise price equal to the fair market value of one share of the Company’s common stock on the date of grant. The options include a cashless exercise feature and vest in twenty-four (24) equal monthly installments on the last day of each month commencing on October 31, 2013. In the event that the Company’s Board of Directors determines to accept any offers that would when executed result in a change of control transaction involving more than 50% of the issued shares of Company, then vesting of non-qualified options to Mr. Scott shall be accelerated, at the election in writing by the Mr. Scott, to the date on which the Company’s Board of Directors determined to accept such offer. Except in situations where the employment of Mr. Scott is terminated For Cause, By Death or By Disability, in the event that the Company terminates the employment of Mr. Scott at any time, Mr. Scott will be eligible to immediately receive all remaining compensation due under the Scott Agreement. This calculation will be based on the then-current Base Salary of Mr. Scott and the amount of days remaining in the Employment Term. Mr. Scott shall also immediately receive the issuance of five percent (5.0%) of the Company’s common stock on a fully diluted basis, giving effect to the issuance. Mr. Scott shall not be entitled to any severance payments if his employment is terminated For Cause, By Death or By Disability, or if Mr. Scott’s employment is terminated by Mr. Scott. For purposes of the Scott Agreement, “For Cause” shall mean: (i) Mr. Scott commits a crime involving dishonesty, breach of trust, or physical harm to any person; or (ii) Mr. Scott willfully engages in conduct that is in bad faith and materially injurious to the Company, including but not limited to, misappropriation of trade secrets, fraud or embezzlement. The Company may terminate Mr. Scott’s employment For Cause at any time, without any advance notice. The Company shall pay to Mr. Scott all compensation to which Mr. Scott is entitled up through the date of termination, subject to any other rights or remedies of Employer under law; and thereafter all obligations of the Company under this Agreement shall cease. Mr. Scott’s employment shall terminate automatically upon his death. The Company shall pay to Mr. Scott’s beneficiaries or estate, as appropriate, any compensation then due and owing. Thereafter all obligations of the Company under the Scott Agreement shall cease. If Mr. Scott becomes eligible for the Company’s long term disability benefits or if, in the sole opinion of the Company, Mr. Scott is unable to carry out the responsibilities and functions of the position held by Mr. Scott by reason of any physical or mental impairment for more than ninety (90) consecutive days or more than one hundred and twenty (120) days in any twelve (12) month period, then, to the extent permitted by law, the Company may terminate Mr. Scott’s employment. The Company shall pay to Mr. Scott all compensation to which he is entitled up through the date of termination, and thereafter all obligations of the Company under this Agreement shall cease. Mr. Scott may terminate employment with the Company at any time for any reason or no reason at all, upon thirty (30) days’ advance written notice. During such notice period Mr. Scott shall continue to diligently perform all of his duties hereunder. The Company shall have the option, in its sole discretion, to make Mr. Scott’s termination effective at any time prior to the end of such notice period as long as the Company pays Mr. Scott all compensation to which he is entitled up through the last day of the thirty-day notice period. Thereafter all obligations of the Company shall cease.
On November 3, 2013, we entered into an Executive Services Agreement (the “Genesi Agreement”) with John Genesi, pursuant to which we engaged Mr. Genesi, from the close of business on November 2, 2013 through November 2, 2016, to provide consulting and management services as our Chief Financial Officer. Per the terms of the Genesi Agreement, Mr. Genesi shall receive an annual salary of $100,000, he shall be eligible for any benefits made generally available by the Company, he shall be eligible to receive any bonuses made generally available by the Company, and he shall be reimbursed for any reasonable expenses incurred while performing his duties as the Company’s Chief Financial Officer. The Genesi Agreement also granted Mr. Genesi non-qualified options to purchase 10,000,000 shares of the Company’s common stock at an exercise price equal to the fair market value of one share of the Company’s common stock on the date of grant. The options include a cashless exercise feature and vest in twenty-four (24) equal monthly installments on the last day of each month commencing on October 31, 2013. In the event that the Company’s Board of Directors determines to accept any offers that would when executed result in a change of control transaction involving more than 50% of the issued shares of Company, then vesting of non-qualified options to Mr. Genesi shall be accelerated, at the election in writing by the Mr. Genesi, to the date on which the Company’s Board of Directors determined to accept such offer. Except in situations where the employment of Mr. Genesi is terminated For Cause, By Death or By Disability, in the event that the Company terminates the employment of Mr. Genesi at any time, Mr. Genesi will be eligible to immediately receive all remaining compensation due under the Genesi Agreement. This calculation will be based on the then-current Base Salary of Mr. Genesi and the amount of days remaining in the Employment Term. Mr. Genesi shall also immediately receive the issuance of two and one-half percent (2.5%) of the Company’s common stock on a fully diluted basis, giving effect to the issuance. Mr. Genesi shall not be entitled to any severance payments if his employment is terminated For Cause, By Death or By Disability, or if Mr. Genesi’s employment is terminated by Mr. Genesi. For purposes of the Genesi Agreement, “For Cause” shall mean: (i) Mr. Genesi commits a crime involving dishonesty, breach of trust, or physical harm to any person; or (ii) Mr. Genesi willfully engages in conduct that is in bad faith and materially injurious to the Company, including but not limited to, misappropriation of trade secrets, fraud or embezzlement. The Company may terminate Mr. Genesi’s employment For Cause at any time, without any advance notice. The Company shall pay to Mr. Genesi all compensation to which Mr. Genesi is entitled up through the date of termination, subject to any other rights or remedies of Employer under law; and thereafter all obligations of the Company under this Agreement shall cease. Mr. Genesi’s employment shall terminate automatically upon his death. The Company shall pay to Mr. Genesi’s beneficiaries or estate, as appropriate, any compensation then due and owing. Thereafter all obligations of the Company under the Genesi Agreement shall cease. If Mr. Genesi becomes eligible for the Company’s long term disability benefits or if, in the sole opinion of the Company, Mr. Genesi is unable to carry out the responsibilities and functions of the position held by Mr. Genesi by reason of any physical or mental impairment for more than ninety (90) consecutive days or more than one hundred and twenty (120) days in any twelve (12) month period, then, to the extent permitted by law, the Company may terminate Mr. Genesi’s employment. The Company shall pay to Mr. Genesi all compensation to which he is entitled up through the date of termination, and thereafter all obligations of the Company under this Agreement shall cease. Mr. Genesi may terminate employment with the Company at any time for any reason or no reason at all, upon thirty (30) days’ advance written notice. During such notice period Mr. Genesi shall continue to diligently perform all of his duties hereunder. The Company shall have the option, in its sole discretion, to make Mr. Genesi’s termination effective at any time prior to the end of such notice period as long as the Company pays Mr. Genesi all compensation to which he is entitled up through the last day of the thirty-day notice period. Thereafter all obligations of the Company shall cease.
On December 4, 2013, we entered into an Executive Services Agreement (the “Hegyi Agreement”) with Marco Hegyi pursuant to which wethe Company engaged Mr. Hegyi from the close of businessas its Chief Executive Officer through October 20, 2018. Mr. Hegyi’s previous Employment Agreement was dated December 4, 2013 and which was set to expire on December 4, 2013 through December 4, 2016, to provide consulting and management services as our President. Per the terms of the Hegyi Agreement, Mr. Hegyi will establish a Company in Seattle, Washington while also maintaining operations in the Southern California area. 2016.
Mr. Hegyi’s annual compensation is $150,000 for the first year of the Term; $250,000 for the second year of the Term; and $250,000 for the third year of the Term.$250,000. Mr. Hegyi is also entitled to receive an annual bonus equal to four percent (4%) of the Company’s EBITDA for that year. The annual bonus shall be paid no later than 31 days (i.e., by January 31st) following the end of each calendar year. Mr. Hegyi’s first annual bonus will be calculated based on the Company’s EBITDA for calendar year 2014, with such bonus payable on or before January 31, 2015. If Mr. Hegyi’s employment is terminated for any reason prior to the expiration of the Term, as applicable, his annual bonus will be prorated for that year based on the number of days worked in that year. At the commencement of Mr. Hegyi’s employment, he (or to a trust or other related or affiliated entity designated by
Mr. Hegyi for estate planning purposes) is entitled toreceived a Warrant to purchase up to 25,000,00010,000,000 shares of common stock of the Company at an exercise price of $0.08$0.01 per share (the “Hegyi Warrant”) (see “NOTE 23 – STOCKHOLDERS’ DEFICT”). The warrants shall be exercisable for a period of 10 years commencing on the date on which the Company completes the increase in the number of its authorized shares of common stock. Immediately after the execution of theshare. In addition, Mr. Hegyi agreement, the Company will increase its authorized shares in an amount sufficientreceived Warrants to have authorizedpurchase up to 10,000,000 shares of common stock available for the full exercise of Hegyi’s warrant to purchase up to 25,000,000 shares of common stock. The Company undertakes to: (1) have the Board of the Company vote to amend its certificateat an exercise price of incorporation to increase the authorized shares of common stock in the Company by a sufficient amount to provide for the Hegyi Warrant to be immediately$0.01 per share which vest on October 21, 2017 and 2018. The Warrants are exercisable for 25,000,000 shares of common stock, subject to shareholder approval; (2) have the Board reserve up to 25,000,000 shares of common stock for exercise of the Hegyi Warrant, subject to the completion of the increase in authorized shares, and (3) prepare a Company proxy statement for and hold a meeting of the shareholders of the Company to vote to approve the amendment to the Company’s certificate of incorporation to increase the authorized shares. If an amendment to the Company’s certificate of incorporation increasing the authorized shares has not been filed with the Secretary of State of the State of Delaware within six (6) months from the date of the Hegyi Agreement, then such failures shall be a Change of Control event. The Company will also reimburse Mr. Hegyi for all reasonable and necessary travel and other out-of-pocket business expenses incurred by him in the performance of his duties and responsibilities, subject to and consistent with the Company’s business expense reimbursement policies in effect from time to time, including an itemized list of the expenses incurred and appropriate receipts and supporting documentation. 5 years.
Mr. Hegyi will be entitled to participate in all group employment benefits that are offered by the Companyus to the Company’sour 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 Companywe will purchase and maintain during the Term a “key manager”an insurance policy on Mr. Hegyi’s life in the amount of $4,000,000, paid as $2,000,000 payable to Mr. Hegyi’s named heirs or estate as the beneficiary, and $2,000,000 payable to the Company. beneficiary.
If prior to the expiration of the Term, the Company terminates Mr. Hegyi’s employment for “Cause”, or if Mr. Hegyi voluntarily terminates his employment without “Good Reason”, or if Mr. Hegyi’s employment is terminated by reason of his death, then all of the Company’s obligations hereunder shall cease immediately, and Mr. Hegyi will not be entitled to any further compensation beyond any pro-rated base salary due and bonus amounts earned through the effective date of termination. Mr. Hegyi will also be reimbursed for any expenses incurred prior to the date of termination for which he was not previously reimbursed. If the Company terminateswe 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:receive (i) his base salaryBase Salary amount through the end of the Term; and (ii) his annual bonusAnnual Bonus amount for each year during the remainder of the Term, which bonus amount shall be equal to the greater of (A) the annual bonus amount for the immediately preceding year, or (B) the bonus amount that would have been earned for the year of termination, absent such termination. Term.
If there has been a “Change in Control” and the Company (or its successor or the surviving entity) terminates Mr. Hegyi’s employment without Cause as part of or in connection with such Change in Control (including any such termination occurring within one (1) month prior to the effective date of such Change in Control), then in addition to the benefits set forth above, Mr. Hegyi will be entitled to the following: (i) an increase of $300,000 in his annual base salary amount (or an additional $25,000 per month) through the end of the Term; plus (ii) a gross-up in the annual base salary amount each year to account for and to offset any tax that may be due by Mr. Hegyi on any payments received or to be received by Mr. Hegyi under this Agreement that would result in a “parachute payment” as described in Section 280G of the Internal Revenue Code of 1986, as amended. If the Companywe (or its successor or the surviving entity) terminatesterminate Mr. Hegyi’s employment without Cause within twelve (12) months after the effective date of any Change in Control, or if Mr. Hegyi terminates his employment for Good Reason within twelve (12) months after the effective date of any Change in Control, then in addition to the benefits set forth above, Mr. Hegyi will be entitled to the following: (i) an increase of $300,000 in his annual base salary amount (or an additional $25,000 per month), which increased annual base salary amount shall be paid for the remainder of the Term or for two (2) years following the Change in Control, whichever is longer; (ii) a gross-up in the annual base salary amount each year to account for and to offset any tax that may be due by Mr. Hegyi on any payments received or to be received by Mr. Hegyi under this Letter Agreement that would result in a “parachute payment” as described in Section 280G of the Internal Revenue Code of 1986, as amended; (iii) payment of Mr. Hegyi’s annual bonus amount as set forth above for each year during the remainder of the Term or for two (2) years following the Change in Control, whichever is longer; and (iv) health insurance coverage provided for and paid by the Company for the remainder of the Term or for two (2) years following the Change in Control, whichever is longer.
Consulting Chief Financial Officer Agreement with an Entity Controlled by Mark E. Scott
On July 31, 2014, we engaged Mr. Scott as its Consulting CFO from July 1, 2014 through September 30, 2014, and continuing thereafter until either party provides sixty-day notice to terminate the Letter or Mr. Scott enters into a full-time employment agreement.
Per the terms of the Scott Agreement, Mr. Scott’s compensation is $150,000 on an annual basis for the first year of the Scott Agreement. Mr. Scott is also entitled to receive an annual bonus equal to two percent of the Company’s EBITDA for that year. Our Board of Directors granted Mr. Scott an option to purchase sixteen million shares of our Common Stock under our 2011 Stock Incentive Plan at an exercise price of $0.07 per share, the fair market price on July 31, 2014. On December 18, 2015, we reduced the exercise price to $0.01 per share. The shares vest as follows:
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| i | Two million shares vest immediately upon securing a market maker with an approved 15c2-11 resulting in our relisting on OTCBB (earned as of February 18, 2016); |
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| ii | Two million shares vest immediately upon the successful approval and effectiveness of our S-1 (not earned as of December 31, 2016); |
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| iii | Two million shares vest immediately upon our resolution of the class action lawsuits (earned as of August 17, 2015); and, |
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| iv | Ten million shares will vest on a monthly basis over a period of three years beginning on the July 1, 2014.
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On October 21, 2016, Mr. Scott cancelled stock option grants totaling 12,000,000 shares of our common stock at $0.01 per share. Mr. Scott has an additional 2,000,000 share stock option grant which continues to vest monthly over 36 months and a 2,000,000 share stock option grant which vests upon the achievement of certain performance goals related to acquisitions.
All options will have a five-year life and allow for a cashless exercise. The stock option grant is subject to the terms and conditions of our Stock Incentive Plan, including vesting requirements. In the event that Mr. Scott’s continuous status as consultant to the Company is terminated by us without Cause or Mr. Scott terminates his employment with us for Good Reason as defined in the Scott Agreement, in either case upon or within twelve months after a Change in Control as defined in our Stock Incentive Plan except for CANX USA, LLC, then 100% of the total number of shares shall immediately become vested.
Mr. Scott 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, we are required to purchase and maintain an insurance policy on Mr. Scott’s life in the amount of $2,000,000 payable to Mr. Scott’s named heirs or estate as the beneficiary. Finally, Mr. Scott is entitled to twenty days of vacation annually and has certain insurance and travel employment benefits.
If, prior to the expiration of the Term, we Mr. Scott’s employment for Cause, or if Mr. Scott voluntarily terminates his employment without Good Reason, or if Mr. Scott’s employment is terminated by reason of his death, then all of our obligations hereunder shall cease immediately, and Mr. Scott will not be entitled to any further compensation beyond any pro-rated base salary due and bonus amounts earned through the effective date of termination. Mr. Scott will also be reimbursed for any expenses incurred prior to the date of termination for which he was not previously reimbursed. Mr. Scott may receive severance benefits and our obligation under a termination by the Company without Cause or Mr. Scott terminates his employment for Good Reason are discussed above.
Outstanding Equity AwardsPromotion Letter with Joseph Barnes
On October 10, 2014, we entered into a Promotion Letter with Joseph Barnes which was effective October 1, 2014 pursuant to which we engaged Mr. Barnes as its Senior Vice-President of Business Development from October 1, 2014 on an at Fiscal Year-Endwill basis. This Promotion Letter supersedes and canceled the Manager Services Agreement with Mr. Barnes dated August 1, 2013.
Per the terms of the Barnes Agreement, Mr. Barnes’s compensation is $90,000 on an annual basis. On January 1, 2016, Mr. Barnes salary was increased to $120,000 per year. Mr. Barnes received a bonus of $6,500 and is also entitled to receive a quarterly bonus based on growth of our growth margin dollars. No quarterly bonuses were earned under this Promotion Letter. Mr. Barnes was granted an option to purchase eight million shares of our common stock under our 2011 Stock Incentive Plan at $0.050 per share. The shares vest as follows:
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| i | Two million shares vested immediately; |
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| iv | Six million shares vest on a monthly basis over a period of three years beginning on the date of grant. |
On October 12, 2016, we amended the exercise price of the stock option grants for Mr. Barnes to $0.010 per share.
All options will have a five-year life and allow for a cashless exercise. The stock option grant is subject to the terms and conditions of our Stock Incentive Plan, including vesting requirements. In the event that Mr. Barnes’s continuous status as employee to us is terminated by us without Cause or Mr. Barnes terminates his employment with us for Good Reason as defined in the Barnes Agreement, in either case upon or within twelve months after a Change in Control as defined in our Stock Incentive, then 100% of the total number of shares shall immediately become vested.
Mr. Barnes was 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. Finally, Mr. Barnes is entitled to fifteen days of vacation annually and has certain insurance and travel employment benefits.
Mr. Barnes may receive severance benefits and our obligation under a termination by the Company without Cause or Mr. Barnes terminates his employment for Good Reason are discussed above.
Potential Payments upon Termination or Change in Control
The following table provides information regardingCompany’s Employment Agreement with Marco Hegyi has provisions providing for severance payments as detailed below.
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Executive | | | | | |
Payments Upon | | | | | |
Separation | | | | | |
Compensation: | | | | | |
Base salary (1) | $- | $- | $468,750 | $600,000 | $- |
Performance-based incentive | | | | | |
compensation | $- | $- | $- | $- | $- |
Stock options | $- | $- | $- | $- | $- |
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Benefits and Perquisites: | | | | | |
Health and welfare benefits | $- | $- | $- | $- | $- |
Accrued vacation pay | $- | $- | $- | $- | $- |
| | | | | |
Total | $- | $- | $468,750 | $600,000 | $- |
(1)
Reflects amounts to be paid upon termination without cause and upon termination in a change of control, less any months worked.
Mr. Scott and Mr. Barnes currently do not have amounts to be paid upon termination without cause and upon termination in a change of control. There outstanding stock options heldvests fully vest under certain conditions.
DIRECTOR COMPENSATION
We primarily use stock options grants to incentive compensation to attract and retain qualified candidates to serve on the Board. This compensation reflected the financial condition of the Company. In setting director compensation, we consider the significant amount of time that Directors expend in fulfilling their duties to the Company as well as the skill-level required by our named executive officers asmembers of the end of our fiscalBoard. During year ended December 31, 2013.
| | Number of Securities Underlying Unexercised Options (#) Exercisable | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | Option Exercise Price ($) (1) | | |
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Sterling C. Scott | | 12,000,000 | | - | | $0.085 | | November 1, 2023 |
CEO, Secretary, and Director | | | | | | | | |
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John Genesi | | 10,000,000 | | - | | $0.085 | | November 1, 2023 |
Chief Financial Officer | | | | | | | | |
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Rob Hunt | | 12,000,000 | | - | | $0.043 | | June 6, 2023 |
President of GrowLife Hydroponics, Inc and Director | | | | | | | | |
2016, Marco Hegyi did not receive any compensation for his service as director. The compensation disclosed in the Summary Compensation Table on page 36 represents the total compensation.
Director Summary Compensation
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Name | $ | | | | $ | | |
Marco Hegyi | $- | $- | $- | $- | $- | $- | $- |
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Michael E. Fasci (2) | - | 65,000 | - | - | - | - | 65,000 |
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Tara Antal (3) | - | - | - | - | - | - | - |
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Brad Fretti (4) | - | - | - | - | - | - | - |
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| $- | $65,000 | $- | $- | $- | $- | $65,000 |
(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 January 27, 2016, we issued 1,500,000 shares of its common stock to Michael E. Fasci pursuant to a service award for $15,000. The shares were valued at the executive officers listedfair market price of $0.01 per share. On May 25, 2016, we issued 2,500,000 shares of its common stock to Michael E. Fasci pursuant to a service award for $50,000. The shares were valued at the fair market price of $0.02 per share.
(3) Ms. Antal resigned as a director on March 4, 2016. She did not receive any compensation as a director.
(4) Mr. Fretti resigned as a director on March 4, 2016. He did not receive any compensation as a director.
Compensation Paid to Board Members
Our independent non-employee directors are not compensated in cash. The only compensation has been in the above table exercised optionsform of stock awards. There is no stock compensation plan for independent non-employee directors. There was no Director compensation during the fiscal year ended December 31, 2013.2016.
Note that the above mentioned stock option grants were recorded in accordance with Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation – Stock Compensation”. The Company measured, and recorded, the fair value of the option grant as of the date of grant and is amortizing the computed value of the option grant over the related vesting period.
Compensation of Directors
We did not pay any separate compensation to our directors prior to August 2012. Commencing in August 2012, outside board members were awarded 2,000,000 shares per year which vest quarterly.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.MATTERS
The following table presentssets forth certain information regarding the beneficial ownership of our common stock by the following persons as of MarchDecember 31, 2014: (i) 2016 by:
| ● | each director and nominee for director; |
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| ● | each person known by us to own beneficially 5% or more of our common stock; |
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| ● | each executive officer named in the summary compensation table elsewhere in this report; and |
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| ● | all directors and executive officers as a group. |
The amounts and director, (ii) all executive officers and directors as a group and (iii) each stockholder known to be the beneficial ownerpercentages of more than 5% of our outstanding common stock (not taking into account contractual restrictionsbeneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership.)
Beneficial ownership is determined in accordance withof 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 generally includes voting or investment power with respecta person may be deemed to securities. be a beneficial owner of securities as to which such person has no economic interest.
Unless otherwise indicated below, to our knowledge, the persons and entitieseach beneficial owner named in the table havehas sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. SharesThe address of oureach beneficial owner is 5400 Carillon Point, Kirkland, WA 98033 and the address of more than 5% of common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of March 31, 2014 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
is detailed below.
The information presented in this table is based | Shares Beneficially Owned |
Name of Beneficial Owner
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Directors and Named Executive Officers
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Marco Hegyi (2) | 40,000,000 | 2.4% |
Mark E. Scott (3) | 14,777,778 | 0.9% |
Michael E. Fasci (4)
| 5,500,000 | * |
Joseph Barnes (5)
| 6,800,000 | * |
Total Directors and Officers (4 in total)
| 67,077,778 | 4.1% |
* Less than 1%.
(1)
Based on 865,090,8591,656,120,083 shares of common stock outstanding as of December 31, 2016.
(2) Reflects the shares beneficially owned by Marco Hegyi, including warrants to purchase 35,000,000 shares of our common stock outstandingat $0.01 per share/
(3) Reflects the shares beneficially owned by Mark E. Scott, including stock option grants totaling 1,777,778 shares that Mr. Scott has the right to acquire in sixty days.
(4) Reflects the shares beneficially owned by Michael E. Fasci.
(5) Reflects the shares beneficially owned by Joseph Barnes, including stock option grants totaling 6,500,000 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 | 24.6% |
Las Vegas, NV 89145 | | |
| | 4.99%) |
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Logic Works LLC (2) | 92,774,167 | 5.3% |
9616 Emeraude Avenue | | |
Las Vegas, NV 89147 | | 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 Marchthe individual ownership and legal structure of CANX. Each owner has a 4.99% ownership limit and the owners cannot act as a control group.
(2) Reflects 92,774,167 shares beneficially owned by Logic Works LLC related to Convertible Notes. Logic Works does not consider themselves a control group because Logic Works has a 4.99% ownership limit.
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 has not adopted a written policy for reviewing related person transactions. 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.
Certain Relationships
Please see the transactions with CANX, LLC and Logic Works in Note 5, TCA Global Credit Master Fund LP and Chicago Venture Partners, L.P. discussed in Note 7, 8 10 and 13.
Transactions with an Entity Controlled by Marco Hegyi
An entity controlled by Mr. Hegyi received a warrant to purchase up to twenty five million shares of our common stock at an exercise price of $0.08 per share was reduced to $0.01 per share on December 18, 2015.
On April 15, 2016, the Company issued 1,000,000 shares of its common stock to an entity affiliated with Marco Hegyi, our Chief Executive Officer, pursuant to a conversion of debt for $20,000. The shares were valued at the fair market price of $0.02 per share.
On October 12, 2016, the Company issued 4,000,000 shares of its common stock to an entity affiliated with Marco Hegyi, our Chief Executive Officer, pursuant to a conversion of debt for $40,000. The shares were valued at the fair market price of $0.01 per share.
On October 21, 2016, we entered into Agreement with Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its Chief Executive Officer through October 20, 2018. Mr. Hegyi’s previous Employment Agreement was dated December 4, 2013 and which is set to expire on December 4, 2016. Mr. Hegyi received a Warrant to purchase up to 10,000,000 shares of our common stock at an exercise price of $0.01 per share. In addition, Mr. Hegyi received Warrants to purchase up to 10,000,000 shares of our common stock at an exercise price of $0.01 per share which vest on October 21, 2017 and 2018. The Warrants are exercisable for 5 years.
Transactions with an Entity Controlled by Mark E. Scott
An entity controlled by Mr. Scott received an option to purchase sixteen million shares of our common stock at an exercise price of $0.07 per share was reduced to $0.01 per share on December 18, 2015. Two million shares vested on August 17, 2015 with the Company’s resolution of the class action lawsuits. An additional two million share stock option vest on April 18, 2016 upon the Company securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB.
On January 4, 2016, we issued 3,000,000 shares of its common stock to an entity affiliated with Mark E. Scott, Chief Financial Officer, pursuant to a conversion of debt for $30,000. The shares were valued at the fair market price of $0.01 per share.
On October 21, 2016, Mr. Scott cancelled stock option grants totaling 12,000,000 shares of our common stock at $0.01 per share. Mr. Scott has an additional 2,000,000 share stock option grant which continues to vest monthly over 36 months and a 2,000,000 share stock option grant which vests upon the achievement of certain performance goals related to acquisitions.
On October 21, 2016, Mr. Scott, the Company’s Chief Financial Officer, converted $40,000 in deferred compensation into 4,000,000 shares of our common stock at $0.01 per share. The price per share was based on the thirty-day trailing average.
On October 21, 2016, Mr. Scott, the Company’s Chief Financial Officer, was granted 6,000,000 shares of our common stock at $0.01 per share. The price per share was based on the thirty-day trailing average.
Transactions with Michael E. Fasci
On January 27, 2016, we issued 1,500,000 shares of its common stock to Michael Fasci, a member of the Board of Directors, for director services. The shares were valued at the fair market price of $0.01 per share.
On May 25, 2016, we issued 2,500,000 shares of its common stock to Michael Fasci, a member of the Board of Directors, for director services. The shares were valued at the fair market price of $0.02 per share.
On October 21, 2016, we entered into a Consulting Agreement with an entity controlled by Michael E. Fasci, a Director. Mr. Fasci is to provide services related to lender management, financing and acquisitions. Mr. Fasci’s compensation is 2,000,000 shares of our common stock valued at $0.01 per share and to be issued on April 21, 2017 and October 21, 2017.
Agreement with Jeff Giarraputo
On February 26, 2014, we engaged Jeff Giarraputo, a member of the Board of Directors, as an advisor to us for six months effective as of February 15, 2014. Mr. Giarraputo agreed to provide marketing, business development, and general management to us related to the cannabis industry. As compensation for these services, and subject to approval by our Board of Directors, we were expected to grant Mr. Giarraputo a stock option to purchase 2,000,000 shares of our common stock at $0.31 per share, which represents the 30-day trailing average of our common stock. All shares subject to the option vested over a six-month period beginning on the date of engagement and are subject to the terms and conditions of our 2011 Stock Incentive Plan including vesting requirements. On August 19, 2014, the Parties cancelled this Agreement and the stock option grant was not issued.
Director Independence
The Board has affirmatively determined that Michael E. Fasci is independent as of December 31, 2014.2016. For purposes of making that determination, the Board used NASDAQ’s Listing Rules even though the Company is not currently listed on NASDAQ. The Board expects to appoint independent directors during 2017 so that the majority of the Directors are independent.
Name of Beneficial Owner | Amount of Beneficial Ownership | Percent of Beneficial Ownership |
Executive Officers and Directors | | |
Sterling Scott (2, 12) | 73,737,499 | 8.5% |
John Genesi (3, 12) | 10,000,000 | 1.2% |
Justin Manns (4, 12) | 15,703,205 | 1.8% |
Rob Hunt (5, 12) | 27,746,460 | 3.2% |
Marco Hegyi (6, 12) | 25,000,000 | 2.9% |
Eric Shevin (7, 12) | 2,004,200 | 0.2% |
Alan Hammer (8, 12) | 808,333 | 0.1% |
Anthony Ciabattoni (9, 12) | 572,222 | 0.1% |
Jeff Giarraputo (10, 12) | 572,222 | 0.1% |
Bob Kurilko (11, 12) | 3,383,333 | 0.4% |
| 159,527,474 | 18.5% |
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESAudit 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, 2016, 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, 2016 and 2015 and 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:
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Audit fees | $52,500 | $67,225 |
Audit related fees | 10,000 | 26,480 |
Tax fees | 20,355 | - |
All other fees | 12,500 | 6,050 |
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| $95,355 | $99,755 |
- “Audit Fees” are fees paid for to PMB 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 PMB and Mayer in connection with filing US income tax returns.
- “All other fees were paid to PMB related to the review of registration statements on Form S-1.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) FINANCIAL STATEMENTS:
The Company’s financial statements, as indicated by the Index to Consolidated Financial Statements set forth below, begin on page F-1 of this Form 10-K, and are hereby incorporated by reference. Financial statement schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Shares issued and outstanding outstanding asTitle of March 31, 2014 Document | | | 806,090,859 | Page |
Options issued to OfficersReport of SD Mayer and DirectorsAssociates, LLP | | | 34,000,000 | |
Warrants issued to Officers and Directors | | | 25,000,000 | F-1 |
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865,090,859Consolidated Balance Sheets as of December 31, 2016 and 2015 | | F-2 |
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Consolidated Statements of Operations for the years ended December 31, 2016 and 2015 | | F-3 |
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Consolidated Statements of Changes in Stockholders' (Deficit) for the years ended December 31, 2016 and 2015 | | F-4 |
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Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 | | F-5 |
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Notes to the Financial Statements | | F-6 |
Exhibit No. | Description |
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3.1 | Certificate of Incorporation. Filed as an exhibit to the Company’s Form 10-SB General Form for Registration of Securities of Small Business Issuers filed with the SEC on December 7, 2007, and hereby incorporated by reference. |
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3.2 | Amended and Restated Bylaws. Filed as an exhibit to the Company’s Form 8-K filed with the SEC on June 9, 2014, and hereby incorporated by reference. |
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3.3 | Second Amended and Restated Bylaws of GrowLife, Inc. dated October 16, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference. |
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3.4 | Certificate of Designation for Series B Preferred Stock. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 29, 2015, and hereby incorporated by reference. |
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3.5 | Certificate of Designation for Series C Preferred Stock. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 29, 2015, and hereby incorporated by reference. |
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4.1 | GrowLife, Inc. 2011 Stock Incentive Plan filed as an exhibit to the Company’s Registration Statement on Form S-1 filed with the SEC on June 8, 2011, and hereby incorporated by reference. |
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10.1 | Form of 7% Convertible Note. Filed as an exhibit to the Company’s Form 8-K and filed with the SC on October 11, 2013, and hereby incorporated by reference. |
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10.2 | Joint Venture Agreement dated November 19, 2013 by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference. |
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10.3 | Warrant Agreement by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on November 21, 2013, and hereby incorporated by reference. |
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10.4 | Commercial Lease Agreement dated March 8, 2013 by and between Evergreen Garden Center LLC and William C. Rowell Family Limited Partnership for our Portland, Maine store. Filed as an exhibit to the Company’s Form 10-K dated December 31, 2014 and filed with the SEC on September 30, 2015, and incorporated by reference. |
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1. 10.5 | Unless otherwise stated,Lease dated October 21, 2013 by and between GrowLife Hydroponics, Inc. and Stone Creek Business Center Ltd. for our Avon (Vail), Colorado store. Filed as an exhibit to the address is c/oCompany’s Form 10-K dated December 31, 2014 and filed with the SEC on September 30, 2015, and incorporated by reference. |
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10.6 | Warrant related to CANX USA LLC Joint Development Agreement dated November 19, 2013. Filed as an exhibit to the Company’s Form 10-K and filed with the SEC on November 21, 2014, and hereby incorporated by reference. |
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10.7 | Employment Agreement for Marco Hegyi dated December 4, 2013. Attached as an exhibit to the Company’s Form 8-K/A and filed with the SEC on June 20, 2014, and hereby incorporated by reference. |
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10.8 | Amended Employment Agreement for Marco Hegyi dated June 20, 2014. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on June 20, 2014, and hereby incorporated by reference. |
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10.9 | Consulting Letter by and between GrowLife, Inc. and Mark Scott Consulting Letter dated July 31, 2014. Filed as an exhibit to the Company’s Form 8-K filed with the SEC on August 6, 2014, and hereby incorporated by reference. |
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10.10 | Waiver and Modification Agreement dated June 25, 2014 by and between GrowLife, Inc. and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference. |
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10.11 | Amended and Restated Joint Venture Agreement dated July 1, 2013 by and between GrowLife, Inc. and CANX USA LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference. |
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10.12 | Secured Credit Facility and Secured Convertible Note dated June 25, 2014 by and between GrowLife, Inc. and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference. |
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10.13 | Closing Certificate dated July 10, 2014 by and between GrowLife, Inc. and CANX USA LLC and Logic Works LLC. Filed as an Exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference. |
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10.14 | Form of Warrant by and between GrowLife, Inc. and CANX USA LLC. Filed as an exhibit to the Company’s Form 8-K/A and filed with the SEC on August 18, 2014, and hereby incorporated by reference. |
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10.15 | Settlement Agreement and Waiver of Default dated June 19, 2014 by and between GrowLife, Inc. and Forglen LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 18, 2014, and hereby incorporated by reference. |
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10.16 | Joseph Barnes Promotion Letter dated October 10, 2014. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 14, 2014, and hereby incorporated by reference. |
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10.17 | Notice of Settlement Agreement dated February 9, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on February 12, 2015, and hereby incorporated by reference. |
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10.18 | Stipulation and Agreement of Compromise, Settlement and Release of the Derivative Actions dated April 6, 2015. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 17, 2015, and hereby incorporated by reference. |
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10.19 | Securities Purchase Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., 20301 Ventura Blvd, Suite 126, Woodland Hills, California 91364.its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. |
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10.20 | Senior Secured, Convertible, Redeemable Debenture entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. |
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10.21 | Form of Security Agreement entered into by and between GrowLife, Inc. and its subsidiaries, respectively, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. |
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10.22 | Form of Guaranty Agreement entered into by and between GrowLife, Inc.’s subsidiaries, respectively, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. |
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10.23 | Form of Pledge Agreement entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. |
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10.24 | Intercreditor Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., its subsidiaries, Logic Works LLC and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. |
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10.25 | Intercreditor Agreement, dated July 9, 2015, entered into by and between GrowLife, Inc., its subsidiaries, Logic Works LLC and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on July 16, 2015, and hereby incorporated by reference. |
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2. 10.26
| Includes 5,833,333 shares issuedSecurities Purchase Agreement dated August 6, 2015 and entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to Mr. Scott during fiscal year 2013 as the final installments due related to a Board grant inCompany’s Form 8-K and filed with the SEC on August 2012. Excludes shares of our common stock that may be issued to Mr. Scott in the event that some or all of the 6% 12, 2015, and hereby incorporated by reference. |
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10.27 | Senior Secured Convertible Note indebtedness is convertedRedeemable Debenture dated August 6, 2015 and entered into by Mr. Scott from debt to shares. Also excludes the variable amount of shares of our common stock issuable upon conversion of the interest accrued on Mr. Scott’s note (see “NOTE 16 – 6% SENIOR CONVERTIBLE NOTES”). Mr. Scott also holds options to purchase 12,000,000 shares of the Company’s common stock (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”)and between GrowLife, Inc., of which all 12,000,000 shares are included in the above Beneficial Ownership analysis. As of the time of this filing, Mr. Scott had not exercised any of his options. |
3. | Mr. Genesi holds options to purchase 10,000,000 shares of the Company’s common stock (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”), of which all 10,000,000 shares are included in the above Beneficial Ownership analysis. As of the time of this filing, Mr. Genesi had not exercised any of his options. |
4. | Includes 4,666,667 shares issued to Mr. Manns during fiscal year 2013its subsidiaries and TCA Global Credit Master Fund LP. Filed as the final installments due related to a Board grant in August 2012. Mr. Manns is a former Director and the Company’s former Chief Financial Officer. Mr. Manns is currently the Controller of GrowLife Hydroponics, Inc. |
5. | Includes 3,333,942 shares issued to Mr. Hunt pursuantan exhibit to the Company’s acquisitionForm 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference. |
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10.28 | Committed Equity Facility dated August 6, 2015 entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference. |
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10.29 | Registration Rights Agreement dated August 6, 2015 entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference. |
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10.30 | Authorization Agreement dated August 6, 2015 entered into by and between GrowLife, Inc., its subsidiaries and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 12, 2015, and hereby incorporated by reference. |
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10.31 | Amended and Restated Securities Purchase Agreement, dated October 27, 2015, entered into by and among GrowLife, Inc., its subsidiaries, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 29, 2015, and hereby incorporated by reference. |
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10. 32 | Amended and Restated Senior Secured, Convertible, Redeemable Debenture, dated October 27, 2015, entered into by and between GrowLife, Inc. and Purchaser. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 29, 2015, and hereby incorporated by reference. |
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10.33 | Amendment to Employment Agreement by and between GrowLife Inc. and Marco Hegyi dated January 25, 2016 but effective December 18, 2015. |
10.34 | Securities Purchase Agreement, dated April 5, 2016, entered into by and among GrowLife, Inc., and Chicago Venture Partners, LP Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 11, 2016, and hereby incorporated by reference. |
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10.35 | Convertible Promissory Note, dated April 5, 2016, entered into by and between GrowLife, Inc. and Chicago Venture Partners, LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 11, 2016, and hereby incorporated by reference. |
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10.36 | Form of Rocky Mountain Hydroponics,Secured Investor Note, dated April 5, 2016, entered into by and between GrowLife, Inc. and Chicago Venture Partners, LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on April 11, 2016, and hereby incorporated by reference. |
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10.37 | Waiver Agreement, dated April 11, 2016, by and between GrowLife, Inc. and TCA Global Credit Master Fund, LP. Filed as an exhibit to the Company’s Registration Statement on Form S-1 filed with the SEC on July 11, 2016, and hereby incorporated by reference. |
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10.38 | First Amendment to Securities Purchase Agreement, effective as of May 4, 2016, entered into by and among GrowLife, Inc., its subsidiaries, and TCA Global Credit Master Fund LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on May 9, 2016, and hereby incorporated by reference. |
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10.39 | Second Replacement Debenture A, dated May 4, 2016, entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund, LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on May 9, 2016, and hereby incorporated by reference. |
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10.40 | Second Replacement Debenture B, dated May 4, 2016, entered into by and between GrowLife, Inc. and TCA Global Credit Master Fund, LP. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on May 9, 2016, and hereby incorporated by reference. |
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10.41 | Debt Purchase Agreement, dated June 9, 2016, entered into by and between TCA Global Credit Master Fund, LP, Old Main Capital, LLC and GrowLife, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 16, 2016, and hereby incorporated by reference. |
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10.42 | Exchange Agreement, dated June 9, 2016, entered into by and among Old Main Capital, LLC and GrowLife, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 16, 2016, and hereby incorporated by reference. |
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10.43 | 10% Senior Convertible Promissory Note, dated June 9, 2016, entered into by and among Old Main Capital, LLC and GrowLife, Inc. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 16, 2016, and hereby incorporated by reference. |
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10.44 | Option Agreement, dated June 8, 2016, entered into by and among TCA Global Credit Master Fund, LP and Old Main Capital, LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on June 16, 2016, and hereby incorporated by reference. |
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10.45 | Advisory Services Agreement, dated September 27, 2015, entered into by and GrowLife, Inc. and TCA Global Credit Master Fund, LP. Filed as an exhibit to the Company’s Registration Statement on Form S-1 filed with the SEC on July 11, 2016, and hereby incorporated by reference. |
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10.46 | Amendment to Advisory Services Agreement, dated October 27, 2015, entered into by and GrowLife, Inc. and TCA Global Credit Master Fund, LP. Filed as an exhibit to the Company’s Registration Statement on Form S-1 filed with the SEC on July 11, 2016, and hereby incorporated by reference. |
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10.47 | Exchange Agreement dated August 17, 2016, entered into by and between GrowLife, Inc. and Chicago Venture Partners, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 30, 2016, and hereby incorporated by reference. |
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10.48 | Debt Purchase Agreement dated August 15, 2016, entered into by and between GrowLife, Inc., TCA Global Credit Master Fund, LP and Chicago Venture Partners, L.P. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 30, 2016, and hereby incorporated by reference. |
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10.49 | First Amendment to Debt Purchase Agreement dated August 15, 2016, entered into by and between GrowLife, Inc., TCA Global Credit Master Fund, LP and Old Main Capital, LLC. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on August 30, 2016, and hereby incorporated by reference. |
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10.50 | Marco Hegyi Employment Agreement and Warrants dated October 21, 2016. Filed as an exhibit to the Company’s Form 8-K and filed with the SEC on October 27, 2016, and hereby incorporated by reference. |
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10.51 | Consulting Agreement dated October 21, 2016 with an entity controlled by Michael E. Fasci (attached herewith). |
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10.52 | Consent to Judgement and Settlement Agreement dated December 7, 2016 y and between Evergreen Garden Center LLC. (“RMH/EGC”),LLC and GrowLife Hydroponics, Inc. and William C. Rowell Family Limited Partnership for our Portland, Maine store (attached herewith). |
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14.1 | Code of which he was majority owner. Also includes 12,412,518 shares issued to Mr. Hunt on January 31, 2014 pursuant to his conversion of the principalConduct and accrued and unpaid interest related to the 12% Senior Secured Convertible Note issued to him on June 7, 2013 relatedEthics dated May 15, 2014. Attached as an exhibit to the Company’s acquisition of RMH/EGC. Mr. Hunt also holds optionsForm 8-Kfiled and with the SEC on June 9, 2014, and hereby incorporated by reference. |
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16.1 | Letter dated July 14, 2016 from PMB Helin Donovan LLP. Filed as an exhibit to purchase 12,000,000 sharesthe Company’s Form 8-K and filed with the SEC on July 14, 2016, and hereby incorporated by reference |
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21.1 | Subsidiaries of the Company’s common stock (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”),Registrant (filed herewith). |
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31.01 | Certification of which all 12,000,000 shares are included in the above Beneficial Ownership analysis. AsPrincipal Executive Officer Pursuant to Rule 13a-14 Filed herewith. |
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31.02 | Certification of Principal Financial Officer Pursuant to Rule 13a-14 Filed herewith. |
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32.01 | CEO Certification Pursuant to Section 906 of the timeSarbanes-Oxley Act Filed herewith. |
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32.02 | CFO Certification Pursuant to Section 906 of this filing, Mr. Hunt had not exercised any of his options.the Sarbanes-Oxley Act Filed herewith. |
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99.1 | Amended and Restated Audit Committee Charter, dated October 16, 2015. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference. |
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99.2 | Compensation Committee Charter dated May 15, 2014. Attached as an exhibit to the Company’s Form 8-K dated June 3, 2014 and filed with the SEC on June 9, 2014, and hereby incorporated by reference. |
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99.3 | Amended and Restated Nominations and Governance Charter, dated October 16, 2015.Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference. |
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99.4 | Amended and Restated Insider Trading Policy, dated October 16, 2015. Attached as an exhibit to the Company’s Form 8-K and filed with the SEC on October 26, 2015, and hereby incorporated by reference. |
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101.INS* | XBRL Instance Document |
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101.SCH* | XBRL Taxonomy Extension Schema Document |
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101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB* | XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
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*Filed Herewith. Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
GrowLife, Inc.:
We have audited the accompanying consolidated balance sheets of GrowLife, Inc. (the “Company”) as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years ended December 31, 2016 and 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of GrowLife, Inc. as of December 31, 2016 and 2015, and the results of its consolidated operations and its cash flows for the years ended December 31, 2016 and 2015 in conformity with generally accepted accounting principles in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has sustained a net loss from operations and has an accumulated deficit since inception. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are also described in Note 2. The consolidated `financial statements do not include any adjustments that might result from the outcome of this uncertainty.
SD Mayer & Associates, LLP /s/ SD Mayer & Associates, LLP March 31, 2017 Seattle, WA |
GROWLIFE, INC. AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS |
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ASSETS | | |
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CURRENT ASSETS: | | |
Cash and cash equivalents | $103,070 | $60,362 |
Inventory, net | 418,453 | 398,439 |
Deposits | 11,163 | 16,754 |
Total current assets | 532,686 | 475,555 |
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EQUIPMENT, NET | 1,890 | 10,327 |
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OTHER ASSETS | | |
Intangible assets, net | - | 243,604 |
Goodwill | - | 739,000 |
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TOTAL ASSETS | $534,576 | $1,468,486 |
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LIABILITIES AND STOCKHOLDERS' (DEFICIT) | | |
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CURRENT LIABILITIES: | | |
Accounts payable - trade | $1,529,919 | $1,272,572 |
Accounts payable - related parties | 10,952 | 71,920 |
Accrued expenses | 132,656 | 121,765 |
Accrued expenses - related parties | 19,605 | 53,287 |
Derivative liability | 2,701,559 | 1,377,175 |
Current portion of convertible notes payable | 2,798,800 | 2,287,868 |
Deferred revenue | 47,995 | 25,000 |
Total current liabilities | 7,241,486 | 5,209,587 |
| | |
LONG TERM LIABILITIES: | | |
Convertible notes payable | - | - |
| | |
COMMITMENTS AND CONTINGENCIES | - | 2,000,000 |
| | |
MEZZANINE EQUITY: | | |
Contingently redeemable common stock- | | |
0 and 15,000,000 shares issued and outstanding at 9/30/2016 and 12/31/2015, respectively | - | 300,000 |
| | |
STOCKHOLDERS' DEFICIT | | |
Preferred stock - $0.0001 par value, 10,000,000 shares authorized, no shares | | |
issued and outstanding | - | - |
Series B Convertible Preferred stock - $0.0001 par value, 150,000 shares authorized, 0 and | | |
150,000 shares issued and outstanding at 12/31/16 and 12/31/15, respectively | - | 15 |
Series C Convertible Preferred stock - $0.0001 par value, 51 shares authorized, | | |
51 shares issued and outstanding at 12/31/2016 and 12/31/2015, respectively | - | - |
Common stock - $0.0001 par value, 3,000,000,000 shares authorized, 1,656,120,083 | | |
and 891,116,496 shares issued and outstanding at 12/31/2016 and 12/31/2015, respectively | 165,600 | 89,098 |
Additional paid in capital | 117,537,822 | 110,585,434 |
Accumulated deficit | (124,410,332) | (116,715,648) |
Total stockholders' deficit | (6,706,910) | (6,041,101) |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $534,576 | $1,468,486 |
The accompanying notes are an integral part of these consolidated financial statements.
6. | Mr. Hegyi holds warrants to purchase 25,000,000 shares of the Company’s common stock (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”), all of which are exercisable within 60 days of this filing and are included in the above Beneficial Ownership analysis. As of the time of this filing, Mr. Hegyi had not exercised any of his warrants. |
7. | Includes 4,200 shares received by Mr. Shevin via the exercise of options at a per share price of $0.019, which resulted in gross proceeds to the Company of $9,000. Also includes 1,500,000 shares received by Mr. Shevin as compensation for Board service for April 1, 2013 through December 31, 2013. Also includes 500,000 shares issued to Mr. Shevin on March 31, 2014 as compensation for Board service for the period of January 1, 2014 through March 31, 2014.GROWLIFE, INC. AND SUBSIDIARIES
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8. | Represents 83,333 shares received as compensation for Board service for the period of December 17, 2013 through December 31, 2013, 225,000 shares purchased by Mr. Hammer in January 2014 on the open market, and 500,000 shares received as compensation for Board service for the period of January 1, 2014 through March 31, 2014. |
9. | Represents 72,222 shares received as compensation for Board service for the period of December 19, 2013 through December 31, 2013 and 500,000 shares received as compensation for Board service for the period of January 1, 2014 through March 31, 2014. Mr. Ciabattoni’s shares have been issued to the Ciabattoni Living Trust, of which Mr. Ciabattoni is the Trustee.
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10. | Represents 72,222 shares received as compensation for Board service for the period of December 19, 2013 through December 31, 2013 and 500,000 shares received as compensation for Board service for the period of January 1, 2014 through March 31, 2014. |
11. | Mr. Kurilko is a former Director who has had no affiliation with the Company since he resigned as a Director on November 2, 2013. Includes 1,683,333 shares received as compensation for Board service for January 1, 2013 through November 2, 2013. During fiscal year 2012, Mr. Kurilko received 1,700,000 shares valued at $17,000. |
12. | Note that the above mentioned stock and option grants were recorded in accordance with Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation – Stock Compensation”. The Company measured, and recorded, the fair value of the grant as of the date of grant and , with respect to option grants, is amortizing the computed value of the option grant over the related vesting period.CONSOLIDATED STATEMENTS OF OPERATIONS |
| |
| | |
| | |
NET REVENUE | $1,231,281 | $3,499,642 |
COST OF GOODS SOLD | 1,275,580 | 2,980,503 |
GROSS PROFIT | (44,299) | 519,139 |
GENERAL AND ADMINISTRATIVE EXPENSES | 1,888,537 | 2,684,107 |
IMPAIRMENT OF LONG-LIVED ASSETS | 876,056 | - |
OPERATING LOSS | (2,808,892) | (2,164,968) |
| | |
OTHER INCOME (EXPENSE): | | |
Change in fair value of derivative | (1,324,384) | 1,678,541 |
Interest expense, net | (816,750) | (1,118,635) |
Other income (expense), primarily related to TCA funding | 144,882 | (2,002,533) |
Loss on debt conversions | (2,889,540) | - |
Loss on class action lawsuit settlements | - | (2,081,250) |
Total other (expense) | (4,885,792) | (3,523,877) |
| | |
(LOSS) BEFORE INCOME TAXES | (7,694,684) | (5,688,845) |
| | |
Income taxes - current benefit | - | - |
| | |
NET (LOSS) | $(7,694,684) | $(5,688,845) |
| | |
Basic and diluted (loss) per share | $(0.01) | $(0.01) |
| | |
Weighted average shares of common stock outstanding- basic and diluted | 1,197,565,907 | 884,348,627 |
Changes in Control ArrangementsThe accompanying notes are an integral part of these consolidated financial statements.
None.
Equity Compensation Plan InformationF-3
GROWLIFE, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT |
| Series B Convertible Preferred Stock | Series C Convertible Preferred Stock | | | | | |
| | | | | | | Investment in Related Party | Additional Paid in Capital | | Total Stockholders' (Deficit) |
Balance as of December 31, 2014 | - | $- | - | $- | 879,343,771 | $87,936 | $- | $108,699,950 | $(111,026,803) | $(2,238,917) |
Stock based compensation for stock options | - | - | - | - | - | - | - | 175,661 | - | 175,661 |
Shares issued for debt conversion | - | - | - | - | 7,772,725 | 777 | - | 170,223 | - | 171,000 |
Shares issued for services rendered | - | - | - | - | 4,000,000 | 400 | | 39,600 | - | 40,000 |
Issuance of Series B Convertible Preferred Stock | 150,000 | 15 | - | - | - | (15) | - | 1,500,000 | - | 1,500,000 |
Issuance of Series C Convertible Preferred Stock | - | - | 51 | - | - | - | - | - | - | - |
Net loss for the year ended December 31, 2015 | - | - | - | - | - | - | - | - | (5,688,845) | (5,688,845) |
| | | | | | | | | | |
Balance as of December 31, 2015 | 150,000 | 15 | 51 | - | 891,116,496 | 89,098 | - | 110,585,434 | (116,715,648) | (6,041,101) |
Stock based compensation for stock options | - | - | - | - | - | - | - | 145,729 | - | 145,729 |
Shares issued for debt conversion | - | - | - | - | 13,400,000 | 1,340 | - | 142,660 | - | 144,000 |
Shares issued for services rendered | - | - | - | - | 26,020,000 | 2,602 | - | 282,598 | - | 285,200 |
Shares issued for convertible note and interest conversion | - | - | - | - | 595,442,539 | 59,546 | - | 5,594,400 | - | 5,653,946 |
Shares issued for mezzanine equity | | | | | 15,000,000 | 1,500 | - | 298,500 | - | 300,000 |
Series B Convertible Preferred Stock converted into convertible notes payable | (150,000) | (15) | - | - | - | - | - | (1,499,985) | - | (1,500,000) |
Shares issued for class action settlements | - | - | - | - | 115,141,048 | 11,514 | - | 1,988,486 | - | 2,000,000 |
Net loss for the year ended December 31, 2016 | - | - | - | - | - | - | - | - | (7,694,684) | (7,694,684) |
| | | | | | | | | | |
Balance as of December 31, 2016 | - | $- | 51 | $- | 1,656,120,083 | $165,600 | $- | $117,537,822 | $(124,410,332) | $(6,706,910) |
The following table sets forth information concerningaccompanying notes are an integral part of these consolidated financial statements.
GROWLIFE, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| |
| | |
| | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | |
Net loss | $(7,694,684) | $(5,688,845) |
Adjustments to reconcile net loss to net cash (used in) | | |
operating activities | | |
Depreciation and amortization | 8,437 | 13,715 |
Amortization of intangible assets | 106,548 | 106,548 |
Stock based compensation | 145,729 | 175,661 |
Preferred shares issued for services | - | 300,000 |
Common stock issued for services | 285,200 | 210,985 |
Amortization of debt discount | 514,668 | (158,237) |
Change in fair value of derivative liability | 1,324,384 | (723,740) |
Accrued interest on convertible notes payable | 120,824 | 310,500 |
Loss on class action settlements | - | 2,000,000 |
Loss on debt conversions | - | 1,500,000 |
Excess and obsolete inventory | - | 20,215 |
Write-off of patent expenses | - | 3,600 |
Loss on debt conversions | 2,889,540 | - |
Impairment of long-lived assets | 876,056 | - |
Changes in operating assets and liabilities: | | |
Inventory | 20,014 | 464,696 |
Prepaid expenses | - | 41,791 |
Deposits | (5,591) | 16,830 |
Accounts payable | 196,379 | 215,362 |
Accrued expenses | (22,791) | (209,972) |
Deferred revenue | 22,995 | 25,000 |
CASH (USED IN) OPERATING ACTIVITIES | (1,212,292) | (1,375,891) |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| - | - |
| - | - |
NET CASH PROVIDED BY INVESTING ACTIVITIES: | - | - |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | |
Cash provided from Convertible Promissory Note with Chicago Venture Partners, L.P. | 1,255,000 | - |
Proceeds from the issuance of convertible debt | - | 1,150,000 |
Series B Convertible Preferred Stock | - | 15 |
NET CASH PROVIDED BY FINANCING ACTIVITIES | 1,255,000 | 1,150,015 |
| | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 42,708 | (225,876) |
| | |
CASH AND CASH EQUIVALENTS, beginning of period | 60,362 | 286,238 |
| | |
CASH AND CASH EQUIVALENTS, end of period | $103,070 | $60,362 |
| | |
Supplemental disclosures of cash flow information: | | |
Interest paid | $- | $10,500 |
Taxes paid | $- | $- |
| | |
Non-cash investing and financing activities: | | |
Shares issued for convertible note and interest conversion | $2,764,406 | $- |
Shares issued for debt conversion | $144,000 | $171,000 |
Shares issued for class action settlements | $2,000,000 | $- |
Shares issued for mezzanine equity | $300,000 | $- |
Series B Convertible Preferred Stock converted into convertible notes payable | $(1,500,000) | $- |
Series B Convertible Preferred Stock converted into convertible notes payable debt discount | $315,669 | $- |
The accompanying notes are an integral part of these consolidated financial statements.
GROWLIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
GrowLife, Inc. (“GrowLife” or the “Company”) is incorporated under the laws of the State of Delaware and is headquartered in Seattle, 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 equity compensation plansregional 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. The Company purchased all of the assets and liabilities of the RMH and EGC Companies, and their retail hydroponics stores, which are located in Vail and Boulder, Colorado and Portland, Maine. The Company purchased RMC and EGC from Rob Hunt, who was appointed to the then Company’s Board of Directors and President of GrowLife Hydroponics, Inc.
On February 18, 2016, the Company’s common stock resumed unsolicited quotation on the OTC Bulletin Board after receiving clearance from the Financial Industry Regulatory Authority (“FINRA”) on our Form 15c2-11. The Company is currently taking the appropriate steps to uplist to the OTCQB Exchange and resume priced quotations with market makers as soon as it is able.
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 $7,694,684 and $5,688,845 for the years ended December 31, 2016 and 2015, respectively. Our net cash used in operating activities was $1,212,192 and $1,375,891 for the years ended December 31, 2016 and 2015, respectively.
The Company anticipates that it will record losses from operations for the foreseeable future. As of December 31, 2016, our accumulated deficit was $124,410,332. The Company has experienced recurring operating losses and negative operating cash flows since inception, and has financed its working capital requirements during this period primarily through the recurring issuance of convertible notes payable and advances from a related party. The audit report prepared by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 2016 and 2015 filed with the SEC on March 31, 2016 includes an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern.
Continuation of the Company as a going concern is dependent upon obtaining additional working capital. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS
Basis of Presentation - The accompanying unaudited consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation of these unaudited consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”).
Principles of Consolidation- The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Inter-Company items and transactions have been eliminated in consolidation.
Cash and Cash Equivalents- The Company classifies highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit.
Accounts Receivable and Revenue - Revenue is recognized on the sale of a product when the product is shipped, which is when the risk of loss transfers to our customers, the fee is fixed and determinable, and collection of the sale is reasonably assured. A product is not shipped without an order from the customer and the completion of credit acceptance procedures. The majority of our sales are cash or credit card; however, we occasionally extend terms to our customers. Accounts receivable are reviewed periodically for collectability.
Inventories - Inventories are recorded on a first in first out basis. Inventory consists of raw materials, purchased finished goods and components held for resale. Inventory is valued at the lower of cost or market. The reserve for inventory was $20,000 as of December 31, 2016 and 2015, respectively.
Property and Equipment - Property and equipment are stated at cost. Assets acquired under capital leases are initially recorded at the lower of the present value of the minimum lease payments discounted at the implicit interest rate or the fair value of the asset. Major improvements and betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed using the straight-line method over an estimated useful life of five years. Assets acquired under capital lease are depreciated over the lesser of the useful life or the lease term. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations.
Goodwill and Intangible Assets - The Company evaluates the carrying value of goodwill, intangible assets, and long-lived assets during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, (3) an adverse action or assessment by a regulator, (4) continued losses from operations, (5) continued negative cash flows from operations, and (6) the suspension of trading of the Company’s securities. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill.
The Company amortizes the cost of other intangible assets over their estimated useful lives, which range up to ten years, unless such lives are deemed indefinite. Intangible assets with indefinite lives are tested in the fourth quarter of each fiscal year for impairment, or more often if indicators warrant.
On March 10, 2017, the Audit Committee reviewed the GrowLife Hydroponics, Inc. operations and based on the capital intensive nature of the business and operating results determined that the goodwill value of $739,000 and intangible assets of $137,056 were impaired as of December 31, 2013.2016. The Company recorded an impairment of goodwill and intangible assets associated with GrowLife Hydroponics, Inc. of $876,056 as general and administrative expenses during the three months ended December 31, 2016.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column |
(a) | (b) | (a) (c) |
Equity compensation plans | | 40,851,187 | | $ 0.085 | | -- |
approved by security holders (1) | | | | | | |
Equity compensation plans not | | 165,000,000 | | $ 0.040 | | -- |
approved by security holders (2) | | | | | | |
Total | | 205,851,187 | | $ 0.049 | | -- |
Long Lived Assets– The Company reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.
Fair Value Measurements and Financial Instruments - ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a 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:
1. | Consists of awards issued and issuable pursuant to the 2011 Stock Incentive Plan. |
2. | Consists of warrants issued to CANX and Hegyi, LLC, an entity controlled by Marco Hegyi, the Company’s President. |
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.
ITEM 13. CERTAIN RELATIONSHIPSDerivative 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, 2016 and December 31, 2015, there was no reserve for sales returns, which are minimal based upon our historical experience.
Stock Based Compensation- The Company has share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options and warrants to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost to employees is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period under ASC 718. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit. Grants of stock to non-employees and other parties are accounted for in accordance with the ASC 505.
Net (Loss) Per Share -Under the provisions of ASC 260, “Earnings per Share,” basic loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations. The common stock equivalents have not been included as they are anti-dilutive. As of December 31, 2016, there are also (i) stock option grants outstanding for the purchase of 12,010,000 common shares at a $0.010 average strike price; (ii) warrants for the purchase of 595 million common shares at a $0.031 average exercise price; and (iii) 207,812,222 shares related to convertible debt that can be converted at $0.0036 per share. In addition, we have an unknown number of common shares to be issued under the TCA Global Credit Master Fund LP and Chicago Venture Partners, L.P. financing agreements. As of December 31, 2015, there are also (i) stock option grants outstanding for the purchase of 29.0 million common shares at a $0.028 average strike price; (ii) warrants for the purchase of 565.0 million common shares at a $0.032 average exercise price; (iii) 243.6 million shares related to convertible debt that can be converted at $0.007 per share; and (iv) 6.0 million shares that may be issued to a former executive related to a severance agreement. We issued $2 million in common stock or 115,141,048 shares of our common stock pursuant to the settlement of the Consolidated Class Action and Derivative Action lawsuits alleging violations of federal securities laws that were filed against the Company in United States District Court, Central District of California.
Dividend Policy- The Company has never paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities.
Use of Estimates - In preparing these unaudited interim consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in our consolidated financial statements relate to the valuation of long-lived assets, estimates of sales returns, inventory reserves and accruals for potential liabilities, and valuation assumptions related to derivative liability, equity instruments and share based compensation.
Recent Accounting Pronouncements
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s consolidated financial statements.
In May 2014, as part of its ongoing efforts to assist in the convergence of GAAP and International Financial Reporting Standards, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which is a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised services or goods in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. The standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, which defers the implementation of this new standard to be effective for fiscal years beginning after December 15, 2017. Early adoption is permitted effective January 1, 2017. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, and in May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which amend certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. The Company currently evaluating which transition approach we will utilize and the impact of adopting this accounting standard on the Company’s financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties About an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company does not expect that this guidance will have a material impact on its financial position, results of operations or cash flows.
In January 2015, the FASB issued ASU 2015-01, Income Statement—Extraordinary and Unusual Items. The objective of this Update is to simplify the income statement presentation requirements in Subtopic 225-20 by eliminating the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2014-220—Income Statement—Extraordinary Items (Subtopic 225-20), which has been deleted. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. the Company’s does not expect this update to have a material impact on financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The standard amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting ASU 2016-02 on the Company’s financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU makes targeted amendments to the accounting for employee share-based payments. This guidance is to be applied using various transition methods such as full retrospective, modified retrospective, and prospective based on the criteria for the specific amendments as outlined in the guidance. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted, as long as all of the amendments are adopted in the same period. The Company is currently evaluating the impact of adopting ASU 2016-09 on the Company’s financial statements.
In June 2016, the FASB issued Accounting Standards Update ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. This ASU is not expected to have a material impact on the Company’s financial statements.
In August 2016, the FASB issued Accounting Standards Update ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. Stakeholders indicated that there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This Accounting Standards Update addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230.This Update is the final version of Proposed Accounting Standards Update EITF-15F—Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments (Topic 230), which has been deleted. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted as all of the amendments are adopted in the same period. This ASU is not expected to have a material impact on the Company’s financial statements.
NOTE 4 – TRANSACTIONS WITH CANX USA, LLC AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.LOGIC WORKS LLC
Transactions with OfficersCANX, LLC and DirectorsLogic Works LLC
Other than the transactions described below, since January 1, 2013, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party:
| • | in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years; and |
| • | in which any director, executive officer, stockholder who beneficially owns 5% or more of our common stock or any member of their immediate family had or will have a direct or indirect material interest. |
On November 19, 2013, the Company entered into a Joint Venture Agreement with CANX, a Nevada limited liability company. Under the terms of the Joint Venture Agreement, the Company and CANX formed Organic Growth International, LLC (“OGI”), a Nevada limited liability company, for the purpose of expanding the Company’s operations in its current retail hydroponic businesses and in other synergistic business verticals and facilitating additional funding for commercially financeable transactions of up to $40,000,000.
The Company initially owned a non-dilutive 45% share of OGI and the Company could acquire a controlling share of OGI as provided in the Joint Venture Agreement. In accordance with the Joint Venture Agreement, the Company and CANX entered into a Warrant Agreement whereby the Company delivered to CANX a warrant to purchase 140,000,000 shares of the Company common stock that is convertible at $0.033 per share, subject to adjustment as provided in the warrant. The five-year warrant expires November 18, 2018. Also, in accordance with the Joint Venture Agreement, on February 7, 2014 the Company issued an additional warrant to purchase 100,000,000 shares of our common stock that is convertible at $0.033 per share, subject to adjustment as provided in the warrant. The five-year warrant expires February 6, 2019.
GrowLife received the $1 million as a convertible note in December 2013, received the $1.3 million commitment but not executed and by January 2014 OGI had Letters of Intent with four investment and acquisition transactions valued at $96 million. Before the deals could close, the SEC put a trading halt on our stock on April 10, 2014, which resulted in the withdrawal of all transactions. The business disruption from the trading halt and the resulting class action and derivative lawsuits ceased further investments with the OGI joint venture. The Convertible Note was converted into GrowLife, Inc. common stock as of the year ended December 31, 2016.
On July 10, 2014, the Company closed a Waiver and Modification Agreement, Amended and Restated Joint Venture Agreement, Secured Credit Facility and Secured Convertible Note with CANX and Logic Works LLC, a lender and shareholder of the Company.
The Amended and Restated Joint Venture Agreement with CANX modified the Joint Venture Agreement dated November 19, 2013 to provide for (i) up to $12,000,000 in conditional financing subject to review by GrowLife and approval by OGI for business growth development opportunities in the legal cannabis industry for up to nine months, subject to extension; (ii) up to $10,000,000 in working capital loans, with each loan requiring approval in advance by CANX; (iii) confirmed that the five year warrants, subject to adjustment, at $0.033 per share for the purchase of 140,000,000 and 100,000,000 were fully earned and were not considered compensation for tax purposes by the Company; (iv) granted CANX five year warrants, subject to adjustment, to purchase 300,000,000 shares of common stock at the fair market price of $0.033 per share as determined by an independent appraisal; (v) warrants as defined in the Agreement related to the achievement of OGI milestones; and (vi) a four year term, subject to adjustment.
The Company entered into a Secured Convertible Note and Secured Credit Facility dated June 25, 2014 with Logic Works whereby Logic Works agreed to provide up to $500,000 in funding. Each funding required approval in advance by Logic Works, provided interest at 6% with a default interest of 24% per annum and requires repayment by June 26, 2016. The Note is convertible into common stock of the Company at the lesser of $0.0070 or (B) twenty percent (20%) of the average of the three (3) lowest daily VWAPs occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable conversion date on which Logic Works elects to convert all or part of this 6% Convertible Note, subject to adjustment as provided in the Note. The 6% Convertible Note is collateralized by the assets of the Company. As of March 31, 2017, the outstanding balance on the Convertible Note was $39,251.
OGI was incorporated on January 7, 2014 in the State of Nevada and had no business activities as of December 31, 2016.
NOTE 5 – INVENTORY
Inventory as of December 31, 2016 and December 31, 2015 consists of the following:
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| | |
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Finished goods | $438,453 | $418,439 |
Inventory reserve | (20,000) | (20,000) |
Total | $418,453 | $398,439 |
Finished goods inventory relates to product at the Company’s retail stores, which is product purchased from distributors, and in some cases directly from the manufacturer, and resold at our stores.
The Company reviews its inventory on a periodic basis to identify products that are slow moving and/or obsolete, and if such products are identified, the Company records the appropriate inventory impairment charge at such time.
NOTE 6 – CONVERTIBLE NOTES PAYABLE, NET
Convertible notes payable as of December 31, 2016 consisted of the following:
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6% Secured convertible note (2014) | $330,295 | $3,692 | $- | $333,987 |
7% Convertible note ($850,000) | 250,000 | 164,137 | - | 414,137 |
Replacement debenture with TCA ($2,830,210) | 1,468,009 | 18,350 | - | 1,486,359 |
10% OID Convertible Promissory Note with Chicago Venture Partners, L.P. | 683,042 | 2,670 | (121,395) | 564,317 |
| $2,731,346 | $188,849 | $(121,395) | $2,798,800 |
Convertible notes payable as of December 31, 2015 consisted of the following:
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6% Senior secured convertible notes (2012) | $413,680 | $172,494 | $- | $586,174 |
6% Secured convertible note (2014) | 350,000 | 30,641 | (83,924) | 296,717 |
7% Convertible note ($850,000) | 250,000 | 104,137 | - | 354,137 |
7% Convertible note ($1,000,000) | 250,000 | 134,469 | - | 384,469 |
18% Senior secured redeemable convertible debenture ($1,150,000) | 1,150,000 | 68,510 | (552,139) | 666,371 |
| $2,413,680 | $510,251 | $(636,063) | $2,287,868 |
Several of the Company’s convertible promissory notes remain outstanding beyond their respective maturity dates. This may trigger an event of default under the respective agreements. The Company is working with these noteholders to convert their notes into common stock and intends to resolve these outstanding issues as soon as practicable. As a result, the Company accrued interest on these notes at the default rates. Furthermore, as a result of being in default on these notes, the Holders could, at their sole discretion, call these notes. Although no such action has been taken by the Holders, the Company classified these notes as a current liability as of December 31, 2016 and 2015.
6% Senior Secured Convertible Notes Payable (2012)
On September 28, 2012, the Company issued aentered into an Amendment and Exchange Agreement with investors, including Sterling Scott, our then CEO. The Exchange Agreement provided for the issuance of new 6% Senior Secured Convertible Note (the “Scott Note”) inNotes that replaced the amount of $282,000 to Sterling Scott, the Company’s Chief Executive Officer.6% Senior Secured Convertible Notes that were previously issued during 2012. The Scott Note accrues6% Notes accrued interest at the rate of 6% per annum and hashad a maturity date of April 15, 2015. No cash payments arewere required; however, accrued interest shall bewas due at maturity. In the event of a default Mr. Scottthe investors may declare the entire principal and accrued interest to be due and payable. Default interest will accrueaccrued at the rate of 12% per annum. The Scott Note is6% Notes were secured by substantially all of the assets of the Company. On September 28, 2012, the original Scott Note was amended to reflect an additional cash investment in the amount of $131,680 made by Mr. Scott, which resulted in a new principal balance owed by the Company to Mr. Scott in the amount of $413,680. The amended Scott Note included a fixed per share conversion price of $0.007.
On February 8, 2013, Eric Shevin, an independent Board Member, exercised options to purchase 470,237 shares of the Company’s common stock for $9,000.
On June 7, 2013, in connection with the Company’s acquisition of Rocky Mountain Hydroponics, LLC and Evergreen Garden Center, LLC (“RMH/EGC”) (see “NOTE 6 – PURCHASE – ROCKY MOUNTAIN HYDROPONICS and EVERGREEN GARDEN CENTER"), the Company issued 3,333,942 shares of itswere convertible into common stock at the rate of $0.007 per share. The Company determined that the conversion feature was a per share pricebeneficial conversion feature.
As of $0.035 ($116,688 inSeptember 10, 2014, the aggregate)outstanding principal balance on Mr. Scott’s 6% convertible note was $413,680 and accrued interest were sold to Rob Hunt,two parties not related to us. On April 27, 2015, the President of GrowLife Hydroponics, Inc. and a memberCompany entered into Amendment One of the Company’s Board of Directors. The shares were issued as consideration for the purchase of RMH/EGC, of which he is a former owner. The Company also issued a 12%Amended and Restated 6% Senior Secured Convertible Note, (see “NOTE 18 –which increased the interest rate to 12% SENIOR SECURED CONVERTIBLE NOTE”)effective April 8, 2014 and extended the maturity to September 15, 2015.
On July 9, 2015, the two investors each entered into Amendment Two of the Amended and Restated 6% Senior Secured Convertible Note which provide for an increase in the interest rate from 6% to 10% and the default interest rate from 12% to 20% on the 6% Senior Secured Convertible Notes for so long as the Company remains in technical default on said notes due to its delisting from its Primary Trading Market April 2014. The Company further agreed that said 20% default interest will be applied to the date of default on April 10, 2014 and continuing through the date of conversion.
During the year ended December 31, 2015, the Company recorded interest expense of $26,964 and $20,486 of non-cash interest expense related to the amortization of the debt discount associated with these 6% convertible notes, respectively. As of December 31, 2015, the outstanding principal on these 6% convertible notes was $413,680, accrued interest was $172,494, and unamortized debt discount was $0, which results in a net amount of $408,000$586,174.
During the year ended December 31, 2016, the Company recorded interest expense of $105,016 related to Mr. Hunt as additional consideration for the Company’s acquisitionthese 6% convertible notes. Two investors converted principal and interest of RMH/EGC.
In November 2013, the Company’s Board of Directors approved a stock option grant to Mr. Hunt via the Company’s 2011 Stock Incentive Plan to purchase 12,000,000$413,680 and $67,418, respectively, into shares of the Company’s common stock at an exercisea per share conversion price of $0.043$0.007. As of December 31, 2016, the outstanding principal and interest on these 6% convertible notes was $0.
6% Secured Convertible Note and Secured Credit Facility (2014)
The Company entered into a Secured Convertible Note and Secured Credit Facility dated June 25, 2014 with Logic Works whereby Logic Works agreed to provide up to $500,000 in funding. Each funding requires approval in advance by Logic Works, provided for interest at 6% with a default interest of 24% per share,annum and requires repayment by June 26, 2016. The Note is convertible into common stock of the Company at the lesser of $0.007 or (B) twenty percent (20%) of the average of the three (3) lowest daily VWAPs occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable conversion date on which representsLogic Works elects to convert all or part of this 6% Convertible Note, subject to adjustment as provided in the fair valueNote.
On July 10, 2014, the Company closed a Waiver and Modification Agreement, Amended and Restated Joint Venture Agreement, Secured Credit Facility and Secured Convertible Note with CANX, and Logic Works, a lender and shareholder of one sharethe Company.
During the year ended December 31, 2015, the Company recorded interest expense of $21,000 and $177,384 of non-cash interest expense related to the amortization of the debt discount associated with these 6% convertible notes, respectively. As of December 31, 2015, the Company has borrowed $350,000 under the Secured Convertible Note and Secured Credit Facility, accrued interest was $30,641 and the unamortized debt discount was $83,924, which results in a net amount of $296,717.
During the year ended December 31, 2016, the Company recorded interest expense of $20,837 and $83,924 of non-cash interest expense related to the amortization of the debt discount associated with this 6% convertible note, respectively. Logic Works converted interest of $47,386 into shares of the Company’s common stock on June 7, 2013. The option grantat a per share conversion price of $0.0036.
As of December 31, 2016, the Company has borrowed $330,295 under the Secured Convertible Note and Secured Credit Facility, accrued interest was made retro-active to June 7,$3,692 and the unamortized debt discount was $0, which results in a net amount of $333,987.
7% Convertible Notes Payable
On October 11, 2013, the Company issued 7% Convertible Notes in the aggregate amount of $850,000 to investors, including $250,000 to Forglen LLC. The Note was due September 30, 2015. All other Notes were converted in 2014. On July 14, 2014, the Board of Directors approved a Settlement Agreement and Waiver of Default dated June 19, 2014 with Forglen related to the 7% Convertible Note. The Company cancelled the April 9, 2014 conversion as a result of the SEC suspension in the trading of the Company’s securities and Forglen has $250,000 of principal and interest outstanding on its note payable as of December 31, 2015 and September 30, 2016. The current annual rate of interest is 24% per annum. The conversion price was $0.007 per share. The Company determined that the conversion feature was a beneficial conversion feature.
On December 20, 2013, the Company issued 7% Convertible Notes for $1,000,000, including $500,000 from Logic Works LLC. The principal balance due to Logic Works of $250,000 was due September 30, 2015. The current annual rate of interest is 24% per annum. The conversion price was $0.007 per share. The Company determined that the conversion feature was a beneficial conversion feature.
During the year ended December 31, 2015, the Company recorded interest expense of $105,041 and $174,252 of non-cash interest expense related to the amortization of the debt discount associated with these 7% convertible notes, respectively. As of December 31, 2015, the outstanding principal on these 7% convertible notes was $500,000, accrued interest was $238,606, and unamortized debt discount was $0, which results in a net amount of $738,606.
During the year ended December 31, 2016, the Company recorded interest expense of $0 related to these 7% convertible notes. Logic Works converted principal of $250,000 and interest of $75,149 and interest of into shares of the Company’s common stock at a per share conversion price of $0.004 to $0.007. As of December 31, 2016, the outstanding principal on these 7% convertible notes was $250,000, accrued interest was $164,137, and unamortized debt discount was $0, which results in a net amount of $414,137.
Funding from TCA Global Credit Master Fund, LP (“TCA”)
The First TCA SPA. On July 9, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP (“TCA”), an accredited investor, whereby the Company agreed to sell and TCA agreed to purchase up to $3,000,000of senior secured convertible, redeemable debentures, of which $700,000 was purchased on July 9, 2015 and up to $2,300,000 could be purchased in additional closings. The closing of the transaction (the “First TCA SPA”) occurred on July 9, 2015. Effective as of May 4, 2016, the Company and TCA entered into a First Amendment to the First TCA SPA whereby the parties agreed to amend the terms of the First TCA SPA in exchange for TCA’s forbearance of existing defaults by the Company.
The Second TCA SPA. On August 6, 2015, the Company closed a second Securities Purchase Agreement and related agreements with TCA whereby the Company agreed to sell and TCA agreed to purchase a $100,000 senior secured convertible redeemable debenture and the Company agreed to issue and sell to TCA, from time to time, and TCA agreed to purchase from the Company up to $3,000,000 of the Company’s common stock pursuant to a committed equity facility. The closing of the transaction (the “Second TCA SPA”) occurred on August 6, 2015. On April 11, 2016, the Company agreed with TCA to mutually terminate the Second TCA SPA.
Amendment to the First TCA SPA. On October 27, 2015, the Company entered into an Amended and Restated Securities Purchase Agreement and related agreements with TCA whereby the Company agreed to sell, and TCA agreed to purchase $350,000 of senior secured convertible, redeemable debentures. This was an amendment to the First TCA SPA (the “Amendment to the First TCA SPA”.) As of October 27, 2015, the Company sold $1,050,000 in Debentures to TCA and up to $1,950,000 in Debentures remained for sale by the Company. The closing of the Amendment to the First TCA SPA occurred on October 27, 2015. In addition, TCA has advanced the Company an additional $100,000 for a total of $1,150.000.
Issuance of Preferred Stock to TCA. Also, on October 21, 2015 the Company issued 150,000 Series B Preferred Stock at a stated value equal to $10.00 per share to TCA. The Series B Preferred Stock is convertible into common stock by dividing the stated value of the shares being converted by 100% of the average of the five (5) lowest closing bid prices for the common stock during the ten (10) consecutive trading days immediately preceding the conversion date as quoted by Bloomberg, LP. On October 21, 2015, we also issued 51 shares of Series C Preferred Stock at $0.0001 par value per share to TCA. The Series C Preferred Stock is not convertible into our common stock. In the event of a default under the Amended and Restated TCA Transaction Documents, TCA can exercise voting control over our common stock with their Series C Preferred Stock voting rights.
TCA’s Forbearance. Due to the Company’s default on which Mr. Hunt becameits repayment obligations under the TCA SPA’s and related documents, the parties agreed to restructure the SPA’s whereby TCA agreed to forbear from enforcement of our defaults and to restructure a Directorpayment schedule for repayment of debt under the SPAs. The Company defaulted because our operating results were not as expected and the Company was unable to generate sufficient revenue through its business operations to serve the TCA debt. Specifically, the First Amendment to Amended and Restated Securities Purchase Agreement made the following material modifications to the existing SPA’s:
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All unpaid debentures were modified as described in more detail below.
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Payments on the debentures shall be made by (i) debt purchase agreement(s) to be entered into by TCA, (ii) through proceeds raised from the transaction(s) with Chicago Venture; or (iii) by the Company directly.
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The due date of the debentures was extended to April 28, 2018.
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TCA agreed that it shall not enforce and shall forbear from pursuing enforcement of any existing defaults by us unless and until a future Company default occurs.
In furtherance of TCA’s forbearance, effective as of May 4, 2016, the Company issued Second Replacement Debenture A in the principal amount of $150,000 and Second Replacement Debenture B in the principal amount of $2,681,210 (collectively, the “Second Replacement Debentures”).
Per the First Amendment to the Amended and Restated Securities Purchase Agreement, the Second Replacement Debentures were combined, and apportioned into two separate replacement debentures. The Second Replacement Debentures were intended to act in substitution for and to supersede the debentures in their entirety. It was the intent of the Company and TCA that while the PresidentSecond Replacement Debentures replace and supersede the debentures, in their entirety, they were not in payment or satisfaction of GrowLife Hydroponics, Inc. Perthe debentures, but rather were the substitute of one evidence of debt for another without any intent to extinguish the old debt. As of September 30, 2016, the maximum number of shares subject to conversion under the Second Replacement Debentures is19,401,389. This is an approximation. The estimation of the maximum number of shares issuable upon the conversion of the Second Replacement Debentures was calculated using an estimated average price of $0.0036 per share.
The Second Replacement Debentures contemplate TCA entering into debt purchase agreement(s) with third parties whereby TCA may, at its election, sever, split, divide or apportion the Second Replacement Debentures to accomplish the repayment of the balance owed to TCA by Company. The Second Replacement Debentures are convertible at 85% of the lowest daily volume weighted average price (“VWAP”) of the Company’s common stock during the five (5) business days immediately prior to a conversion date.
In connection with the above agreements, the parties acknowledged and agreed that certain advisory fees previously paid to TCA as provided in the SPAs in the amount of $1,500.000 have been added and included within the principal balance of the Second Replacement Debentures. The advisory fees related to financial, merger and acquisition and regulatory services provided to the Company. The conversion price discount on the Second Replacement Debentures will not apply to the advisory fees added to the Second Replacement Debentures. TCA also agreed to surrender its Series B Preferred Stock in exchange for the $1,500,000 being added to the Second Replacement Debenture.
As more particularly described below, the Company remains in debt to TCA for the principal amount of $1,500,000. The remaining $1,400,000 of principal debt was assigned to Old Main Capital, LLC (see discussion immediately below.) The Company intends to use the funds generated from the Chicago Venture transaction to fuel its business operations and business plans which, in turn, will presumably generate revenues sufficient to avoid another default in the remaining TCA obligations. If the Company is unable to raise sufficient funds through the Chicago Venture transaction and/or generate sales sufficient to service the remaining TCA debt then the Company will be unable to avoid another default. Failure to operate in accordance with the various agreements with TCA could result in the cancellation of these agreements, result in foreclosure on the Company’s assets in an event of default which would have a material adverse effect on our business, results of operations or financial condition.
At the date of the TCA debt restructuring the remaining unamortized discount was expensed to interest in the amount of $482,112 and the Company recognized a loss on restructuring of $ 279,897.
As of December 31, 2016, the Company is indebted to TCA under the First and Second Replacement Debentures in the amount of $1,468,009, accrued interest was $18,350 and the unamortized debt discount was $0, which results in a net amount of $1,486,359.
During the year ended December 31. 2016, Old Main converted principal and accrued interest of $757,208 into 144,650,951 shares of our common stock at a per share conversion price of $0.0052.
During the year ended December 31, 2016, Chicago Venture converted principal and accrued interest of $1,403,599 into 264,672,323 shares of our common stock at a per share conversion price of $0.0053.
During the year ended December 31. 2016, the Company recorded the unamortized debt discount reversal of $750,339 related to the TCA financing as a reduction in additional paid in capital because TCA did not convert its debt but assigned its debentures to others.
The Company has recorded a loss on these transactions in the amount of $2,889,540. The loss on debt conversions related to the conversion of our notes payable at prices below the market price.
On January 10, 2017, Chicago Venture, at the Company’s instruction, remitted funds of $1,495,901 to TCA in order to satisfy all debts to TCA. On or around January 11, 2017, the Company was notified by TCA that $13,540 were due to TCA in order for TCA to release its security interest in the Company’s assets. On February 1, 2017, TCA notified the Company that all funds were received and TCA would release its security interest in Company’s assets. TCA has confirmed that it is paid in full and the Company is not aware of any other obligations that the Company has as to TCA. The funds received under the Chicago Venture Agreements and previous Chicago Venture Agreements were used to pay-off TCA.
TCA Assignment of Debt to Old Main Capital, LLC
On June 9, 2016, the Company closed a Debt Purchase Agreement and related agreements (the “Old Main Transaction Documents”) with TCA and Old Main Capital, LLC (“Old Main”) whereby TCA agreed to sell and Old Main agreed to purchase in multiple tranches $1,400,000 in senior secured convertible, redeemable debentures (the “Assigned Debt”) (the “Old Main Transaction”). The Assigned Debt was our debt incurred in the TCA financing transactions that closed in 2015. We were required to execute the Old Main Transaction Documents as the Company is the “borrower” on the Assigned Debt.
Debt Purchase Agreement.As set forth above, the Company entered into the Debt Purchase Agreement on June 9, 2015 with TCA and Old Main whereby Old Main agreed to purchase, in tranches, $1,400,000 of debt previously held by TCA. The Company executed the Debt Purchase Agreement as it was the “borrower” under the Assigned Debt and was required to make certain representations and warranties regarding the Assigned Debt. The Assigned Debt is represented by a new “10% Senior Convertible Promissory Note” entered into by and between Old Main and the Company (more particularly described below.)
Exchange Agreement.In conjunction with the Debt Purchase Agreement, on June 9, 2016, the Company entered into an Exchange Agreement whereby we agreed to exchange, in tranches, the Assigned Debt, as well as any amendments thereto, with a 10% Senior Convertible Promissory Note (the “Note”)having a principal balance of $1,400,000. The closing dates for the exchanges, scheduled to occur in tranches, are set forth in Schedule 1 attached to the Exchange Agreement.
10% Senior Convertible Promissory Note.Pursuant to the Exchange Agreement, the Company entered into a 10% Senior Convertible Promissory Note dated June 9, 2016 with Old Main whereby the Company agreed to be indebted to Old Main for the Assigned Debt. The Company promised to pay Old Main, by no later than the maturity date of June 9, 2017 the outstanding principal of the Assigned Debt together with interest on the outstanding principal amount under the Note, at the rate of ten percent (10%) per annum simple interest.
At any time after June 9, 2016, and while the Note is still outstanding and at the sole option of Old Main, Old Main may convert all or any portion of the outstanding principal, accrued and unpaid interest redemption premium and any other sums due and payable hereunder or under any of the other Transaction Documents into shares of our Common Stock at a price equal to the lower of: (i) sixty-five percent (65%) of the lowest traded price of the Company’s Common Stock during the thirty (30) trading days prior to the Conversion Date; or (ii) sixty-five percent (65%) of the lowest traded price of the Common Stock in the thirty (30) Trading Days prior to the Closing Date.
Option Agreement.In connection with the Old Main Transaction Documents, TCA and Old Main entered into an Option Agreement dated June 8, 2016 whereby TCA agreed to grant Old Main an option to purchase the Assigned Debt, or any portion thereof, under the terms and conditions of the Debt Purchase Agreement. In consideration, Old Main agreed to pay the Option Payment as more particularly described in the Option Agreement.
On August 24, 2016, TCA terminated its Debt Purchase Agreement and related agreements with Old Main. The specific termination date is September 25, 2016, and Old Main had a right to purchase an additional $300,000 in debt from TCA.
During the year ended December 31. 2016, Old Main converted principal and accrued interest of $757,208 into 144,650,951 shares of our common stock at a per share conversion price of $0.0052.
Funding from Chicago Venture Partners, L.P. (“Chicago Venture”)
Securities Purchase Agreement with Chicago Venture Partners, L.P. As of April 4, 2016, the Company entered into a Securities Purchase Agreement and Convertible Promissory Note (the “Chicago Venture Note”) with Chicago Venture, whereby we agreed to sell, and Chicago Venture agreed to purchase an unsecured convertible promissory note in the original principal amount of $2,755,000. In connection with the transaction, the Company received $350,000 in cash as well as a series of twelve Secured Investor Notes for a total Purchase Price of $2,500,000. The Note carries an Original Issue Discount (“OID”) of $250,000 and we agreed to pay $5,000 to cover Purchaser’s legal fees, accounting costs and other transaction expenses.
The Secured Investor Notes are payable (i) $50,000 upon filing of a Registration Statement on Form S-1; (ii) $100,000 upon effectiveness of the Registration Statement; and (iii) up to $200,000 per month over the 10 months following effectiveness at our sole discretion, subject to certain conditions. The Company filed the Registration Statement within forty-five (45) days of the Closing and agreed to register shares of our common stock for the benefit of Chicago Venture in exchange for the payments under the Secured Investor Notes.
Chicago Venture has the option agreement,to convert the shares were to vestNote at 65% of the average of the three (3) lowest volume weighted average prices in twenty-four (24) equal monthly installmentsthe twenty (20) Trading Days immediately preceding the applicable conversion (the “Conversion Price”). However, in no event will the Conversion Price be less than $0.02 or greater than $0.09. In addition, beginning on the lastdate that is the earlier of six (6) months or five (5) days after the Registration Statement becomes effective, and on the same day of each month commencingthereafter, the Company will re-pay the Note in monthly installments in cash, or, subject to certain Equity Conditions, in the Company’s common stock at 65% of the average of the three (3) lowest volume weighted average prices in the twenty (20) Trading Days immediately preceding the applicable conversion (the “Installment Conversion Price”).
As discussed above, once effective, the Company has the discretion to require Chicago Venture to sell to us up to $200,000 per month over the next 10 months on the above terms. The Company would then have the option to issue shares registered under this Registration Statement to Chicago Venture. Through this prospectus, the selling stockholder may offer to the public for resale shares of the Company’s common stock that we may issue to Chicago Venture pursuant to the Chicago Venture Note.
For a period of no more than 36 months from the effective date of the Registration Statement, we may, from time to time, at the Company’s sole discretion, and subject to certain conditions that we must satisfy, draw down funds under the Chicago Venture Note.
The Company’s ability to require Chicago Venture to fund the Chicago Venture Note is at its 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 the Company’s common stock for the twenty (20) and sixty (60) trading days immediately preceding the funding date are greater than $100,000; (ii) the Company’s market capitalization on the funding date is greater than $17,000,000; (iii) the Company is not in default with respect to share delivery obligations under the note as of the funding date; and (iv) the Company is current in its reporting obligations. Chicago Venture’ obligations under the equity line are not transferable.
The issuance of the Company’s common stock under the Chicago Venture Note will have no effect on the rights or privileges of existing holders of common stock except that the economic and voting interests of each stockholder will be diluted as a result of any such issuance. Although the number of shares of common stock that stockholders presently own will not decrease, these shares will represent a smaller percentage of the Company’s total shares that will be outstanding after June 7, 2013, theyany issuances of shares of common stock to Chicago Venture. If the Company’s draw down amounts under the Chicago Venture Note when the Company’s share price is decreasing, the Company will need to issue more shares to repay the same amount than if the Company’s stock price was higher. Such issuances will have a dilutive effect and may further decrease our stock price.
There is no guarantee that the Company will be able to meet the foregoing conditions or any other conditions under the Securities Purchase Agreement and/or Chicago Venture Note or that the Company will be able to draw down any portion of the amounts available under the Securities Purchase Agreement and/or Chicago Venture Note. However, the Company does believe there is a strong likelihood, as long as we can meet the various conditions to funding, that the Company will receive the full amount of funding under the equity line of credit. Given the Company’s financial challenges and the competitive nature of our business, the Company also believes it will need the full amount of funding under the equity line of credit in order to fully realize the business plans.
A portion of the funds received from Chicago Venture will be used to pay off TCA, a previous equity financing partner and a portion will be invested in our business. Specifically, the Company anticipates that approximately $1,400,000 is expected to be used to pay TCA and the remaining funds, if any, will be used for general business purposes such as marketing, product development, expansion and administrative costs. The Company is not aware of any relationship between TCA and Chicago Venture. The Company has had no previous transactions with Chicago Venture or any of Chicago Venture’s affiliates. The Company cannot predict whether the Chicago Venture transaction will have either a positive or negative impact on our stock price. However, in addition to the fact that each Chicago Venture conversion, when and if it occurs, has a dilutive effect on the Company’s stock price, that should Chicago Venture convert large portions of the debt into registered shares and then sells those shares on the market, that the Company’s stock price could be exerciseddepressed.
As of December 31, 2016, the outstanding balance due to Chicago Venture is $683,042, accrued interest was $2,670, net of the OID of $121,395, which results in a net amount of $564,317. The OID has been recorded as a discount to debt and will be amortized over the life of the loan.
During the year ended December 31. 2016, Chicago Venture converted principal and accrued interest of $1,403,599 into 264,672,323 shares of our common stock at any time ona per share conversion price of $0.0053.
On January 10, 2017, Chicago Venture, at the Company’s instruction, remitted funds of $1,495,901 to TCA in order to satisfy all debts to TCA. On or afteraround January 11, 2017, the grant date,Company was notified by TCA that $13,540 were due to TCA in order for TCA to release its security interest in the term was ten years,Company’s assets. On February 1, 2017, TCA notified the Company that all funds were received and TCA would release its security interest in Company’s assets. TCA has confirmed that it is paid in full and the optionsCompany is not aware of any other obligations that the Company has as to TCA. The funds received under the Chicago Venture Agreements and previous Chicago Venture Agreements were used to pay-off TCA.
Debt Purchase Agreement and First Amendment to Debt Purchase Agreement and Note Assignment AgreementOn August 24, 2016, the Company closed a Debt Purchase Agreement and a First Amendment to Debt Purchase Agreement and related agreements with Chicago Venture and TCA.
On August 24, 2016, TCA closed an Assignment of Note Agreement and related agreements with Chicago Venture. The referenced agreements relate to the assignment of Company debt, in the form of debentures, by TCA to Chicago Venture. The Company was a party to the agreements between TCA and Chicago Venture because the Company is the “borrower” under the TCA held debentures.
Exchange Agreement, Convertible Promissory Note and related Agreements with Chicago VentureOn August 17, 2016, the Company closed an Exchange Agreement and a Convertible Promissory Note and related agreements with Chicago Venture whereby the Company agreed to the assignment of debentures representing debt between the Company, on the one hand, and with TCA, on the other hand. Specifically, the Company agreed that TCA could assign a portion of the Company’s debt held by TCA to Chicago Venture.
According to the Exchange Agreement, the debt is to be exercisedassigned in tranches, with the first tranche of debt assigned from TCA to Chicago Venture being $128,000 which is represented by an Initial Exchange Note as defined in the Exchange Agreement.
NOTE 7 – 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 cashless basis.reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants or conversion features with such provisions are no longer recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price.
Derivative liability as of December 31, 2016 is as follows:
| | | | |
| Fair Value Measurements Using Inputs | |
Financial Instruments | | | | |
| | | | |
Liabilities: | | | | |
Derivative Instruments | $- | $2,701,559 | $- | $2,701,559 |
| | | | |
Total | $- | $2,701,559 | $- | $2,701,559 |
For the year ended December 31, 2016, the Company recorded non-cash income of $1,324,384 related to the “change in fair value of derivative” expense related to its 6%, 7% and 18% convertible notes
Derivative liability as of December 31, 2015 is as follows:
| | | | |
| Fair Value Measurements Using Inputs | |
Financial Instruments | | | | |
| | | | |
Liabilities: | | | | |
Derivative Instruments | $- | $1,377,175 | $- | $1,377,175 |
| | | | |
Total | $- | $1,377,175 | $- | $1,377,175 |
For the year ended December 31, 2015, the Company recorded non-cash income of $723,740 related to the “change in fair value of derivative” expense related to its 6%, 7% and 18% convertible notes.
The risk-free rate of return reflects the interest rate for the United States Treasury Note with similar time-to-maturity to that of the warrants.
7% Convertible Notes
As of December 31, 2015, the Company had outstanding 7% convertible notes for $500,000 that the Company determined had an embedded derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the optionsderivative liability of these notes at $228,000$105,515 using the Black-ScholesBlack-Scholes-Merton option pricing model, usingwhich approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions:assumptions (i) dividend yield of 0%; (ii) expected volatility of 82.77%133.2%; (iii) risk free rate of 0.04%.001%, (iv) stock price of $.005, (v) per share conversion price of $0.007, and (vi) expected term of 2.25 years, and a per share market price of $0.043, which was the closing price of the Company’s shares on June 7, 2013. Beginning in June 2013 and ending May 2015,as the Company will expenseestimated that these notes would be converted by March 31, 2016.
As of December 31, 2016, the $228,000 atCompany had outstanding 7% convertible notes with a remaining balance of $250,000 that the rate of $9,500 per month overCompany determined had an embedded derivative liability due to the 24-month vesting term of“reset” clause associated with the option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”).
In November 2013, the Company’s Board of Directors granted Sterling Scott, the Company’s Chief Executive Officer, a stock option via the Company’s 2011 Stock Incentive Plan to purchase 12,000,000 shares of the Company’s common stock. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing on October 31, 2013. The term is ten years and the options include a cashless exercise feature.note’s conversion price. The Company valued the optionsderivative liability of these notes at $537,600$1,495,495 using the Black-ScholesBlack-Scholes-Merton option pricing model, usingwhich approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions:assumptions (i) dividend yield of 0%; (ii) expected volatility of 82.77%160.0%; (iii) risk free rate of 0.02%.001%, (iv) stock price of $0.017, (v) per share conversion price of $0.0036, and (vi) expected term of 3.25 years, and a per share market priceas the Company estimates that the balance of $0.085, which was the closing pricethese notes will be converted by March 31, 2017.
6% Convertible Notes
As of the Company’s shares on November 1, 2013. Beginning in November 2013 and ending OctoberDecember 31, 2015, the Company will expensehad outstanding unsecured 6% convertible notes for $350,000 that the $537,600 atCompany determined were a derivative liability due to the rate of $22,400 per month over“reset” clause associated with the 24-month vesting term of the option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”).
In November 2013, the Company’s Board of Directors granted John Genesi, the Company’s Chief Financial Officer, a stock option via the Company’s 2011 Stock Incentive Plan to purchase 10,000,000 shares of the Company’s common stock. Per the terms of the stock option agreement, the shares were to vest in twenty-four (24) equal monthly installments on the last day of each month commencing from and after October 31, 2013, they could be exercised at any time on or after the grant date, the term was ten years, and the options could be exercised on a cashless basis.note’s conversion price. The Company valued the optionsderivative liability of these notes at $448,000$54,377 using the Black-ScholesBlack-Scholes-Merton option pricing model usingmodel. which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions:assumptions (i) dividend yield of 0%; (ii) expected volatility of 82.77%133.2%; (iii) risk free rate of 0.02%0.34%, (iv) stock price of $0.005, (v) per share conversion price of $0.007, and (vi) expected term of 3.56 years.
As of December 31, 2016, the Company had outstanding unsecured 6% convertible notes for $330,295 that the Company determined had an embedded derivative liability due to the “reset” clause associated with the note’s conversion price. The Company valued the derivative liability of these notes at $1,206,064 using the Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions (i) dividend yield of 0%; (ii) expected volatility of 160.0%; (iii) risk free rate of .001%, (iv) stock price of $0.017, (v) per share conversion price of $0.0036, and (vi) expected term of .25 years, as the Company estimates that these notes will be converted by March 31, 2017.
Funding from TCA Global Credit Master Fund, LP (“TCA”).
The First TCA SPA. On July 9, 2015, the Company closed a Securities Purchase Agreement and related agreements with TCA Global Credit Master Fund LP (“TCA”), an accredited investor, whereby the Company agreed to sell and TCA agreed to purchase up to $3,000,000of senior secured convertible, redeemable debentures, of which $700,000 was purchased on July 9, 2015 and up to $2,300,000 may be purchased in additional closings. The closing of the transaction (the “First TCA SPA”) occurred on July 9, 2015. Effective as of May 4, 2016, the Company and TCA entered into a First Amendment to the First TCA SPA whereby the parties agreed to amend the terms of the First TCA SPA in exchange for TCA’s forbearance of existing defaults by the Company.
The Second TCA SPA. On August 6, 2015, the Company closed a second Securities Purchase Agreement and related agreements with TCA whereby the Company agreed to sell and TCA agreed to purchase a $100,000 senior secured convertible redeemable debenture and the Company agreed to issue and sell to TCA, from time to time, and TCA agreed to purchase from the Company up to $3,000,000 of the Company’s common stock pursuant to a committed equity facility. The closing of the transaction (the “Second TCA SPA”) occurred on August 6, 2015. On April 11, 2016, the Company agreed with TCA to mutually terminate the Second TCA SPA.
Amendment to the First TCA SPA. On October 27, 2015, the Company entered into an Amended and Restated Securities Purchase Agreement and related agreements with TCA whereby the Company agreed to sell, and TCA agreed to purchase $350,000 of senior secured convertible, redeemable debentures. This was an amendment to the First TCA SPA (the “Amendment to the First TCA SPA”.) As of October 27, 2015, the Company sold $1,050,000 in Debentures to TCA and up to $1,950,000 in Debentures remain for sale by the Company. The closing of the Amendment to the First TCA SPA occurred on October 27, 2015. In addition, TCA has advanced the Company an additional $100,000 for a total of $1,150.000.
Issuance of Preferred Stock to TCA. Also, on October 21, 2015 the Company issued 150,000 Series B Preferred Stock at a stated value equal to $10.00 per share to TCA. The Series B Preferred Stock is convertible into common stock by dividing the stated value of the shares being converted by 100% of the average of the five (5) lowest closing bid prices for the common stock during the ten (10) consecutive trading days immediately preceding the conversion date as quoted by Bloomberg, LP. On October 21, 2015, we also issued 51 shares of Series C Preferred Stock at $0.0001 par value per share to TCA. The Series C Preferred Stock is not convertible into our common stock. In the event of a default under the Amended and Restated TCA Transaction Documents, TCA can exercise voting control over our common stock with their Series C Preferred Stock voting rights.
TCA’s Forbearance. Due to the Company’s default on its repayment obligations under the TCA SPA’s and related documents, the parties agreed to restructure the SPA’s whereby TCA agreed to forbear from enforcement of our defaults and to restructure a payment schedule for repayment of debt under the SPAs. The Company defaulted because our operating results were not as expected and the Company were unable to generate sufficient revenue through its business operations to serve the TCA debt. Specifically, the First Amendment to Amended and Restated Securities Purchase Agreement made the following material modifications to the existing SPA’s:
●
All unpaid debentures were modified as described in more detail below.
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Payments on the debentures shall be made by (i) debt purchase agreement(s) to be entered into by TCA, (ii) through proceeds raised from the transaction(s) with Chicago Venture; or (iii) by the Company directly.
●
The due date of the debentures was extended to April 28, 2018.
●
TCA agreed that it shall not enforce and shall forbear from pursuing enforcement of any existing defaults by us unless and until a future Company default occurs.
In furtherance of TCA’s forbearance, effective as of May 4, 2016, the Company issued Second Replacement Debenture A in the principal amount of $150,000 and Second Replacement Debenture B in the principal amount of $2,681,210 (collectively, the “Second Replacement Debentures”).
Per the First Amendment to Amended and Restated Securities Purchase Agreement, the Second Replacement Debentures were combined, and apportioned into two separate replacement debentures. The Second Replacement Debentures were intended to act in substitution for and to supersede the debentures in their entirety. It was the intent of the Company and TCA that while the Second Replacement Debentures replace and supersede the debentures, in their entirety, they were not in payment or satisfaction of the debentures, but rather were the substitute of one evidence of debt for another without any intent to extinguish the old debt. As of September 30, 2016, the maximum number of shares subject to conversion under the Second Replacement Debentures is 19,401,389. This is an approximation. The estimation of the maximum number of shares issuable upon the conversion of the Second Replacement Debentures was calculated using an estimated average price of $.0036 per share.
The Second Replacement Debentures contemplate TCA entering into debt purchase agreement(s) with third parties whereby TCA may, at its election, sever, split, divide or apportion the Second Replacement Debentures to accomplish the repayment of the balance owed to TCA by Company. The Second Replacement Debentures are convertible at 85% of the lowest daily volume weighted average price (“VWAP”) of the Company’s common stock during the five (5) business days immediately prior to a conversion date.
In connection with the above agreements, the parties acknowledged and agreed that certain advisory fees previously paid to TCA as provided in the SPAs in the amount of $1,500,000 have been added and included within the principal balance of the Second Replacement Debentures. The advisory fees related too financial, merger and acquisition and regulatory services provided to the Company. The conversion price discount on the Second Replacement Debentures will not apply to the advisory fees added to the Second Replacement Debentures. TCA also agreed to surrender its Series B Preferred Stock in exchange for the $1,500,000 being added to the Second Replacement Debenture.
As more particularly described below, the Company’s remain in debt to TCA for the principal amount of $1,500,000. The remaining $1,400,000 of principal debt was assigned to Old Main Capital, LLC (see discussion immediately below.) The Company intends to use the funds generated from the Chicago Venture transaction to fuel its business operations and business plans which, in turn, will presumably generate revenues sufficient to avoid another default in the remaining TCA obligations. If the Company is unable to raise sufficient funds through the Chicago Venture transaction and/or generate sales sufficient to service the remaining TCA debt then the Company will be unable to avoid another default. Failure to operate in accordance with the various agreements with TCA could result in the cancellation of these agreements, result in foreclosure on the Company’s assets in an event of default which would have a material adverse effect on our business, results of operations or financial condition.
On July 9, 2015, the Company valued the conversion feature as a derivative liability of this senior secured convertible redeemable debenture at $888,134 and discounted debt by $700,000 and recorded interest expense of $188,134. The Company valued the derivative liability of this debenture at $888,134 using the Black-Scholes-Merton option pricing model. which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions (i) dividend yield of 0%; (ii) expected volatility of 160.0%; (iii) risk free rate of 0.25%, (iv) stock price of $0.02, (v) per share conversion price of $0.011, and (vi) expected term of 1.0 years.
At the inception of the Replacement Debentures, the embedded derivative liability was remeasured at fair value and the Company recorded a net gain of $420,822, using the Black-Scholes-Merton option pricing model which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions (i) dividend yield of 0%; (ii) expected volatility of 150.0%; (iii) risk free rate of 0.001%, (iv) stock price of $0.015, (v) per share conversion price of $0.013, and (vi) expected term of 1.0 year.
At inception, the Company valued the conversion feature of the Replacement Debentures as a derivative liability in the amount of $979,716 using the Black-Scholes-Merton option pricing model. which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions (i) dividend yield of 0%; (ii) expected volatility of 150.0%; (iii) risk free rate of .52%, (iv) stock price of $.015, (v) per share conversion price of $0.013, and (vi) expected term of 1.0 years, as the Company estimated that the Replacement Debentures will be converted by September 30, 2017. The amount was recorded as a discount to debt and will be amortized over the life of the debentures.
As of December 31, 2016, the Company remaining debt was below $1,500,000 and does not include a derivative liability.
NOTE 8 – RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS
Since January 1, 2015, the Company engaged in the following reportable transactions with our directors, executive officers, holders of more than 5% of our voting securities, and affiliates or immediately family members of our directors, executive officers and holders of more than 5% of our voting securities.
Certain Relationships
Please see the transactions with CANX, LLC and Logic Works in Note 5, TCA Global Credit Master Fund LP and Chicago Venture Partners, L.P. discussed in Note 4, 6, 7 and 13.
Transactions with an Entity Controlled by Marco Hegyi
An entity controlled by Mr. Hegyi received a warrant to purchase up to twenty five million shares of our common stock at an exercise price of $0.08 per share was reduced to $0.01 per share on December 18, 2015.
On April 15, 2016, the Company issued 1,000,000 shares of its common stock to an entity affiliated with Marco Hegyi, our Chief Executive Officer, pursuant to a conversion of debt for $20,000. The shares were valued at the fair market price of $0.085,$0.02 per share. On October 12, 2016, the Company issued 4,000,000 shares of its common stock to an entity affiliated with Marco Hegyi, pursuant to a conversion of debt for $40,000. The shares were valued at the fair market price of $0.01 per share.
On October 21, 2016, the Company entered into Agreement with Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its Chief Executive Officer through October 20, 2018. Mr. Hegyi’s previous Employment Agreement was dated December 4, 2013 and which is set to expire on December 4, 2016. Mr. Hegyi received a Warrant to purchase up to 10,000,000 shares of common stock of the closingCompany at an exercise price of $0.01 per share. In addition, Mr. Hegyi received Warrants to purchase up to 10,000,000 shares of common stock of the Company at an exercise price of $0.01 per share which vest on October 21, 2017 and 2018. The Warrants are exercisable for 5 years.
Transactions with an Entity Controlled by Mark E. Scott
An entity controlled by Mr. Scott received an option to purchase sixteen million shares of our common stock at an exercise price of $0.07 per share was reduced to $0.01 per share on December 18, 2015. Two million shares vested on August 17, 2015 with the Company’s resolution of the class action lawsuits. An additional two million share stock option vest on April 18, 2016 upon the Company securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB.
On January 4, 2016, the Company issued 3,000,000 shares of its common stock to an entity affiliated with Mark E. Scott, our Chief Financial Officer, pursuant to a conversion of accrued consulting fees and expenses for $30,000. The shares were valued at the fair market price of $0.01 per share. On October 21, 2016, an entity affiliated with Mr. Scott converted $40,000 in accrued consulting fees and expenses into 4,000,000 shares of the Company’s common stock at $0.01 per share. The price per share was based on the thirty-day trailing average. On October 21, 2016, an entity affiliated with Mr. Scott was granted 6,000,000 shares of the Company’s common stock at $0.01 per share. The price per share was based on November 1, 2013. Beginning in November 2013 and endingthe thirty-day trailing average. On October 2015,21, 2016, an entity affiliated with Mr. Scott cancelled stock option grants totaling 12,000,000 shares of the Company’s common stock at $0.01 per share.
Transactions with Michael E. Fasci
On January 27, 2016, the Company will expense the $448,000issued 1,500,000 shares of its common stock to Michael E. Fasci, a Board Director, pursuant to a service award for $15,000. The shares were valued at the ratefair market price of $18,667$0.01 per month over the 24-month vesting term of the option (see “NOTE 23 – STOCKHOLDERS’ DEFICIT”).
In March 2013,share. On May 25, 2016, the Company issued 2,500,000 shares of its common stock to Sterling Scott, the Company’s Chief Executive Officer, as consideration for services provided to the Company. These shares represent an installment due to Mr. Scott in relationMichael E. Fasci pursuant to a Board grant from August 2012.service award for $50,000. The shares were valued at $25,000the fair market price of $0.02 per share.
On October 21, 2016, the Company entered into a Consulting Agreement with an entity controlled by Michael E. Fasci. Mr. Fasci agreed to provide services related to lender management, financing and acquisitions. Mr. Fasci’s compensation is 2,000,000 shares of our common stock valued at $0.01 per share and to be issued on April 21, 2017 and October 21, 2017.
NOTE 9 – EQUITY
Authorized Capital Stock
The Company has authorized 3,010,000,000 shares of capital stock, of which 3,000,000,000 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.
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.
Series B Preferred Stock Designation
In connection with the Amended and Restated Securities Purchase Agreement, the Board of Directors, on October 21, 2015, approved the authorization of a Series B Preferred Stock as provided in our Certificate of Incorporation, as amended.
The Series B Preferred Stock has authorized 150,000 shares with a stated value equal to $10.00 per share. Dividends payable to other classes of stock are restricted until repayment of the aggregate value of Series B Preferred Stock. Upon the Company’s liquidation or dissolution, Series B Preferred Stock has no priority or preference with respect to distributions of any assets by the Company. The Series B Preferred Stock is convertible into common stock by dividing the stated value of the shares being converted by 100% of the average of the five lowest closing bid prices for the common stock during the ten consecutive trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
TCA was issued 150,000 shares of Series B Preferred Stock. However, in no event will Purchaser be entitled to hold in excess of 4.99% of the outstanding shares of common stock of the Company.
In connection with the First Amendment to Amended and Restated Securities Purchase Agreement, TCA surrendered the Series B Preferred Stock.
Series C Preferred Stock Designation
In connection with the Amended and Restated Securities Purchase Agreement, the Board of Directors, on October 21, 2015, approved the authorization of a Series C Preferred Stock as provided in the aggregate.Company’s Certificate of Incorporation, as amended, and the issuance of 51 shares of Series C Preferred Stock. These shares only have voting rights in the event of a default by us under the Amended and Restated Transaction Documents. The Series C Preferred Stock is cancelled with the repayment of the TCA debt.
The Series C Preferred Stock Designation authorizes 51 shares of Series C Preferred Stock. Series C Preferred Stock is not entitled to dividend or liquidation rights and is not convertible into our common stock.
In the event of a default under the Amended and Restated Transaction Documents, each share of Series C Preferred Stock shall have voting votes equal to 0.019607 multiplied by the total issued and outstanding common stock and preferred stock eligible to vote divided by .49 minus the numerator. For example, if the total issued and outstanding common stock eligible to vote is 5,000,000, the voting rights of one share of Series C Preferred Stock shall be equal to 102,036 (e.g. ((0.019607 x 5,000,000/0.49) – (0.019607 x 5,000,000) = 102,036). In the event of a default under the Amended and Restated TCA Transaction Documents, TCA can exercise voting control over our common stock.
In March 2013,connection with the closing of the Chicago Venture transactions which closed on February 1, 2017, TCA surrendered the Series C 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, 2016, the Company had had the following sales of unregistered of equity securities to accredited investors unless otherwise indicated:
On January 4, 2016, the Company issued 2,000,0003,000,000 shares of its common stock to Justin Manns, the Company’s formeran entity affiliated with Mark E. Scott, our Chief Financial Officer, a former member of the Company’s Board of Directors, and the current Controller of GrowLife Hydroponics, Inc. The shares were issued as consideration for services provided to the Company. These shares represent an installment due to Mr. Manns in relationpursuant to a Board grant from August 2012.conversion of accrued consulting fees and expenses for $30,000. The shares were valued at $20,000 in the aggregate.
In November 2013, the Company issued 3,333,333 sharesfair market price of its common stock to Sterling Scott, the Company’s Chief Executive Officer, as consideration for services provided to the Company. These shares represent the final installment due to$0.01 per share. On October 21, 2016, an entity affiliated with Mr. Scott converted $40,000 in relation to a Board grant from August 2012. Theaccrued consulting fees and expenses into 4,000,000 shares were valued at $33,333 in the aggregate.
In November 2013, the Company issued 2,666,667 shares of its common stock to Justin Manns, the Company’s former Chief Financial Officer, a former member of the Company’s Board of Directors, and the current Controller of GrowLife Hydroponics, Inc. The shares were issued as consideration for services provided to the Company. These shares represent the final installment due to Mr. Manns in relation to a Board grant from August 2012. The shares were valued at $26,667 in the aggregate.
On November 30, 2013, Sterling Scott, the Company’s Chief Executive Officer, signed a First Amendment to Amended and Restated 6% Senior Secured Convertible Note (“the Amendment”). The Amendment stated that the Company and Mr. Scott would not effect the conversion of $451,824.12 of principal and accrued and unpaid interest owed by the Company to Mr. Scott via a 6% Senior Secured Convertible Note until after the completion of the Company amending its Certificate of Incorporation to increase the authorized shares of common stock of the Company from 1,000,000,000 to 3,000,000,000. At a conversion price of $0.007 per share, the Amendment prevented 64,546,303 shares of stock being issued upon a potential conversion by Mr. Scott. On February 7, 2014, the Company held a shareholder meeting and proxy which resulted in shareholder approval to increase the number of shares authorized from 1,000,000,000 to 3,000,000,000.
In December 2013, the Company paid $100,000 cash to Eastside Mountain Corporation, which is controlled by Marco Hegyi, the Company’s President and a member of its Board of Directors, to perform a business assessment of the Company.
On December 11, 2013, the Company issued 25,000,000 warrants to Hegyi, LLC (“Hegyi”), an entity controlled by Marco Hegyi, who was hired as President of the Company in December 2013. The warrants have a ten-year term with an original exercise price of $0.08at $0.01 per share. The warrants vest immediately and are exercisable in whole, or in part, at any time and from time to timeprice per share was based on or after the issue date and on or before the termination date. The Company valued the warrants at the time of issuance using the Black-Scholes option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 88.81%; (iii) risk free rate of 0.02% and (iv) expected term of 3 years, which resulted in a value of $1,725,000. As previously stated, the Company will expense the $1,725,000 at the rate of $14,375 per month over the ten-year lifethirty-day trailing average. On October 21, 2016, an entity affiliated with Mr. Scott was granted 6,000,000 shares of the warrant agreement.
Company’s common stock at $0.01 per share. The price per share was based on the thirty-day trailing average. On October 21, 2016, an entity affiliated with Mr. Scott cancelled stock option grants totaling 12,000,000 shares of the Company’s common stock at $0.01 per share.
During the twelve months ended December 31, 2013,On January 27, 2016, the Company issued 1,500,000 shares of its common stock to Eric Shevin, an independent member of the Company’s Board of Directors, as consideration for his service asMichael E. Fasci, a Board member from April 1, 2013 through December 31, 2013.Director, pursuant to a service award for $15,000. The shares were valued at $30,000 in the aggregate.
During the twelve months ended December 31, 2013,fair market price of $0.01 per share. On May 25, 2016, the Company issued 1,683,3332,500,000 shares of its common stock to Bob Kurilko,Michael E. Fasci pursuant to a former independent member of the Company’s Board of Directors, as considerationservice award for his service as a Board member from January 1, 2013 through November 2, 2013.$50,000. The shares were valued at $33,667 in the aggregate.fair market price of $0.02 per share.
In consideration for advisory services provided by TCA to the twelve months ended December 31, 2013,Company, the Company issued 500,00015,000,000 shares of Common Stock during the year ending December 31, 2015. As the common stock was conditionally redeemable, the Company recorded the common stock as mezzanine equity in the accompanying consolidated balance sheet as of December 31, 2015. As of September 30, 2016, the shares are no longer conditionally redeemable and were recorded as issued and outstanding common stock.
The Company issued $2 million in common stock or 115,141,048 shares of our common stock on April 6, 2016 pursuant to the settlement of the Consolidated Class Action and Derivative Action lawsuits alleging violations of federal securities laws that were filed against the Company in United States District Court, Central District of California. The Company accrued $2,000,000 as loss on class action lawsuits and contingent liabilities during the year ending December 31, 2015.
On April 15, 2016, the Company issued 1,000,000 shares of its common stock to Craig Ellins,an entity affiliated with Marco Hegyi, our Chief Executive Officer, pursuant to a former independent memberconversion of the Company’s Board of Directors, as considerationdebt for his service as a Board member from January 1, 2013 through March 31, 2013.$20,000. The shares were valued at $10,000 in the aggregate.
fair market price of $0.02 per share. On December 31, 2013,October 12, 2016, the Company issued 83,3334,000,000 shares of its common stock to Alan Hammer, an independent memberentity affiliated with Marco Hegyi, pursuant to a conversion of the Company’s Board of Directors, as considerationdebt for his service as a Board member from December 17, 2013 through December 31, 2013.$40,000. The shares were valued at $1,667 in the aggregate.fair market price of $0.01 per share.
On December 31, 2013,July 13, 2016, the Company issued 72,2226,000,000 shares of common stock pursuant to Settlement Agreement and Release with Mr. Robert Hunt, a former executive, which were valued at the fair market price of $0.010 per share.
On October 21, 2016, the Company issued 5,020,000 shares to two former directors and a supplier (unaccredited) for services provided. The Company valued the 5,020,000 shares at $0.01 per share or $50,200.
During the year ended December 31. 2016, the Company issued 6,400,000 shares of its common stock to Anthony Ciabattoni, an independent membertwo service providers (one unaccredited) pursuant to conversions of the Company’s Board of Directors, as consideration for his service as a Board member from December 19, 2013 through December 31, 2013.debt totaling $64,000. The shares were valued at $1,444 in the aggregate. Mr. Ciabattoni’sfair market price of $0.010 per share.
During the year ended December 31. 2016, Holders of the Company’s Convertible Notes Payables, converted principal and accrued interest of $1,080,247 into 186,119,285 shares have been issued toof the Ciabattoni Living Trust,Company’s common stock at a per share conversion price of which Mr. Ciabattoni is$0.006.
During the Trustee.year ended December 31. 2016, Old Main converted principal and accrued interest of $757,208 into 144,650,951 shares of our common stock at a per share conversion price of $0.0052.
During the year ended December 31. 2016, Chicago Venture converted principal and accrued interest of $1,403,599 into 264,672,323 shares of our common stock at a per share conversion price of $0.0053.
During the year ended December 31, 2015, the Company had had the following sales of unregistered sales of equity securities:
On December 31, 2013,June 16, 2015, the Company issued 72,2227,772,725 shares of its common stock to Jeff Giarraputo,a supplier pursuant a conversion of debt for $171,000. The shares were valued at the fair market price of $0.022 per share.
On December 18, 2015, the Company issued 2,000,000 shares to two if its former independent Board Directors. The Company valued the 4,000,000 shares at $0.01 per share or $40,000.
Warrants
The Company issued the following warrants during the year ended December 31, 2016.
On October 21, 2016, Mr. Hegyi received a Warrant to purchase up to 10,000,000 shares of common stock of the Company at an independent memberexercise price of $0.01 per share. In addition, Mr. Hegyi received Warrants to purchase up to 10,000,000 shares of common stock of the Company at an exercise price of $0.01 per share which vest on October 21, 2017 and 2018. The Warrants are exercisable for 5 years. The warrants were valued at $390,000 and the Company recorded $23,958 of compensation expense for the warrants that had vested at December 31, 2016.
A summary of the warrants issued as of December 31, 2016 is as follows:
| |
| | |
| | |
| | |
| | |
Outstanding at beginning of period | 565,000,000 | $0.032 |
Issued | 30,000,000 | 0.010 |
Exercised | - | - |
Forfeited | - | - |
Expired | - | - |
Outstanding at end of period | 595,000,000 | $0.031 |
Exerciseable at end of period | 595,000,000 | |
A summary of the status of the warrants outstanding as of December 31, 2016 is presented below:
| |
| | | | |
| | | | |
| | | | |
| | | | |
540,000,000 | 2.31 | $0.033 | 540,000,000 | $0.033 |
55,000,000 | 3.54 | 0.010 | 35,000,000 | 0.010 |
| | | | |
| | | | |
595,000,000 | 2.34 | $0.031 | 575,000,000 | $0.032 |
Warrants totaling 35,000,000 shares of common stock had an intrinsic value of $245,000 as of December 31, 2016.
NOTE 10– STOCK OPTIONS
Description of Stock Option Plan
In fiscal year 2011, the Company authorized a Stock Incentive Plan whereby a maximum of 18,870,184 shares of the Company’s common stock could be granted in the form of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, and Other Stock-Based Awards. On April 18, 2013, the Company’s Board of Directors voted to increase to 35,000,000 the maximum allowable shares of the Company’s common stock allocated to the 2011 Stock Incentive Plan. The Company has outstanding unexercised stock option grants totaling 12,010,000 shares as consideration for his service as a Board member from December 19, 2013 throughof December 31, 2013. 2016. All grants are non-qualified as the plan was not approved by the shareholders within one year of its adoption.
Determining Fair Value under ASC 505
The shares were valued at $1,444 inCompany records compensation expense associated with stock options and other equity-based compensation using the aggregate.
Commencing in August 2012, outside board members were awarded 2,000,000 shares per year which vest quarterly.
Our boardBlack-Scholes-Merton option valuation model for estimating fair value of directors conducts an appropriate reviewstock options granted under our plan. The Company amortizes the fair value of and oversees all related party transactionsstock options on a continuingratable basis and reviews potential conflictover the requisite service periods, which are generally the vesting periods. The expected life of interest situations where appropriate. Our boardawards granted represents the period of directors has not adopted formal standards to apply when it reviews, approves or ratifies any related party transaction. However, our board of directors believestime that the related party transactionsthey are fair and reasonable to our company and on terms comparable to those reasonably 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, 2016, the Company had the following stock option activity:
An entity controlled by Mr. Scott had a two million share stock option that was previously issued vest on April 18, 2016 upon the Company securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB.
An employee resigned January 13, 2016 and an option to purchase five million shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan expired on April 13, 2016.
An employee forfeited a stock grant for 10,000 shares of the Company’s common stock during the nine months ended September 30, 2016.
On October 12, 2016, the Company amended the exercise price of the stock option grants for Mr. Barnes to $0.010 per share.
On October 21, 2016, Mr. Scott cancelled stock option grants totaling 12,000,000 shares of the Company’s common stock at $0.01 per share. Mr. Scott has an additional 2,000,000 share stock option grant which continues to vest monthly over 36 months and a 2,000,000 share stock option grant which vests upon the achievement of certain performance goals related to acquisitions.
During the year ended December 31, 2015, the Company had the following stock option activity:
Mr. Adam Edwards resigned July 11, 2015 and an option to purchase four million five hundred thousand shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at $0.05 per shares expired on October 10, 2015.
Ms. Tina Qunell resigned July 2, 2015 and an option to purchase seven million shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at $0.05 per share expired on October 1, 2015.
Resigned employees forfeited options to purchase 200,000 shares of the Company’s common stock under the Company’s 2011 Stock Incentive Plan at $0.05 per share expired during the year ended December 31, 2015.
As of December 31, 2016, there are 12,010,000 options to purchase common stock at an average exercise price of $0.010 per share outstanding under the 2011 Stock Incentive Plan. The Company recorded $121,770 and $175,661 of compensation expense, net of related tax effects, relative to stock options for the years ended December 31, 2016 and 2015 in accordance with ASC 505. Net loss per share (basic and diluted) associated with this expense was approximately ($0.00). As of December 31, 2016, there is $22,631 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 2.88 years.
Stock option activity for the years ended December 31, 2016 and 2015 is as follows:
| |
| | | |
Outstanding as of December 31, 2014 | 40,720,000 | $0.058 | $2,356,000 |
Granted | - | - | (960,000) |
Exercised | - | - | - |
Forfeitures | (11,700,000) | (0.050) | (585,000) |
Outstanding as of December 31, 2015 | 29,020,000 | 0.028 | 811,000 |
Granted | - | - | - |
Exercised | - | - | - |
Forfeitures | (17,010,000) | (0.041) | (690,500) |
Outstanding as of December 31, 2016 | 12,010,000 | $0.010 | $120,500 |
The following table summarizes information about stock options outstanding and exercisable at December 31, 2016:
| | | | | |
| | | | | |
| | | | | |
| | | | | |
$0.05 | 10,000 | 3.11 | $0.050 | 6,667 | $0.050 |
| 12,000,000 | 2.88 | 0.010 | 8,277,778 | 0.010 |
| 12,010,000 | 2.88 | $0.010 | 8,284,444 | $0.010 |
Stock option grants totaling 12,010,000 shares of common stock have an intrinsic value of $84,070 as of December 31, 2016.
NOTE 11 – COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
Legal Proceedings
The Company is involved in the disputes and legal proceedings described below. In addition, as a public company, the Company is also potentially susceptible to litigation, such as claims asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. The Company accrues any contingent liabilities that are likely.
Class Actions Alleging Violations of Federal Securities Laws
Beginning on April 18, 2014, three class action lawsuits alleging violations of federal securities laws were filed against the Company in United States District Court, Central District of California (the “Court”). On May 15, 2014 and August 4, 2014, respectively two shareholder derivative lawsuits were filed against the Company with the Court (the “Derivative Actions”). On October 20, 2014, AmTrust North America, our insurer, filed a lawsuit contesting insurance coverage on the above legal proceedings. The Company accrued $2,000,000 as settlement of the Consolidated Class Action and Derivative Action lawsuits alleging violations of federal securities laws that were filed against the Company during the year ending December 31, 2015. The Company issued $2 million in common stock or 115,141,048 shares of the Company’s common stock on April 6, 2016 pursuant to the settlement of the Consolidated Class Action and Derivative Action lawsuits alleging violations of federal securities laws that were filed against the Company in United States District Court, Central District of California.
Sales, Payroll and Other Tax Liabilities
As of December 31, 2016, the Company owes approximately $128,989 in sales tax.
Potential Convertible Note Defaults
Several of the Company’s convertible promissory notes remain outstanding beyond their respective maturity dates. This may trigger an event of default under the respective agreements. The Company is working with these noteholders to convert their notes into common stock and intends to resolve these outstanding issues as soon as practicable.
Other Legal Proceedings
The Company been sued for non-payment of lease payments at closed stores in Boulder, Colorado and Plaistow, New Hampshire. The Company is currently subject to legal actions with various vendors.
It is possible that additional lawsuits may be filed and served on the Company.
Operating Leases
On December 7, 2016, the Company entered into entered into a Consent to Judgement and Settlement Agreement related to its retail hydroponics store located in Portland, Maine. This Agreement provides for a monthly lease payment of $4,668 through May 2, 2017. If the Company is in compliance with the Settlement Agreement, it can can extend the lease from May 2, 2017 to May 1, 2020 at the monthly lease payment of $5,373. The Company also agreed to a repayment schedule for past due rent of $70,013. The Company does not have an option to extend the lease after May 1, 2020.
On October 21, 2013, the Company entered into a lease agreement for retail space for its hydroponics store in Avon (Vail), Colorado. The lease expires on September 30, 2018. Monthly rent for year one of the lease is $2,606 and increases 3.5% per year thereafter through the end of the lease. The Company does not have an option to extend the lease.
On May 31, 2016, the Company rented space at 5400 Carillon Point, Kirkland, Washington 98033 for $1,539 per month for its corporate office. The Company’s agreement expires May 31, 2017 and can be extended.
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, | |
2017 | $115,205 |
2018 | 15,579 |
2019 | 0 |
2020 | 0 |
2021 | - |
Beyond | - |
Total | $130,784 |
Employment and Consulting Agreements
Employment Agreement with independent third partiesMarco Hegyi
On October 21, 2016, the Company entered into an Employment Agreement with Marco Hegyi pursuant to which the Company engaged Mr. Hegyi as its Chief Executive Officer through October 20, 2018. Mr. Hegyi’s previous Employment Agreement was dated December 4, 2013 and which is set to expire on December 4, 2016.
Mr. Hegyi’s annual compensation is $250,000. Mr. Hegyi is also entitled to receive an annual bonus equal to four percent (4%) of the Company’s EBITDA for that year. The annual bonus shall be paid no later than 31 days following the same goods and/or servicesend of each calendar year.
Mr. Hegyi received a Warrant to purchase up to 10,000,000 shares of common stock of the Company at an exercise price of $0.01 per share. In addition, Mr. Hegyi received Warrants to purchase up to 10,000,000 shares of common stock of the time theyCompany at an exercise price of $0.01 per share which vest on October 21, 2017 and 2018. The Warrants are authorized by our board of directors.exercisable for 5 years.
Director Independence
In conjunction with the preparation of this report, using the definition of “independence” establishedMr. Hegyi will be entitled to participate in all group employment benefits that are offered by the NASDAQ Stock Market, we have evaluated all relationships between each directorCompany to the Company’s senior executives and us. Basedmanagement 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 foregoing definition, we have determined that Eric Shevin, Anthony Ciabattoni, Alan Hammer, and Jeff Giarraputo currently meetamount of $2,000,000 payable to Mr. Hegyi’s named heirs or estate as the definitionbeneficiary.
If the Company terminates Mr. Hegyi’s employment at any time prior to the expiration of an “independent” directorthe Term without Cause, as defined in the applicable rulesEmployment Agreement, or if Mr. Hegyi terminates his employment at any time for companies traded on“Good Reason” or due to a “Disability”, Mr. Hegyi will be entitled to receive (i) his Base Salary amount through the NASDAQ Stock Market. Our board of directors will continually monitor the standards established for director independence under applicable law or listing requirements and will take all reasonable steps to assure compliance with those standards.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
On September 14, 2012, we dismissed Weinberg & Co. P.A. (“Weinberg”) as its independent registered public accounting firm. The decision was approved by our Board.
The reports of Weinberg on our financial statements for the fiscal years ended December 31, 2011 and 2010 did not contain an adverse opinion or disclaimer of opinion and were not modified as to uncertainty, audit scope, or accounting principles, except the report did contain an explanatory paragraph related to our ability to continue as a going concern. During the fiscal years ended December 31, 2011 and 2012, there were (i) no disagreements with Weinberg on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Weinberg would have caused Weinberg to make reference to the subject matterend of the disagreementsTerm; and (ii) his Annual Bonus amount for each year during the remainder of the Term.
If there has been a “Change in Control” and the Company (or its successor or the surviving entity) terminates Mr. Hegyi’s employment without Cause as part of or in connection with such Change in Control (including any such termination occurring within one (1) month prior to the effective date of such Change in Control), then in addition to the benefits set forth above, Mr. Hegyi will be entitled to (i) an increase of $300,000 in his annual base salary amount (or an additional $25,000 per month) through the end of the Term; plus (ii) a gross-up in the annual base salary amount each year to account for and to offset any tax that may be due by Mr. Hegyi on any payments received or to be received by Mr. Hegyi under this Agreement that would result in a “parachute payment” as described in Section 280G of the Internal Revenue Code of 1986, as amended. If the Company (or its report,successor or the surviving entity) terminates Mr. Hegyi’s employment without Cause within twelve (12) months after the effective date of any Change in Control, or if Mr. Hegyi terminates his employment for Good Reason within twelve (12) months after the effective date of any Change in Control, then in addition to the benefits set forth above, Mr. Hegyi will be entitled to (i) an increase of $300,000 in his annual base salary amount (or an additional $25,000 per month), which increased annual base salary amount shall be paid for the remainder of the Term or for two (2) years following the Change in Control, whichever is longer; (ii) a gross-up in the annual base salary amount each year to account for and (ii) no “reportable events”to offset any tax that may be due by Mr. Hegyi on any payments received or to be received by Mr. Hegyi under this Letter Agreement that would result in a “parachute payment” as that termdescribed in Section 280G of the Internal Revenue Code of 1986, as amended; (iii) payment of Mr. Hegyi’s annual bonus amount as set forth above for each year during the remainder of the Term or for two (2) years following the Change in Control, whichever is definedlonger; and (iv) health insurance coverage provided for and paid by the Company for the remainder of the Term or for two (2) years following the Change in Item 304(a)(1)(v) of Regulation S-K.Control, whichever is longer.
Consulting Chief Financial Officer Agreement with an Entity Controlled by Mark E. Scott
On July 31, 2014, the Company entered into a Consulting Chief Financial Officer Letter with an entity controlled by Mark E. Scott pursuant to which the Company engaged Mr. Scott as its Consulting CFO from July 1, 2014 through September 14, 2012,30, 2014, and continuing thereafter until either party provides sixty day notice to terminate the Letter or Mr. Scott enters into a full-time employment agreement.
Per the terms of the Scott Agreement, Mr. Scott’s compensation is $150,000 on an annual basis for the first year of the Scott Agreement. Mr. Scott is also entitled to receive an annual bonus equal to two percent of the Company’s EBITDA for that year. The Company’s Board of Directors granted Mr. Scott an option to purchase sixteen million shares of the Company’s Common Stock under the Company’s 2011 Stock Incentive Plan at an exercise price of $0.07 per share, the fair market price on July 31, 2014. On December 18, 2015, the Company reduced the exercise price to $0.01 per share. The shares vest as follows:
| | |
| i | Two million shares vest immediately upon securing a market maker with an approved 15c2-11 resulting in the Company’s relisting on OTCBB (earned as of February 18, 2016); |
| | |
| ii | Two million shares vest immediately upon the successful approval and effectiveness of the Company’s S-1 (not earned as of December 31, 2016); |
| | |
| iii | Two million shares vest immediately upon the Company’s resolution of the class action lawsuits (earned as of August 17, 2015); and, |
| | |
| iv | Ten million shares will vest on a monthly basis over a period of three years beginning on the July 1, 2014. |
On October 21, 2016, Mr. Scott cancelled stock option grants totaling 12,000,000 shares of the Company’s common stock at $0.01 per share. Mr. Scott has an additional 2,000,000 share stock option grant which continues to vest monthly over 36 months and a 2,000,000 share stock option grant which vests upon the achievement of certain performance goals related to acquisitions.
All options will have a five-year life and allow for a cashless exercise. The stock option grant is subject to the terms and conditions of the Company’s Stock Incentive Plan, including vesting requirements. In the event that Mr. Scott’s continuous status as consultant to the Company is terminated by the Company without Cause or Mr. Scott terminates his employment with the Company for Good Reason as defined in the Scott Agreement, in either case upon or within twelve months after a Change in Control as defined in the Company’s Stock Incentive Plan except for CANX USA, LLC, then 100% of the total number of shares shall immediately become vested.
Mr. Scott will be entitled to participate in all group employment benefits that are offered by the Company to the Company’s senior executives and management employees from time to time, subject to the terms and conditions of such benefit plans, including any eligibility requirements. In addition, the Company is required to purchase and maintain an insurance policy on Mr. Scott’s life in the amount of $2,000,000 payable to Mr. Scott’s named heirs or estate as the beneficiary. Finally, Mr. Scott is entitled to twenty days of vacation annually and also has certain insurance and travel employment benefits.
If, prior to the expiration of the Term, the Company terminates Mr. Scott’s employment for Cause, or if Mr. Scott voluntarily terminates his employment without Good Reason, or if Mr. Scott’s employment is terminated by reason of his death, then all of the Company’s obligations hereunder shall cease immediately, and Mr. Scott will not be entitled to any further compensation beyond any pro-rated base salary due and bonus amounts earned through the effective date of termination. Mr. Scott will also be reimbursed for any expenses incurred prior to the date of termination for which he was not previously reimbursed. Mr. Scott may receive severance benefits and the Company’s obligation under a termination by the Company without Cause or Mr. Scott terminates his employment for Good Reason are discussed above.
Promotion Letter with Joseph Barnes
On October 10, 2014, the Company entered into a Promotion Letter with Joseph Barnes which was effective October 1, 2014 pursuant to which we engaged Anton & Chia, LLPMr. Barnes as its Senior Vice-President of Business Development from October 1, 2014 on an at will basis. This Promotion Letter supersedes and canceled the Manager Services Agreement with Mr. Barnes dated August 1, 2013.
Per the terms of the Barnes Agreement, Mr. Barnes’s compensation is $90,000 on an annual basis. On January 1, 2016, Mr. Barnes salary was increased to $120,000 per year. Mr. Barnes received a bonus of $6,500 and is also entitled to receive a quarterly bonus based on growth of our new independent registered public accounting firm.growth margin dollars. No quarterly bonuses were earned under this Promotion Letter. Mr. Barnes was granted an option to purchase eight million shares of our common stock under our 2011 Stock Incentive Plan at $0.050 per share. The appointmentshares vest as follows:
| | |
| i | Two million shares vested immediately; |
| | |
| iv | Six million shares vest on a monthly basis over a period of three years beginning on the date of grant. |
On October 12, 2016, the Company amended the exercise price of Anton & Chia, LLPthe stock option grants for Mr. Barnes to $0.010 per share.
All options will have a five-year life and allow for a cashless exercise. The stock option grant is subject to the terms and conditions of our Stock Incentive Plan, including vesting requirements. In the event that Mr. Barnes’s continuous status as employee to us is terminated by us without Cause or Mr. Barnes terminates his employment with us for Good Reason as defined in the Barnes Agreement, in either case upon or within twelve months after a Change in Control as defined in our Stock Incentive, then 100% of the total number of shares shall immediately become vested.
Mr. Barnes was approvedentitled to participate in all group employment benefits that are offered by the Company to our Board. Duringsenior executives and management employees from time to time, subject to the fiscalterms and conditions of such benefit plans, including any eligibility requirements. Finally, Mr. Barnes is entitled to fifteen days of vacation annually and has certain insurance and travel employment benefits.
Mr. Barnes may receive severance benefits and our obligation under a termination by the Company without Cause or Mr. Barnes terminates his employment for Good Reason are discussed above.
Investment Banking Letter with D. Weckstein and Co. Inc.
On August 27, 2014, the Company issued 5,000,000 shares of its common stock to D. Weckstein and Co., Inc. pursuant to an Investment Banking Letter. The shares were valued at the fair market price of $0.08 per share.
Consulting Agreement with an Entity Controlled by Michael E. Fasci
On October 21, 2016, the Company entered into a Consulting Agreement with an entity controlled by Michael E. Fasci. Mr. Fasci agreed to provide services related to lender management, financing and acquisitions. Mr. Fasci’s compensation is 2,000,000 shares of our common stock valued at $0.01 per share and to be issued on April 21, 2017 and October 21, 2017.
NOTE 12 – INCOME TAXES
The Company has incurred losses since inception, which have generated net operating loss carryforwards. The net operating loss carryforwards arise from United States sources.
Pretax losses arising from United States operations were approximately $6,500,000 and $5,800,000 and for the years ended December 31, 20112016 and 2012, we did2015, respectively.
The Company has net operating loss carryforwards of approximately $16,000,000, which expire in 2022-2032. Because it is not consult with Anton & Chia, LLPmore likely than not that sufficient tax earnings will be generated to utilize the net operating loss carryforwards, a corresponding valuation allowance of approximately $6,600,000 was established as of December 31, 2016. 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 (i) the applicationamount of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinionnet operating loss carryforwards that may be rendered on the Company's financial statements, and Anton & Chia, LLP did not provide eitherused to offset taxable income when a written report or oral advice tocorporation has undergone significant changes in its stock ownership. There can be no assurance that the Company that was an important factor considered bywill be able to utilize any net operating loss carryforwards in the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii)future.
For the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
Audit Fees
The aggregate fees billed by Anton & Chia, LLP for professional services rendered for the audit of our annual financial statements and review of financial statements included in our quarterly reports and services that are normally provided in connection with statutory and regulatory filings were $135,386 for the fiscal year ended December 31, 2013.2016, the Company’s effective tax rate differs from the federal statutory rate principally due to net operating losses, warrants issued for services, change in fair value of derivative and debt discount.
The aggregate fees billed by Anton & Chia, LLP for professional services rendered forprincipal components of the audit of our annual financial statements and review of financial statements included in our quarterly reports and services that are normally provided in connection with statutory and regulatory filings were $25,139 for the fiscal year endedCompany’s deferred tax assets at December 31, 2012.2016 and 2015 are as follows:
The aggregate fees billed by Weinberg for professional services rendered | | | | |
U.S. operations loss carry forward and state at statutory rate of 40% | $6,584,821 | $5,852,421 | $5,038,976 | $3,612,736 |
Less valuation allowance | (6,584,821) | (5,852,421) | (5,038,976) | (3,612,736) |
Net deferred tax assets | - | - | - | - |
Change in valuation allowance | $(6,584,821) | $(5,852,421) | $(5,038,976) | $(3,612,736) |
A reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the audit of our annual financial statements and review of financial statements included in our quarterly reports and services that are normally provided in connection with statutory and regulatory filings were $51,554 and $73,820 for the fiscal years ended December 31, 20122016 and 2011, respectively.
Audit-Related Fees
None.
Tax Fees
During fiscal year 2013, we recorded accounting/professional fees totaling $12,000 that were billed to us by Hartley Moore Accountancy for the preparation of our 2012 annual tax returns.
All Other Fees
None.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The financial statements filed2015is as part of this Annual Report on Form 10-K are listed on page 28.
The exhibits filed with this Annual Report on Form 10-K are listed in the attached Exhibit Index.
follows:
| | | | |
Federal statutory rate | -34.0% | -34.0% | -34.0% | -34.0% |
State income tax rate | -6.0% | -6.0% | -6.0% | -6.0% |
Change in valuation allowance | 40.0% | 40.0% | 40.0% | 40.0% |
Effective tax rate | 0.0% | 0.0% | 0.0% | 0.0% |
The Company’s tax returns for 2011 to 2015 are open to review by the Internal Revenue Service.
NOTE 13 – SUBSEQUENT EVENTS
The Company evaluates subsequent events, for the purpose of adjustment or disclosure, up through the date the financial statements are available.
Subsequent to December 31, 2016, the following material transactions occurred:
Equity Issuances
On January 2, 2017, Brighton Capital LLC converted debt of $127,148 into 15,893,500 shares of our common stock at a per share conversion price of $0.008.
During the three months ended March 31, 2017, Chicago Venture converted principal and interest of $1,253,000 into 190,189,197 shares of our common stock at a per share conversion price of $0.007.
On February 28, 2017, Logic Works converted principal and interest of $291,044 into 82,640,392 shares of our common stock at a per share conversion price of $.004.
Transactions with Chicago Venture Partners, L.P. (‘Chicago Venture”) and TCA Global Credit Master Fund, LP (“TCA”)
On February 1, 2017, the Company closed the transactions described below with Chicago Venture Partners, L.P. (“Chicago Venture”).
Securities Purchase Agreement, Secured Promissory Notes, Membership Interest Pledge Agreement and Security Agreement
On January 9, 2017, the Company executed the following agreements with Chicago Venture: (i) Securities Purchase Agreement; (ii) Secured Promissory Notes; (iii) Membership Interest Pledge Agreement; and (iv) Security Agreement (collectively the “Chicago Venture Agreements”). The Company entered into the Chicago Venture Agreements with the intent of paying its debt, in full, to TCA Global Credit Master Fund, LP (“TCA”), which included any TCA affiliates.
The total amount of funding under the Chicago Venture Agreements is $1,105,000.00 (the “Debt”). Each Convertible Promissory Note carries an original issue discount of $100,000 and a transaction expense amount of $5,000, for total debt of $1,105,000. The Company agreed to reserve 500,000,000 of its shares of common stock for issuance upon conversion of the Debt, if that occurs in the future. If not converted sooner, the Debt is due on or before January 9, 2018. The Debt carries an interest rate of ten percent (10%). The Debt is convertible, at Chicago Venture’s option, into the Company’s common stock at $0.009 per share subject to adjustment as provided for in the Secured Promissory Notes attached hereto and incorporated herein by this reference. As of the date of this report on Form 8-K, Chicago Venture has funded the entire amount of the Debt.
Chicago Venture’s obligation to fund the Debt was secured by Chicago Venture’s 60% interest in Typenex Medical, LLC, an Illinois corporation, as provided for in the Membership Pledge Agreement attached hereto and incorporated herein by this reference.
The Company’s obligation to pay the Debt, or any portion thereof, is secured by all of the Company’s assets as described in Schedule A to the Security Agreement attached hereto and incorporated herein by this reference.
Payment of All TCA Obligations
On January 10, 2017, Chicago Venture, at the Company’s instruction, remitted funds of $1,495,901 to TCA in order to satisfy all debts to TCA. On or around January 11, 2017, the Company was notified by TCA that $13,540 were due to TCA in order for TCA to release its security interest in the Company’s assets. On February 1, 2017, TCA notified the Company that all funds were received and TCA would release its security interest in Company’s assets. TCA has confirmed that it is paid in full and the Company is not aware of any other obligations that the Company has as to TCA. The funds received under the Chicago Venture Agreements and previous Chicago Venture Agreements were used to pay-off TCA.
Director Appointments
On February 14, 2017, the board appointed Katherine McClain and Mark E. Scott, our consulting Chief Financial Officer, to the Board of Directors.
Impairment of Goodwill and Intangible Assets
On March 10, 2017, the Audit Committee reviewed the GrowLife Hydroponics, Inc. operations and based on the capital intensive nature of the business and operating results, determined that the goodwill value of $739,000 and intangible assets of $137,056 were impaired as of December 31, 2016. The Company recorded an impairment of goodwill and intangible assets associated with GrowLife Hydroponics, Inc. of $876,056 during the three months December 31, 2016.
Dissolution of Certain Non-Operating Subsidiaries
The Company determined that certain wholly-owned subsidiaries were unnecessary for the ongoing operations of the Company’s business and elected to dissolve these entities and/or surrender their foreign status in certain jurisdictions for the purpose of reducing unnecessary compliance costs.
The Company is dissolving SG Technologies Corp., a Nevada corporation, and is surrendering its qualification to do business in California due to the fact that the Company no longer operates any business under this wholly-owned subsidiary.
The Company is dissolving Phototron, Inc. and GrowLife Productions, Inc., all California corporations, due to the fact that the Company no longer operates any business under these wholly-owned subsidiaries.
The Company is dissolving Business Bloom, Inc., a California corporation, and is withdrawing its foreign entity status in Colorado due to the fact that the Company no longer operates any business under this wholly-owned subsidiary.
The Company is surrendering its qualification to do business in California for GrowLife Productions, Inc. due to the fact that the Company no longer operates any business under this wholly-owned subsidiary.
Potential Convertible Note Defaults
Several of the Company’s convertible promissory notes remain outstanding beyond their respective maturity dates. This may trigger an event of default under the respective agreements. The Company is working with these noteholders to convert their notes into common stock and intends to resolve these outstanding issues as soon as practicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrantGrowLife, Inc. (the "Registrant") has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GROWLIFE, INC. | |
| (Registrant) | |
| | |
| | |
| | |
Date: March 31, 20142017 | By: | /s/ Sterling Scott | Marco Hegyi |
| | Sterling Scott | Marco Hegyi |
| | Chairman, Chief Executive Officer & President | and Director (Principal Executive Officer) |
| | | |
Date: March 31, 2014 | By: | /s/ John Genesi | Mark E. Scott |
| | John Genesi | Mark Scott |
| | Chief Financial Officer, | Director and Secretary (Principal Financial and Accounting Officer) |
POWER OF ATTORNEY
The undersigned directors and officers of GrowLife, Inc. do hereby constitute and appoint Sterling Scott, and each of them, with full power of substitution and resubstitution, as their true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto, and we do hereby ratify and confirm all that said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantRegistrant and in the capacities and on the dates indicated.indicated:
SignatureSIGNATURES | TITLE | Title | | DateDATE |
| | | | |
/s/ Sterling Scott | | Chairman, Chief Executive Officer, President, Secretary, and Director | | March 31, 2014 |
| | | | |
/s/ John Genesi | | Chief Financial Officer | | March 31, 2014 |
| | | | |
/s/ Marco Hegyi | | President of GrowLife, Inc.Chief Executive Officer and Director | | March 31, 20142017 |
Marco Hegyi | (Principal Executive Officer) | |
| | |
/s/ Rob HuntMark E. Scott | | President of GrowLife Hydroponics, Inc.Chief Financial Officer, Director and Director | Secretary | March 31, 20142017 |
Mark E. Scott | (Principal Financial/Accounting Officer) | | | | |
/s/ Eric Shevin | | Director | | March 31, 2014 |
| | | | |
/s/ Alan Hammer | | Director | | March 31, 2014 |
/s/ Jeff Giarraputo | | Director | | March 31, 2014 |
/s/ Anthony Ciabattoni | | Director | | March 31, 2014 |
PART II
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On January 1, 2013 the Company issued 2,000,000 shares of its common stock to an independent third party. These shares were issued on a non-cash basis and were compensation for services rendered.
Beginning January 3, 2013, and ending on March 20, 2013, the Company issued 15,278,861 shares of its common stock to certain investors in relation to the Company’s Subscription Agreement dated December 2011. The shares were issued for cash at $0.035 per share.
On January 3, 2013, the Company issued 333,333 shares of its common stock to Zcapital, Inc. in relation to the Company’s licensing agreement to use Zcapital’s website Cannabis.org. The shares were issued on a non-cash basis.
On January 9, 2013, the Company issued 4,500,000 shares of its common stock to W-Net Fund I, LP in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $31,500 reduction in the outstanding principal balance of the 6% Convertible Notes.
On January 18, 2013, the Company issued 2,097,209 shares of its common stock to Black Mountain Equities, Inc. The shares were issued in relation to the 10% Convertible Note entered into on January 8, 2013 between the Company and Black Mountain Equities, Inc.. The conversion price was $0.024 per share and resulted in a $50,370 reduction in the outstanding principal balance of the 10% Convertible Note.
On February 1, 2013, the Company issued 11,000,000 shares of its common stock to W-Net Fund I, LP in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $77,000 reduction in the outstanding principal balance of the 6% Convertible Notes.
On February 1, 2013, the Company issued 2,203,580 shares of its common stock to Black Mountain Equities, Inc. The shares were issued in relation to the 10% Convertible Note entered into on January 8, 2013 between the Company and Black Mountain Equities, Inc.. The conversion price was $0.025 per share and resulted in a $56,353 reduction in the outstanding principal balance of the 10% Convertible Note.
On February 5, 2013, the Company issued 1,969,624 shares of its common stock to Black Mountain Equities, Inc. The shares were issued in relation to the 10% Convertible Note entered into on January 8, 2013 between the Company and Black Mountain Equities, Inc.. The conversion price was $0.025 per share and resulted in a $49,277 reduction in the outstanding principal balance of the 10% Convertible Note. The 10% Convertible Note was fully converted after this transaction.
On February 7, 2013, the Company issued 10,000,000 shares of its common stock to Europa International, Inc. in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $70,000 reduction in the outstanding principal balance of the 6% Convertible Notes.
On February 7, 2013, the Company issued 1,428,571 shares of its common stock to a Holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $10,000 reduction in the outstanding principal balance of the 6% Convertible Notes.
On February 8, 2013, the Company issued 470,237 shares of its common stock in relation to the exercising of a stock option. The option was exercised for cash at $0.019 per share.
On February 12, 2013, the Company issued 13,000,000 shares of its common stock to W-Net Fund I, LP in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $91,000 reduction in the outstanding principal balance of the 6% Convertible Notes.
On February 14, 2013, the Company issued 7,396,477 shares of its common stock to Forglen, LLC in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $51,775 reduction in the outstanding principal balance of the 6% Convertible Notes.
On February 18, 2013, the Company issued 10,000,000 shares of its common stock to W-Net Fund I, LP in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $70,000 reduction in the outstanding principal balance of the 6% Convertible Notes.
On February 21, 2013, the Company issued 731,202 shares of its common stock in relation to the exercising of a stock option. The option was exercised on a non-cash basis.
On February 23, 2013, the Company issued 298,949 shares of its common stock in relation to the exercising of a stock option. The option was exercised on a non-cash basis.
On February 23, 2013, the Company issued 1,197,479 shares of its common stock in relation to the exercising of a stock option. The option was exercised on a non-cash basis.
On March 1, 2013, the Company issued 1,453,143 shares of its common stock in relation to the exercising of a stock option. The option was exercised on a non-cash basis.
On March 8, 2013, the Company issued 12,000,000 shares of its common stock to W-Net Fund I, LP in relation to the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $84,000 reduction in the outstanding principal balance of the 6% Convertible Notes.
On March 31, 2013, the Company issued 9,045,833 shares of its common stock to Board of Directors and employees. These shares were issued on a non-cash basis and were compensation for services rendered.
On April 1, 2013, the Company issued 2,000,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $20,000 in the aggregate and $0.01 per share.
On April 2, 2013, the Company issued 17,000,000 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $119,000 reduction in the outstanding principal balance of the 6% Convertible Notes.
On April 11, 2013, the Company issued 620,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $21,700 in the aggregate and $0.035 per share.
Beginning April 16, 2013 and ending on June 4, 2013, the Company issued 2,528,572 shares of its common stock to certain investors in relation to the Company’s Subscription Agreement dated December 2011. The shares were issued for cash at $0.035 per share and generated proceeds to the Company in the amount of $88,500.
On April 18, 2013, the Company issued a total of 1,625,000 shares of its common stock to 6 third-party consultants. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $65,000 in the aggregate and $0.04 per share.
On April 19, 2013, the Company issued 333,333 shares of its common stock to a third-party consultant in relation to the Company’s licensing agreement to use the website “Cannabis.org”. The shares were issued on a non-cash basis and were valued at $11,667 in the aggregate and $0.035 per share.
On April 26, 2013, the Company issued 14,000,000 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $98,000 reduction in the outstanding principal balance of the 6% Convertible Notes.
On May 1, 2013, the Company issued 137,300 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $6,000 in the aggregate and $0.0437 per share.
On May 16, 2013, the Company issued 1,464,970 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $10,000 reduction in the outstanding principal balance of the 6% Convertible Notes and a $255 reduction in accrued and unpaid interest on these notes.
On May 22, 2013, the Company issued 22,429.669 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $193,000 reduction in the outstanding principal balance of the 6% Convertible Notes and a $13,008 reduction in accrued and unpaid interest on these notes.
On May 22, 2013, the Company issued 1,333,334 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $13,333 in the aggregate and $0.01 per share.
On May 23, 2013, the Company issued 19,771.748 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $110,604 reduction in the outstanding principal balance of the 6% Convertible Notes and a $27,798 reduction in accrued and unpaid interest on these notes.
On June 5, 2013, the Company issued 551,657 shares of its common stock to its landlord at 20301 Ventura Blvd, Woodland Hills, CA. These shares were payment in full for the Company’s monthly rent for June, July, and August 2013. These shares were valued at $20,274 in the aggregate and $0.0367 per share.
On June 7, 2013, the Company issued 7,857,141 shares of its common stock to the former owners of RMH/EGC. These shares were issued as partial payment for the Company’s purchase of 100% of the ownership interests of both Rocky Mountain Hydroponics and Evergreen Garden Center. These shares were valued at $275,000 in the aggregate and $0.035 per share.
On June 7, 2013, the Company issued 2,000,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $100,000 in the aggregate and $0.05 per share.
On June 7, 2013, the Company issued a total of 3,700,000 shares of its common stock to 4 third-party consultants. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $333,000 in the aggregate and $0.09 per share.
On June 18, 2013, the Company issued 15,935,428 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $100,000 reduction in the outstanding principal balance of the 6% Convertible Notes and a $11,548 reduction in accrued and unpaid interest on these notes.
On June 30, 2013, the Company issued 637,500 shares of its common stock to certain employees. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $57,375 in the aggregate and $0.09 per share.
On July 18, 2013, the Company issued 3,000,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $120,000 in the aggregate and $0.04 per share.
On July 18, 2013, the Company issued 2,000,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $80,000 in the aggregate and $0.04 per share.
On August 15, 2013, the Company issued 27,297,747 shares of its common stock to a certain holder of the Company’s 6% Convertible Notes. The conversion price was $0.007 per share and resulted in a $172,293 reduction in the outstanding principal balance of the 6% Convertible Notes and payment in full for all accrued and unpaid interest.
On August 26, 2013, the Company issued 702,592 shares of its common stock to its landlord at 20301 Ventura Blvd, Woodland Hills, CA. These shares were payment in full for the Company’s monthly rent for September, October, and November 2013. These shares were valued at $20,274 in the aggregate and $0.0289 per share.
On August 30, 2013, the Company issued 2,000,000 shares of its common stock to a third-party consultant. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $80,000 in the aggregate and $0.04 per share.
On September 5, 2013, the Company issued 25,510,204 shares of its common stock to a certain holder of the Company’s 7% Convertible Notes. The conversion price was $0.02156 per share and resulted in a $550,000 reduction in the outstanding principal balance of the 7% Convertible Notes.
On September 6, 2013, the Company issued 1,224,918 shares of its common stock to a former employee of the Company as payment in full of both principal and accrued interest related to $25,000 loaned to the Company in March 2013. These shares were issued at $0.021 per share.
On September 17, 2013, the Company issued 6,757,328 shares of its common stock to a certain holder of the Company’s 7% Convertible Notes. The conversion price was $0.02156 per share and resulted in a $150,000 reduction in the outstanding principal balance of the 7% Convertible Notes.
On September 20, 2013, the Company issued 519,200 shares of its common stock to an unrelated third party in exchange for product/inventory valued at $18,172 in the aggregate. The shares were issued at a price of $0.035 per share.
On September 30, 2013, the Company issued 537,500 shares of its common stock to certain employees. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $48,375 in the aggregate and $0.09 per share.
On September 30, 2013, the Company issued 1,000,000 shares of its common stock to its two (2) independent members of the Company’s Board of Directors. These shares were issued on a non-cash basis and were compensation for services rendered during the April – June 2013 period. These shares were valued at $20,000 in the aggregate and $0.02 per share.
On October 14, 2013, the Company issued 9,000,000 shares of its common stock in relation to the cashless exercise of warrants by Gemini Master Fund. These shares were valued at zero dollars by the Company.
On October 14, 2013, the Company issued 8,000,000 shares of its common stock in relation to the conversion of a $280,000 note payable to Gemini Master Fund. The shares were issued via the Company’s Subscription Agreement and were valued at $0.035 per share and $280,000 in the aggregate.
On November 15, 2013, the Company cancelled the issuance of 1,500,000 shares of its common stock that the Company had previously approved for issuance to two (2) independent third party consultants as consideration for services to be rendered. The shares were originally valued at $0.04 per share and $60,000 in the aggregate. The Company debited its equity accounts $60,000 in the aggregate upon the cancellation of these shares on November 15, 2013.
On November 16, 2013, the Company issued 1,250,000 shares of its common stock to Integrity Media, Inc. in relation to the Company’s service agreement with Integrity Media dated November 16, 2013. The shares were issued on a non-cash basis and were consideration for investor/public relations services provided by Integrity Media to the Company. The shares were valued at $0.08 per share and $100,000 in the aggregate.
On November 26, 2013, the Company issued 25,000 shares of its common stock to one of its employees for services rendered. The issuance of these shares was approved by the Company’s Board of Directors on February 15, 2013. These shares were issued on a non-cash basis and were valued at $2,250 in the aggregate and $0.09 per share.
On December 3, 2013, a Holder of the Company’s 6% Senior Secured Convertible Notes converted the entire principal and accrued and unpaid interest into 6,073,111 shares of the Company’s common stock. The shares were valued at $0.007 per share and $42,512 in the aggregate.
On December 4, 2013, the Company issued 500,000 shares of its common stock to an independent third party as consideration for services provided to the Company. The shares were issued on a non-cash basis and were valued at $0.09 per share and $45,000 in the aggregate.
On December 16, 2013, two (2) of the Holders of the Company’s 12% Senior Secured Convertible Notes converted their entire principal and accrued and unpaid interest into 11,881,204 shares of the Company’s common stock. The shares were valued at $0.035 per share and $415,842 in the aggregate.
On December 19, 2013, a Holder of the Company’s 7% Senior Secured Convertible Notes converted the remaining principal and accrued and unpaid interest into 2,453,945 shares of the Company’s common stock. The shares were valued at $0.025 per share and $61,349 in the aggregate.
On December 31, 2013, the Company issued 475,000 shares of its common stock to certain employees. These shares were issued on a non-cash basis and were compensation for services rendered. These shares were valued at $42,750 in the aggregate and $0.09 per share.
On December 31, 2013, the Company issued 1,000,000 shares of its common stock to one of its independent members of the Company’s Board of Directors. These shares were issued on a non-cash basis and were compensation for services rendered during the July 1 ��� December 31, 2013 period. These shares were valued at $20,000 in the aggregate and $0.02 per share.
On December 31, 2013, the Company issued 683,333 shares of its common stock to a former independent member of the Company’s Board of Directors. These shares were issued on a non-cash basis and were compensation for services rendered during the July 1, 2013 through November 2, 2013 period. These shares were valued at $13,667 in the aggregate and $0.02 per share.
On December 31, 2013, the Company issued 227,777 shares of its common stock to three (3) of its independent members of the Company’s Board of Directors. These shares were issued on a non-cash basis and were compensation for services rendered during the December 17, 2013 through December 31, 2013 period. These shares were valued at $4,556 in the aggregate and $0.02 per share.
During the three-month period ended December 31, 2013, the Company sold 19,174,429 shares of its common stock via the Company’s Subscription Agreement. The shares were sold at a per share price of $0.035 and generated gross proceeds to the Company in the amount of $671,105.
During the three-month period ended December 31, 2013, the Company issued 8,666,667 shares of its common stock to four (4) of its employees in relation to a Unanimous Written Consent of the Board of Directors dated August 8, 2012. These shares represent the final installment due to these four employees and were valued at $0.01 per share and $86,667 in the aggregate.
In connection with the above stock sales, we did not pay any underwriting discounts or commissions. None of the sales of securities described or referred to above was registered under the Securities Act of 1933, as amended (the “Securities Act”). We had or one of our affiliates had a prior business relationship with each of the purchasers, and no general solicitation or advertising was used in connection with the sales. In making the sales without registration under the Securities Act, we relied upon the exemption from registration contained in Section 4(2) of the Securities Act.
Exhibit Index
Exhibit Number | | Description of Exhibit |
| | |
2.1/s/ Michael E. Fasci | Director | Securities Purchase Agreement dated June 7, 2013, by and among GrowLife, Inc., GrowLife Hydroponics, Inc., Sequoia, LLC, Pressure Drop Holdings, LLC and Sachin Karia. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013.March 31, 2017 |
Michael E. Fasci | | |
10.1 | | Securities Purchase Agreement, dated May 1, 2013, by and between GrowLife, Inc. and Gemini Master Fund, Ltd .. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2013.Director | March 31, 2017 |
Katherine McLain | | |
10.2 | | Form of OID Secured Bridge Note. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2013. |
| | |
10.3 | | Form of Common Stock Purchase Warrant. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2013. |
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10.4 | | Revolving Promissory Note dated June 7, 2013 issued by GrowLife, Inc. in favor of W-Net Fund I, L.P. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013. |
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10.5 | | Form of 12% Senior Secured Convertible Note. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013. |
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10.6 | | Amendment to Revolving Promissory Note dated August 6, 2013 by and between GrowLife, Inc. and W-Net Fund I, L.P. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 9, 2013. |
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31.1 | | Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended. |
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31.2 | | Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended. |
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32.1 | | Certificate of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended. |
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32.2 | | Certificate of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended. |
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101 | | XBRL information |